Does Nachiket Mor Committee report impress to deceive?

One of the first initiatives that the new RBI Governor Mr Raghuram Rajan took after assuming office a few months back was the formation of the Nachiket Mor committee on “Comprehensive Financial Services for Small Businesses and Low Income Households”.

Now the committee which was set up only in September 2013 has submitted its report at the same speed with which Raghuram Rajan displayed on the licensing of new banks. RBI released a copy of the report on january 7th for public comments. The Comments may be emailed or sent by post to the Principal Chief General Manager, Rural Planning and Credit Department, Reserve Bank of India, Central Office, 10th floor, Shahid Bhagat Singh Marg, Mumbai 400 001 on or before January 24, 2014.

The committee has made several radical recommendations and while laying down its vision statement for financial inclusion and deepening, has suggested providing a universal bank account to all Indians above the age of eighteen years and has recommended a Vertically Differentiated Banking System with Payments Banks for Deposits & Payments and Wholesale Banks for credit outreach with relaxed entry point norms of ` 50 crore.

On priority sector, the Committee has recommended Adjusted Priority Sector Lending Target of 50 per cent against the current requirement of 40 per cent with sectoral and regional weightages based on the level of difficulty in lending. The Committee has also recommended risks and liquidity transfers through markets.

The Committee has advocated regulatory convergence between banks and NBFCs based on the principle of neutrality with regard to classification of non-performing assets and the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002 eligibility.

The Committee has suggested that a State Finance Regulatory Commission (SFRC) be created into which all the existing State Government-level regulators could be merged and functions like the regulation of Non-Government Organisations-Micro Finance Institutions and local Money Services Business could be added on.

The Committee has desired that the Reserve Bank should issue regulations on suitability, applicable specifically for individuals and small businesses, to all regulated entities within its purview so that the violation of such regulations would result in penal action for the institution as contemplated under the relevant statutes through a variety of measures, including fines, cease-and-desist orders, and modification and cancellation of licences.

The recommendations are radical and will have significant impact on the Banking and Financial sector in India and will also significantly affect the stock markets. It will also affect the proposed new Banking licensee aspirants.

In view of the nature of some of the recommendations that may also affect security of public money, it is essential for experts in the field to study the report and submit their comments to RBI in time.

Mr M.S.Sriram, a former professor of IIM Ahmedabad opines has published an interesting article titled “Why the Nachiket Mor committee report on financial inclusion disappoints” in livemint.com which makes a good reading to begin your exploration of the report.

Naavi

Copy of the report is available here.: 

Additional comments of two of the members can be found here:

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Bitcoin Regulation.. Where should the focus be?

We have been watching Bitcoin exchange rates growing exponentially at MtGox attracting the attention of regulators both from the point of view of the possible effect on the monetary controls of the Sovereign States and loss of Tax revenue besides the money laundering.

Regulators should also recognize another aspect of the market that could be a cause of worry. That is the growing number of Bitcoin clones in the market. A few days back only 9 bitcoin clones were visible. Yesterday the report was about 53 clones. Today the number of Bitcoin clones appear to have grown to about 142 as this report suggests. (Complete Directory of Crypto Coins)

Since Bitcoin protocol is an open source protocol, we can expect more Crypto currencies to emerge as we go on. In fact many of the “Reward Schemes” operated in the markets can overnight convert themselves into crypto currencies and provide a capital appreciation prospect to the reward points.

Regulators now have to therefore worry not only on Bitcoins, but on all other Crypto Currencies and the dynamics of the issue is is changing so fast that it is difficult for regulators to keep watching any more.

Let’s us now look at some of the major concerns of the regulators.

1. Use of Bitcoins (and all other Crypto currencies) for criminal activities:

Cyber Crimes is an important concern of the community. Today, the Cyber Crime related money laundering transactions is said to be bigger than Drug related transactions. There is therefore a legitimate concern that any system that assists in holding of assets in anonymous and liquid form, movable across the globe in minutes (like BTC) is an obvious choice of the crime mafia.

However the real concern of the society on Cyber Crimes is when money from the physical society is stolen via the Internet. Infact, if a virtual asset of one Netizen is stolen  or lost, the physical society would not be much bothered.  It is only when a person loses his Rupee or dollar balances in his Bank account that the physical society is really concerned.

Hence If Bitcoins are lost by a holder, it is only some body elese in the Bitcoin community who may be bothered and not the physical society regulators.

If the crime syndicate wants to use Bitcoins as the currency for rewarding crimes, they still need to transfer their crime income in Dollars or Rupees to BTCs and vice versa. The concern should therefore be about the “Conversion Point”.

IOW, BTC is not a threat to the society but it is only the convertibility of physical currency to BTC and vice versa which is a matter of concern to the physical society. 

2. Taxing of the Revenue

Governments everywhere are interested in “Taxing” the population and appropriating their wealth so that the Governance can be financed. Whenever they see people making profits in business, they therefore think of how to tax them. If they feel that the profits are earned relatively easily then the urge to tax on a higher tax bracket is more.

Currently the regulators can understand the part of the Bitcoin business which involves buying and selling of BTCs. This is no different from stock market or property transactions. Investors will make either trading profit or loss in the short term or long term. As long as such profits or losses are realized in local currency terms, they can be brought under tax net.

When the stocks remain in BTC form, the regulators need to arrive at a valuation scheme and they may either take the value as prevailing in MtGox or have a system of weighted valuation across a few top Exchanges.

Regulators will however have some difficulty on understanding the nature of wealth creation that occurs in the “Mining Activity”. The value created in the mining activity accumulates in bitcoin wallets which are difficult to trace and it is only when a person declares his holding will the IRS/IT department come to know of the existence of the BTC wealth of the citizen.

However once declared by the miner, it is possible for the tax authorities to value it in terms of the exchange rates and consider it as a property.

The cost of acquisition of the BTC is however not easy to ascertain. The cost of hardware and electricity as well as any other fees paid need to be taken into account just as in any other business. However there is a reasonable way of estimating this based on the calculators that are available. Some uncertainty may still be there when miners adopt innovative strategies to cool the processors and thereby save electricity.

However it would not be difficult for the tax officials to agree upon a cost declaration and allow it as a deduction from the value of the coins created and also agree to tax the holdings on the basis of holdings or on conversion to physical society currency at some point of time in the future.

They may also introduce a condition that unless the costs are declared during the year of operation, they will not be allowed as a deduction on sale in the subsequent years.

Hence taxing of BTC related operations is well withing the grasp of the regulators and can be easily managed.

3. Impact on the Economy

There is one more concern among regulators about whether holding of monetary assets by people as a parallel currency affect the money circulation in the economy and affect monetary policies such as interest rates etc.

This is unfounded since at present the vale of BTC wealth is too small in comparison with the physical currencies floating around.

Even when the BTC holding in an economy goes upto a significant level of say 10 to 20%, what it means is that there would be some “pseudo wealthy persons” in the society who can feel proud that they are millionaires. But their status would be like some property owners who may be sitting on prime property but may not have cash to meet their wealth tax obligations itself.

The wealth has value only when converted into domestic currency and when BTC is sold and coverted to local currency. The wealth then becomes part of the local currency and neither causes inflation or deflation on its own.

I therefore consider that the regulators need not have any worry about the adverse effect of BTC on the economy.

However, I  concede and strongly contend that there is a need to ensure that BTCs are not used as the currency of the Cyber Crime underworld or as the Currency of the criminals for laundering their crime money or for politicians to hoard their ill gotten wealth in BTCs instead of Swiss Banks.

In order to achieve this objective there is a need to regulate the “Exchanges”.  It is necessary for the Governments to ensure that conversion of BTC (Or any other Crypto Currency) to legacy currency of the land or vice versa has to be through a regulated process.

This means that the exchanges have to be “Authorized” and there has to be a proper “Record Keeping including an effective Know Your Customer norm” and “Record Submission to authorities”.

I suggest regulators to start thinking in this direction but otherwise let the crypto currency system to thrive on its own steam.

In fact if more Indians can start BTC mining, then ISPs would be happy with the higher bandwidth usage. Power sellers would be happy with higher capacity utilization ( I assume that power shortage is not an issue at the place of mining). IT hardware industry would be happy since it creates a market for more computers and specialized mining equipments. (Hope this would give a fillip to  computer hardware industry in India!).

More mining in India means more global wealth flow to India and more tax collection by the authorities.

Hope RBI is watching the developments in the right perspective.

There could be a concern however for the environmentalists and those who would like conservation of resources and prioritizing productive uses. The debate could be whether the amount of computing power that is getting diverted into BTC activity is worth the effort. (See the report here). May be this is left to a later point of time when the activity is more significant.

Naavi

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Negligence of Export Promotion Councils, ECGC and Banks lead to Rs 2.35 crore fraud

In what has now become a routine type of fraud, a tobacco exporter  in Andhra has been defrauded to the extent of Rs 2.35 crtores.  Naavi.org recalls its open letter  to RBI and ECGC in its post on July 14, 2013 about the increasing nature of such frauds.

Way back on October 30, 2011, writing in Exim Matters, Naavi in his article “The Law of Internet For Exporters” had highlighted the dangers of relying on unauthenticated e-mails and the possibility of exporters becoming victims of frauds. This was followed up in the next article on the use of Digital Signatures. Had the contents of these articles been properly assimilated by exporters, some of the frauds which we are now facing could perhaps have been prevented.

Again in the July 14, 2013, Naavi.org had highlighted the responsibility of RBI and ECGC on educating Exporters and also black listing some of the destination countries to which fraud remittances are usually sent. No action came forth from these regulators and the problems continued.

In the latest fraud incident the money has been sent not to Nigeria or China or Hong Kong but to USA and Turkey. It therefore appears that these fraudsters have now spread their net across other countries as well. In all these cases the original remittance instructions of an Export or Import order had been altered through fraudulent e-mails. Obviously the original contracts were in the knowledge of banks and therefore they were also privy to the fact that the terms of payment had been changed before the final remittance. This is an easily recognizable modus operandi of these fraudsters and if the Bankers had a reasonable knowledge of such cyber frauds, these could have been prevented.

I therefore place the responsibility for these frauds at the doors of irresponsible and ignorant bankers. The regulators such as RBI and ECGC also has to share the blame for not properly educating the Bankers in this regard.

I therefore suggest that just as the Police in Bangalore have recently pulled up Banks for their lack of security in ATMs, Police in Andhra should pull up Banks in this case by invoking their vicarious responsibility in this regard.

In the meantime ECGC may have to absorb the loss since the Exporter here is also a victim of a Cyber Crime.

Naavi

 

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The threat of Bitcoins…Attention RBI

An article in Forbes raises an interesting aspect on how China may be preparing for a new Cyber War front based on controlling the virtual currency.

See the article here

Readers of Naavi.org are familiar with the discussions on “Linden” the virtual currency used on secondlife.com and how there was a dispute about conversion of the Lindens into US dollars by a person alleged to have fraudulently sold virtual land in secondlife.com. This happnned several years ago but was an indication of how disputes may arise if Virtual world starts interfering with the physical world in the currency domain.

Now every cyber fraudster has to still collect physical currency through a Bank to enjoy the fruits of his fraud. But if Virtual currencies gain wide acceptance then fraudsters can easily encash their fraud proceeds through the virtual currency by passing the regulatory system of the physical world. This will have very serious adverse consequences on the society.

Now an indication of what is likely to happen has been indicated by the increasing popularity of “Bitcoin”, a peer to peer digital currency that functions without he inter mediation of a central authority. The system is a currency version of Bit Torrent.

Bitcoin is termed as a “Cryptocurrency” since it uses crryptography to control transactions and prevent duplication. The system works through operators known as “Miners” who process the generation of coins.  Every individual transaction is permanently recorded in a public ledger known as the block chain.

Users keep “Wallets” in which bitcoins are stored. Payment gateways assist in transfering payments from one bitcoin wallet to another.

The Bitcoin system originally introduced in 2008 as a concept paper became operational in 2009. In 2011 it is reported that Bitcoin exchange value rose from $0.30 to $32 before falling back to $2.

This year, China appears to be showing increased attention on the system and the China based Bitcoin exchange BTC China is said to have overtaken the Japan based Mt Gox and Europe based Bitstamp to become the largest Bitcoin trading exchage.on 19th November 2013, it is reported that one Bitcoin was traded at US $1100. The total Bitcoin holding is said to be roughly 12 million. The marketcap of Bitcoin is therefore expected to be more than US $7.2billion.

The future threat of Bitcoins is that it is likely to be used in replacement of the Swiss Banks  for black money holding, money laundering and financing of criminal activities.

From the Forbes article it appears that China is promoting the currency with the intention of posing a challenge to US dollars as a globally accepted currency as well as  to overcome international sanctions.

The emerging threats of Bitcoins appear to be many and unless we in India start thinking on how we address the threat, the country may face a new threat from the terrorists who may start using this currency for financing anti India activities.

We therefore request RBI and SEBI to start thinking on how to tackle this threat of peer to peer virtual currency.

Naavi

Related Article in The Hindu

All about Bitcon

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Future of ATM banking in India

Yesterday’s physical attack on an ATM customer at Bangalore should be an eye opener for all security professionals who are interested in security as well as Bank professionals who are promoting for increased use of ATM as a customer service channel. It was unfortunate that the victim of the physical attack within the premises of Corporation Bank ATM was a manager of the Bank itself. It was therefore an attack within the Bank’s premises of a Bank staff for which the Bank should take all the responsibility.

More Details

The fact that the lady remained bleeding inside the ATM for over 3 hours since the blood flowing out of the closed doors caught the attention of some school children speaks very poorly of the security situation.

It is time now for Banks to immediately close all un-guarded ATMs failing which the Police should close down such ATMs.

In the meantime a comprehensive security system has to be built for the continued use of ATMs irrespective of the costs that may be involved in the process. Such security system should include

a) Real time electronic surveillance

b) Automatic Alert generation on feed failure

c)Accountability for surveillance with a designated Bank official

d) Stronger authentication system both for entry into the premises as well as ATM usage.

I look forward to Mr Raghuram Rajan, the new Governor of RBI to start focusing on his  Bank Supervision responsibilities along with inflationary control.

I also warn some of the new Banking licensees such as the Shriram Group who have charted their plans on the increased use of technology to take note of the risks associated with unmanned banking and build in necessary security measures as part of their plans.

Naavi

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Time to question safety of ATMs?

So far we have been debating the cyber crime risks associated with ATMs and the need for Banks to assume responsibility. However today an incident in Bangalore has changed the perspective completely and throwing up basic questions on whether at all use of ATMs is safe for public?

For those who may not know, today morning around 7.30 am a lady who entered a Corporation Bank ATM in Bangalore to draw cash was followed by a person who closed the shutters, and attacked the lady with a sharp weapon and a pistol injuring her. He then non nonchalantly walked away. The lady is said to be out of danger but the incident has shaken up the ATM users and made ATM use completely unsafe.

Now it is necessary for customers to go to ATMs with their own arm guards since Banks cannot afford to appoint their own guards.

I demand the Governor of RBI to explain how he views this incident and what remedies he suggests. The responsibility for safeguarding Bank customers lies at the RBI Governor’s doors since RBI has been encouraging the policy of ATM use and discouraging customers from visiting Banks for cash withdrawals by charging the customers extra fees if they wish to visit the Banks.

Customers should stop using ATMs except within Branch premises to avoid such incidents.

I also suggest Bangalore police to take steps to close down any ATM which is not provided with a 24 hour guard by the Bank.

Naavi

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