A SURVEY PROJECT

INTRODUCTION

INTRODUCTIONBanking regulation Act, 1949, defines banking as accepting for the purpose of lending or investment, of deposits of money from the public, repayable on demands or otherwise and with drawable on demand by cheques, draft or order otherwise.

Functions of Commercial Banks:

To change cash for bank deposits and bank deposits for cash.

To transfer bank deposits between individuals and or companies.

To exchange deposits for bills of exchange, govt. bonds, the secured and unsecured promises of trade and industrial units.

To underwrite capital issues. They are also allowed to invest 5% of their incremental deposit liabilities in shares and debentures in the primary and secondary markets.

The lending or advancing of money either upon securities or without securities.

The borrowing, raising or taking of money.

The collecting and transmitting of money and securities.

The buying and selling of foreign exchange including foreign bank notes.

Banking scene in IndiaThe banking sector in India is passing through a period of structural change under the combined impact of financial sector reforms, internal competition, changes in regulations, new technology, global competitive pressure and fast evolving strategic objectives of banks and their existing and potential competitors. Until the last decade, banks were regarded largely as institutions rather akin to public utilities.The market for banking services were oligopolies and Centralized while the market place was regulated and banks were expected to receive assured spreads over their cost of funds. This phenomenon, which was caricatured as 3-6-3 banking in the united states, meaning that banks accepted deposits at 3%, lent at 6%, and went home at 3 p.m. to play golf, was the result of the sheltered markets and administrated prices for banking products. Existence of entry barriers for new banks meant that competition was restricted to existing players, who often operated as a cartel, even in areas where the freedom to price their products existed.

The market place began to change for banks in India as a result of reforms of the financial sectors initiated in the current decade. On account of policy measures introduce to infuse greater competitive vitality in the system, the banking has entered in to a competitive phase. Competition has emerged not only from within the banking system but also from non-banking institutions. Lowering of entry barriers, deregulation of interest rates and growing sophistication of customers have made banking far less oligopolistic today. Introduction of capital adequacy and other prudential norms, freedom granted to enter into new turfs and greater overlap of functions between banks and non-banks have forced banks to get out of their cozy little world and think of the future of the banking.

Emerging environment in IndiaFull convertibility of rupee leading to free mobility of capital, which will mean virtual collapse of the national borders for trade and capital flows.Greater coordination between monetary, fiscal and exchanged rate policies for achieving the goals of faster and sustainable economic growth, macro-economic stability and export promotion.Close integration of various financial markets such as money market, capital market and forex market.Removal of lowering of existing barriers of competitiveness, which are present today in the form of quantitative instructions on certain imports protective custom duties, reservation of certain utilities for the public sector.

Growing privatization and commercialization infrastructure sector.

Today, Banks customers are better informed, more sophisticated and discerning. They also have a wide choice to choose from various banks and non-bank intermediaries. Their expectations are soaring. This is particularly true for banks corporate clientele but also applies to customers from personal segment.

This is changing profile of customers call for a shift from product-based approach to customers-based approach. A bank aiming at maximizing customer value must, of necessity, plan for customized products. A combination of marketing skills and state-of-the-art technology should enable to bank in maximizing its profits through customer satisfaction.

In the next millenium banks will have to be more and more cautions about customer service, profitability, increased productivity, to keep face with changing banking scenario. As banks in India prepare themselves for the millenium these are the shifts in the paradigm they are likely to experience. The 21stcentury may see the dawn of DARWINIAN BANKING. Only the banks could fulfill the demands of markets and changing items would survive and prosper.

A word about SBI cardSBI Segment:

Small business credit card (SBI credit card)

Preamble:

Small business units, retail traders, artisans, village industries, small-scale industrial units and tiny units, professionals and self employed persons etc., contribute significantly to the growth of our economy. The entrepreneur himself manages many of the units. Very often, these entrepreneurs complain of procedural delay in sanctions and renewal of limits. They also find it difficult to cope with the demands for audited balance sheet and other statements sought by the bank from time to time for availing credit facilities. With a view to providing hassle free financial supports to the above categories of entrepreneurs who have shown commitment to run the unit successfully and who are dealing with the banks forlast two yearssatisfactorily, new and friendly credit product namelysmall business credit card schemeis designed. Under the scheme, cumbersome procedural aspects relating to reviews and renewals, submission of balance sheet, stock statements and other statements are done with credit delivery made simple and easy.

Purpose:

To meet the credit requirements of small business units, industrial unit, retail trader, artisan, Small Scale Industry (SSI) and tiny units.

Eligibility:

A.Customers of the following segments with a satisfactory track record for the last two years enjoying credit facilities.

Small industrial units (SSI and tiny units including artisans)

Small retail traders (Under SBF)

Professional and self employed persons

Small business enterprise

B.Units who do not enjoy credit limit with us/other banks at present with excellent performance and credential may be considered.

Quantum of loan:

Loan up to Rs. 5 Lakh can be sanctioned to eligible persons.

Assessment:

The small business credit card limit can be fixed as follows :

For small business, retail trader etc.20% of the annual turnover declared for tax purpose or last twelve months turnover in the operative accounts, whichever is higher.

In respect of parties with good track record, where sales tax returns are not available, the credit limits may be decided taking into consideration the actual turnover in the accounts during the last two years.

For professionals and self employed persons,50% of their gross annual income as per IT return shall be considered as the limit for issuing the SBI credit card.

For small scale industrial units, tiny sector unitsthe assessment norms in vogue as per the Nayak Committee recommendations would continue.

Validity:

Credit card limit will be valid for a period of three years, subject to satisfactory conduct of the accounts.

Annual review will be done based on conduct/operations of the A/cs. A major portion of the sales turnover should have been routed through the accounts as revealed by the credit summations.

Repayment:

The working capital advance may be continued subject to that review every year provided the credit summations in the account is not less than 50% of the projected sales turnover. If the credit summations is less than 50% of projected sales turnover. The outstanding as on the due date of review should be made repayable in suitable monthly installments.

The term loan is repayable in suitable installments with in a maximum period of five years.

In case of composite loans, only the term loan is repayable in installments up to a maximum period of five years.

Interest rate:

As per extent instructions issued from time to time relating the market segment.

Refinance:

No refinance is to be claim from SIDBI

Security:

Primary : Hypothecation of the stock in trade receivables, machinery, office equipment.

Collateral:

Under SSI-No collateral security as per existing guidelines of RBI.

User SBF:

Up to Rs. 25000/- No collateral security.

Over Rs. 25000/- charge over movable/immovable property or third party granted.

However, in case of the excellent track record, sanctioning authority may waive collateral requirement.

Margins:

Up to Rs. 25000/- NIL

Rs. 25001/- to Rs. 5,00,000/-20%

Documentation:

Documents as per extant instructions.

Methodology:

The credit card is a hassle free convenient banking product aimed at simplifying the credit delivery mechanism. Cumbersome procedural aspects relating to reviews and renewals, submission of stock statement, balance sheet and other statements are done away with. The credit limit will be worked as detail above.

Small business credit card

Card No.

Name

Account No.

Tel. No.

Limit Rs.

Date of issue

Valid upto

.. (Branch Code)

Signature of the Brach Manager

Card holders Photograph with signature

The borrower would be issued a photo card indicating sanctioned limit and validity of the limit (sample card)

Insurance:Fixed assets/stock pledged/hypothecated to the bank be fully insured at least to the extent of the bank interests.Bank may waive insurance of assets for equipment against the fire and other risk up to Rs.25000/-Cover under credit guarantee scheme:All eligible laon accounts sanctioned for small scale industries (other than services) would qualify for cover under CGTFSI scheme (presently the scheme has been introduce in five circles on pilot basis viz. New Delhi, Chandigarh, Lucknow, Patna & Hydrabad).

Operation:

Small business credit card accounts should be maintained in a separate ledger.

Cheque book should be issued and marked as small business credit card account.

Pass book should be issued for mall business credit card holders.

Stock statement waived.

Submission of audited balance sheet waived.

Borrower would be issued a small business credit card with photograph thereon. Cost of photograph to be borne by banks.

IRAC norms would be applicable.

Brief opinion report should be recorded. Marked inquiries should be made and recorded in the opinion report and singed by the field officer/cash officer or officers not below that rank.

Units within a radius of 5 kilometers may be covered intensively for the issue of credit card. This condition may be waived for such of those units already in the book of the branch as on 31-2-2002.

Inspections:

Half-yearly inspection/monitoring to ensure the end user funds.

Sanction:

Required loan may be sanctioned with in a week after receipt of detailed information.

Control return after sanction may be sent to next higher authority for approval .

Scoring Model:

Loan would be sanctioned up to Rs. 5,00,000/- based on the simplified scoring model as given in annexure- II. Those who are scoring less than 60% would not qualify for the loan.

Rationale:

New schemes for hassle free credit facilities to small borrower.

Automatic Teller Machine (ATM)An ATM (Automatic Teller Machine) card is useful to a card holder as it helps him to withdraw cash from banks even when they are closed. This can be done by inserting the card in the ATM installed at various banks locations.

State Bank Cash PlusCARDoSignature Panel.

Magnetic Stripe

Features of State Bank Cash Plus CardState Bank Cash Plus Card having the 19 digit.

Name of the card holders mention there on it.

In case of State Bank Cash Plus Card, there is no expiry period but for the old card, the date after which your card needs to be renewed is the last day of the month indicated on your card.

Signature panel on which you must sign as soon as youre your card. It identifies the card as your State Bank Card Plus Card.

The magnetic stripe, which contains encoded information.

ATM card possess pincode which having the 4 digit.

Use of State Bank Cash Plus CardWe uses our State Bank Cash Plus Card for cash withdrawal from ATMs.

We uses it for making the payments for purchase made at the merchant establishments.

Significance of the StudyThis study entitled comparative study of various credit schemes of SBI V/s other banks will be helpful for bankers to maintain customers service policy, for customers while deciding their financing needs and also helpful for other researchers for further research in the future.

SBI card provides customers with an option, in addition to the existing banking credit facilities available. With an SBI card customers can enjoy hassle-free credit facilities.

This study would help us to know about the problems that are faced by the consumers during transactions. It would also reveal the problems that are being faced by the bank employees while dealing with customers and would also highlight the future prospect of SBI card.

Review of existing literatureIt is very essential to know whether the study has already been conducted before. If so, how and to what extent ? And because of this scholar has to go through all the existing literature related to the study. SBI Card is a new concept introduced in Bhiwani byState Bank of Indiaonly a few months back, very limited studies have been conducted on the subject. Due to the time restrictions scholar could seek advice from only the limited literature, which is available with the bank.

As the concept is completely under the control of various banks and RBI. So the information is directly taken from these sources.

ConceptualizationAs the concept includes two terms i.e. cash credit or working capital loans and terms loans. Therefore both the terms are taken into consideration in the proposed study. Due to the privatization of banking sector many big private players entered in this sector giving a tough competition to the existing players. So, to face this stiff competition all the public sector banks have to review their functioning. These aspects will be given importance in this study.

The concept of SBI card is quite new to the people of Bhiwani. Question crops in mind what is a SBI card, What is its shape and size, what is its function. A SBI card is nothing but a identity card containing card holders photographs with signature, card no. Name, A/c No. limit, validity period, branch code with signature of Branch Manager.

COMPANY PROFILEState Bank of India

BACKGROUND

The SBI was formed through an Act of Parliament in 1955 by taking over the Imperial Bank. The SBI group consisted of seven associate banks: State Bank of Hyderabad State Bank of Indore State Bank of Mysore State Bank of Patiala State Bank of Saurashtra State Bank of Travancore State Bank of Bikaner & Jaipur

The State Bank of India, the countrys oldest Bank and a premier in terms of balance sheet size, number of branches, market capitalization and profits is today going through a momentous phase of Change and Transformation the two hundred year old Public sector behemoth is today stirring out of its Public Sector legacy and moving with an agility to give the Private and Foreign Banks a run for their money.

The bank is entering into many new businesses with strategic tie ups Pension Funds, General Insurance, Custodial Services, Private Equity, Mobile Banking, Point of Sale Merchant Acquisition, Advisory Services, structured products etc each one of these initiatives having a huge potential for growth.

The Bank is forging ahead with cutting edge technology and innovative new banking models, to expand its Rural Banking base, looking at the vast untapped potential in the hinterland and proposes to cover 100,000 villages in the next two years.

It is also focusing at the top end of the market, on whole sale banking capabilities to provide Indias growing mid / large Corporate with a complete array of products and services. It is consolidating its global treasury operations and entering into structured products and derivative instruments. Today, the Bank is the largest provider of infrastructure debt and the largest arranger of external commercial borrowings in the country. It is the only Indian bank to feature in the Fortune 500 list.

The Bank is changing outdated front and back end processes to modern customer friendly processes to help improve the total customer experience. With about 8500 of its own 10000 branches and another 5100 branches of its Associate Banks already networked, today it offers the largest banking network to the Indian customer. The Bank is also in the process of providing complete payment solution to its clientele with its over 8500 ATMs, and other electronic channels such as Internet banking, debit cards, mobile banking, etc.

With four national level Apex Training Colleges and 54 learning Centers spread all over the country the Bank is continuously engaged in skill enhancement of its employees. Some of the training programs are attended by bankers from banks in other countries.

The bank is also looking at opportunities to grow in size in India as well as Internationally. It presently has 82 foreign offices in 32 countries across the globe. It has also 7 Subsidiaries in India SBI Capital Markets, SBICAP Securities, SBI DFHI, SBI Factors, SBI Life and SBI Cards - forming a formidable group in the Indian Banking scenario. It is in the process of raising capital for its growth and also consolidating its various holdings.

Throughout all this change, the Bank is also attempting to change old mindsets, attitudes and take all employees together on this exciting road to Transformation. In a recently concluded mass internal communication Programme termed Parivartan the Bank rolled out over 3300 two day workshops across the country and covered over 130,000 employees in a period of 100 days using about 400 Trainers, to drive home the message of Change and inclusiveness. The workshops fired the imagination of the employees with some other banks in India as well as other Public Sector Organizations seeking to emulate the Programme.

The CNN IBN, Network 18 recognized this momentous transformation journey, the State Bank of India is undertaking, and has awarded the prestigious Indian of the Year Business, to its Chairman, Mr. O. P. Bhatt in January 2008.

The SBI was the largest bank in India in terms of network of branches, revenues and workforce. It offered a wide range of services for both personal and corporate banking. The personal banking services included credit cards, housing loans, consumer loans, and insurance. For corporate banking, SBI offered infrastructure finance, cash management and loan syndication.

Over the years; the bank became saddled with a large workforce and huge NPAs. According to reports, staff costs in 1999-2000 amounted to Rs 4.5 billion as against Rs 4.1 billion in 1998-99. Increased competition from the new private sector banks (NPBs) further added to SBI's problems. The NPBs had effectively leveraged technology to make up for their size.

Though SBI had 9,000 branches, a mere 22% of those (1935 branches) were connected through Internet. In contrast all of HDFC[5] Bank's 61 branches were connected. By 2000, SBI's net profit per employee was Rs 0.43 million while HDFC's was Rs 0.96 million, and SBI's NPA level was around 7.18% as against HDFC's 0.73% (Refer Table I).

A COMPARISON BETWEEN SBI & SOME NPBs

BANK NPAs/NET ADVANCES PROFIT PER EMPLOYEE (Rs in Million)

SBI 7.18% 0.43

HDFC 0.77% 0.96

UTI BANK 4.71% 0.69

ICICI BANK 1.53% 0.78

GTB 0.87% 1.2

IDBI BANK 1.95% 1.15

Source: www.bankersindia.com

SBI - reach, customer base and experience - had become its problems. Technological tools like ATMs and the Internet had changed banking dynamics. A large portion of the back-office staff had become redundant after the computerization of banks. To protect its business and remain profitable, SBI realized that it would have to reduce its cost of operations and increase its revenues from fee-based services. The VRS implementation was a part of an over all cost cutting initiative.

The VRS package offered 60 days salary for every year of service or the salary to be drawn by the employee for the remaining period of service, whichever was less. While 50% of the payment was to be paid immediately, the rest could be paid in cash or bonds. An employee could avail the pension or provident fund as per the option exercised by the employee. The package was offered to the permanent staff who had put in 15 years of service or were 40 years old as of March 31, 2000.

Activities:

State Bank of India offers its products and services in domains like -

Personal Banking.

NRI Services.

Agriculture.

International.

Corporate.

SME.

Domestic Treasury.

State Bank of India Services offers the following products through its well-managed, efficient and deep-rooted network:

Domestic Treasury.

SBI Vishwa Yatra Foreign Travel Card.

Broking Services

Revised Service Charge.

ATM Services.

Internet Banking.

E-Pay.

E-Rail.

RBIEFT.

Safe Deposit Lockers.

Gift Cheques.

MICR Codes.

Foreign Inward Remittances.

Products and ServicesListed on the left are Services, SBI offers to its customers.

DOMESTIC TREASURY

SBI VISHWA YATRA FOREIGN TRAVEL CARD

BROKING SERVICES

REVISED SERVICE CHARGES

ATM SERVICES

INTERNET BANKING

E-PAY

E-RAIL

RBIEFT

SAFE DEPOSIT LOCKER

GIFT CHEQUES

MICR CODESFOREIGN INWARD REMITTANCES

MOBILE BANKING SERVICES

SBI FreedoM Your Mobile Your Bank

Away from home, bills can be paid or money sent to the loved ones or balance enquiries done anytime 24x7 !!!That is what SBI FreedoM offers -convenience, simple, secure, anytime and anywhere banking.

The service is presently available on java enabled mobile phones over SMS/ GPRS/ WAP as also non java phones with GPRS connection. The service can be availed over the free GPRS facilities offered by various mobile service providers. The services for other non-Java mobile phones are under development and will be offered using Unstructured Supplementary Services Data (USSD).

The following functionalities will be provided in the Phase I :

-Funds transfer (within and outside the bank using NEFT)

-Enquiry services (Balance enquiry/ Mini statement)

-Request services (cheque book request)

-Bill Payment (Utility bills, credit cards)

Business Rules Governing Mobile Banking Services:

The Mobile Banking Service will be available to all the customers having a satisfactory running account (Current/ Savings). The customers will have to register for the services.

Daily transaction limits for fund transfer and bill/ merchant payment will be Rs.5000.00and Rs.10,000.00 respectively per customer with an overall calendar month limit of Rs.30,000.00

The service will be carrier-agnostic i.e. all customers can avail the mobile banking service with the Bank irrespective of the service provider for their mobiles.

Credit Guarantee Fund Scheme for MICRO AND SMALL ENTERPRISESThere are an estimated 26 million micro and small enterprises (MSEs) in the country providing employment to an estimated 60 million persons. The MSE sector contributes about 45% of the manufacturing sector output and 40 % of the nation's exports. Of all the problems faced by the MSEs, non-availability of timely and adequate credit at reasonable interest rate is one of the most important. One of the major causes for low availability of bank finance to this sector is the high risk perception of the banks in lending to MSEs and consequent insistence on collaterals which are not easily available with these enterprises. The problem is more serious for micro enterprises requiring small loans and the first generation entrepreneurs.

2. The Credit Guarantee Fund Scheme for Micro and Small Enterprises (CGMSE) was launched by the Government of India to make available collateral-free credit to the micro and small enterprise sector. Both the existing and the new enterprises are eligible to be covered under the scheme. The Ministry of Micro, Small and Medium Enterprises and Small Industries Development Bank of India (SIDBI), established a Trust named Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) to implement the Credit Guarantee Fund Scheme for Micro and Small Enterprises. The scheme was formally launched on August 30, 2000 and is operational with effect from 1st January 2000. The corpus of CGTMSE is being contributed by the Government and SIDBI in the ratio of 4:1 respectively and has contributed Rs.1906.55 crore to the corpus of the Trust up to March 31,2010. As announced in the Package for MSEs, the corpus is to be raised to Rs.2500 crore by the end of 11th Plan.

Eligible Lending Institutions3. The institutions, which are eligible under the scheme, are scheduled commercial banks (Public Sector Banks/Private Sector Banks/Foreign Banks) and select Regional Rural Banks (which have been classified under 'Sustainable Viable' category by NABARD). National Small Industries Corporation Ltd. (NSIC), North Eastern Development Finance Corporation Ltd. (NEDFi) and SIDBI have also been made eligible institutions. As on March 31, 2010, there were 112 eligible Lending Institutions registered as (MLIs) of the Trust, comprising of 27 Public Sector Banks, 16 Private Sector Banks, 61 Regional Rural Banks, 2 Foreign Bank and 6 other Institutions viz., NSIC, NEDFI, SIDBI and The Tamil Nadu Industrial Investment Corporation(TNIIC).

Eligible Credit Facility4. The credit facilities which are eligible to be covered under the scheme are both term loans and working capital facility up to Rs.100 lakh per borrowing unit, extended without any collateral security or third party guarantee, to a new or existing micro and small enterprise. For those units covered under the guarantee scheme, which may become sick owing to factors beyond the control of management, rehabilitation assistance extended by the lender could also be covered under the guarantee scheme. It is noteworthy that if the credit facility exceeds Rs.50 lakh, it may still be covered under the scheme but the guarantee cover will be extended for credit assistance of Rs.50 lakh only. Another important requirement under the scheme is that the credit facility should be availed by the borrowing unit from a single lending institution. However, the unit already assisted by the State Level Institution/NSIC/NEDFi can be covered under the scheme for the credit facility availed from member bank, subject to fulfillment of other eligibility criteria. Any credit facility in respect of which risks are additionally covered under a scheme, operated by Government or other agencies, will not be eligible for coverage under the scheme.

Guarantee Cover 5. The guarantee cover available under the scheme is to the extent of 75 per cent of the sanctioned amount of the credit facility. The extent of guarantee cover is 80 per cent for (i) micro enterprises for loans up to Rs.5 lakh; (ii) MSEs operated and/or owned by women; and (iii) all loans in the North-East Region. In case of default, Trust settles the claim up to 75% (or 80% wherever applicable) of the amount in default of the credit facility extended by the lending institution. For this purpose the amount in default is reckoned as the principal amount outstanding in the account of the borrower, in respect of term loan, and amount of outstanding working capital facilities, including interest, as on the date of the account turning Non-Performing Asset (NPA).

Tenure of Guarantee 6. The Guarantee cover under the scheme is for the agreed tenure of the term loan/composite credit. In case of working capital, the guarantee cover is of 5 years or block of 5 years.

Fee for Guarantee7. The fee payable to the Trust under the scheme is one-time guarantee fee of 1.5% and annual service fee of 0.75% on the credit facilities sanctioned. For loans up to Rs.5 lakh, the one-time guarantee fee and annual service fee is 1% and 0.5% respectively. Further, for loans in the North-East Region, the one-time guarantee fee is only 0.75%.

Website8. Operations of CGTMSE are conducted through Internet. The website of CGTMSE has been hosted at www.cgtsi.org.in.

Scheme Awareness Programmes9. CGTMSE has adopted multi-channel approach for creating awareness about its guarantee scheme amongst banks, MSE associations, entrepreneurs, etc. through print and electronic media, by conducting workshops/seminars, attending meetings convened at various district/state/national fora, etc. As on March 31,2010, 1080 workshops and seminars were conducted on Credit Guarantee Scheme. Also, CGTMSE participated in 19 exhibitions and attended 304 SLBC/meetings convened by RBI/other Government offices. Posters and mailers have been circulated to banks, industry associations, and other stakeholders for promoting the scheme and creating its greater awareness. With a view to imparting training to MLIs through their training colleges, multimedia CD-ROM containing operational modalities of the scheme, was distributed to the staff training centers/colleges of the MLIs. The Trust has recently launched an advertisement campaign in 194 newspapers across the country through DAVP, which has created considerable awareness about the scheme among the target audience.

Operational Highlights of CGTMSEOperational Highlights of CGTMSE 10. As on March 31, 2010, 3,00,105 proposals from micro and small enterprises have been approved for guarantee cover for aggregate credit of Rs.11550.61 crore, extended by 85 MLIs in 35 States/UTs. A year-wise growth position is indicated in the table below:

PeriodActive MLIsNumber of Proposals ApprovedCredit Amount Approved (Rs. in Lakh)

FY 2000-019951606

FY 2001-021622962952

FY 2002-032249555867

FY 2003-0429660311760

FY 2004-0532951632677

FY 2005-06361628446191

FY 2006-07402745770453

FY 2007-08*4730825105584

FY 2008-09*5753708219940

FY 2009-10*85151387687511

Scheme of Micro Finance ProgrammeThe Government has launched a Scheme of Micro Finance Programme in 2003-04.The Scheme has been tied up with the existing programme of SIDBI by way of contributing towards security deposits required from the MFIs/NGOs to get loan from SIDBI.The scheme is being operated in underserved States and underserved pockets/districts of other states.

The Government of India provide funds for Micro-Finnance Programme to SIDBI, which is called 'Portfolio Risk Fund'(PRF).At present SIDBI takes fixed deposit equal to 10% of the loan amount.The share of MFIs/NGOs is 2.5% of the loan amount (i.e. 25% of security deposit) and balance 7.5%(i.e. 7.5% of security deposite) is adjusted from the funds provided by the Government of India.

Community-based saving and credit schemes

Coopration Internationale pour le Dveloppement et la Solidarit (CIDSE)

CIDSE is a working group of 16 Catholic development agencies. In 1998, CIDSE celebrated the twentieth anniversary of its work in Viet Nam. Initially CIDSE provided emergency aid and supported national reconstruction programmes. However, political and economic changes in the country have allowed CIDSE to increasingly focus on community-based development.

CIDSE has been supporting projects focusing on community-based primary health care, agricultural extension, integrated pest management (IPM), farmer-managed irrigation, credit and savings and emergency assistance. CIDSEs main target groups are poor ethnic minorities, farmers and the unemployed with a special focus on women.

In the area of micro-credit, CIDSE has supported projects adapting the Grameen Bank methodology to Viet Nam since 1992 starting in Ho Chi Minh City. Twenty-one credit and savings projects have been supported by CIDSE in nine provinces.

Loans issued by CIDSE range from VND 500,000 (US$ 36) to VND 2,000,000 (US$ 143), with the first loan to be granted not exceeding VND 500,000. Interest rates are kept low at 1,5 per cent per month for sustainability purposes. Groups of 5 persons are formed as basic units of a savings and credit scheme. The members of the group hold regular weekly/monthly meetings to develop and improve their solidarity, mutual understanding and undertake credit and savings as well as social activities. CIDSE does not target loans; it is up to the people to decide on how use the money for the purpose of income generating activities. Besides, CIDSE encourages a "small loan small repayment" policy. Loans need to be repaid through weekly installments that are collected by the group leaders and consist of three components: principal, interest and savings.

CIDSE has been focusing on income generation and self-employment in urban District 1, 3, 8 and 11 in Ho Chi Minh City, as well as, in suburban districts in Binh Chanh, Cu Chi, Hoc Mon and Nha Be. Savings and credit projects are implemented through the Peoples Committees of the Subdistricts, i.e. Wards, and other partners. Among them are the City Womens Union, the Gardeners Association, the Institute for Economic Research and the C.E.P. Fund of the Ho Chi Minh City Labour Union. More in general, CIDSEs programmes are aimed at promoting job creation and productivity through savings and credit schemes and supporting the urban and rural poor in determining and managing their own development process.

An important component of CIDSEs activities is strengthening the ability of local partners to become self-sufficient in development work by providing them with training and exposure trips. Besides, for group members, CIDSE provides training in small business, simple accounting to improve their income activities and finance management skills.

Environmental Development Action in the Third World (ENDA)

ENDA is an international NGO working in the area of sustainable community development. Its activities are funded by the European Community, the French Government and European NGOs. ENDA has been implementing programmes on slum improvement and urban community development in HCMC and Hue City and recently started to develop projects in Hanoi and Danang in the perspective of creating a network of urban community development at the national level. Besides, ENDA supports ethnic minority communities in the central highland provinces Gialai and Daklak and the coastal provinces Quang Nai and Phu Yen. In the urban context ENDA works at ward level, while with respect to the ethnic minorities ENDA works at village/commune level. The target group of ENDAs urban programmes consists of poor, marginalized, threatened and disadvantaged communities in bigger cities. Most participants of ENDAs projects or programmes - that are all developed as a lead-up to environmental improvement (e.g. through promoting the use of handcarts, community-based waste collection, latrine building, road and sewage system repairing etc.) - are women living in slum settlements likely to be reallocated by Central Government policies. All programmes include and encourage awareness raising activities on health, environment, nutrition and family planning, amongst others through television and video applications. Meanwhile, the target group of ENDAs rural programmes are local indigenous people under threat of the vicious circle of poverty as they are becoming landless due to rapid population growth and land use competition of the migrants.

ENDA adheres to an integrated community development approach and regards savings and credit schemes as a tool to strengthen the communities capacities to eventually take the lead in the community development process. In order to achieve this, ENDA supports social workers (trained as facilitators cum motivators to assist community leaders) and local mass organizations (e.g. Financial Institutions, the Labour Union, the Youth Union and the Women Union) as partners in savings and credit programmes. ENDAs regular collaboration with social workers of the Youth Union and Women Union proves to be very dynamic. At ward level, when dealing with community problems such as income generation and small-scale environmental improvement, ENDA more than often experiences good cooperation of the Ward Peoples Committees, even though they are new to the community development approach. However, when addressing sensitive issues such as land and housing planning, larger and newly constructed or improved infrastructure etc., the ward authority should follow and implement policies and regulations imposed by the district and city level. Unfortunately, at these levels the interpretation of national legislation documents and policies is not always transparent, nor applicable to the needs of the poor people, as is the case with providing housing for the evicted people. As a result, a partnership with district and city level authorities is essential but not always easy or efficient.

Credit funds to beneficiaries funded by ENDA are refundable with a monthly interest rate of 2 per cent to foster the communitys involvement. Besides, these funds can be used in a flexible way: either on a short-term basis (contributing to direct economic improvement) or a long-term basis (benefiting community infrastructure and housing schemes). The registration and accounting system is kept as simple as possible. ENDAs most recent programme is called the Local Initiative Support Programme, a revolving fund of US$ 2,500/each to be used for supporting any sustainable development purpose suggested by the community. This program has been put into operation since early 1999. Moreover, ENDA and the Peoples Committee of District 2 have developed a Housing Credit System that is supposed to benefit 200 low-income families on a long-term basis (approximately 10 years) through voluntary relocation of their houses financed with maintained capital stemming from interest earnings on loans allocated. However, long-term loans appear to scare poor people off because of the higher amounts of money and interest rates involved. As they mostly prefer small short-term loans ENDA decided to adapt the approach and turn it into a step-by-step saving system and get people used to the positive effects of longer term loans. In the meantime, ENDA has circulated the project proposal for funding to different donors.

Tiet Kiem Mua Xuan - Spring Saving Group

Tiet Kiem Mua Xuan saving group is located in the Triangle Community (Ward 3, District 11) of My Tho City, a suburb of HCMC. The Triangle Community was formed in the early 1990s when district 11 authorities demolished community houses on a cemetery and transformed it into a new real estate site. The poor families living on the cemetery grounds were relocated to a small triangular plot of land behind the new housing estate. However, many families did not have the financial means to build new houses and quickly sold their new plots of land to better-off families, causing fragmentation within the community. The Tiet Kiem Mua Xuan savings and credit programme started in February 1994 after a small group of women from the Triangle Community participated in a training visit (organized by the Youth Association of HCMC with financial support of ENDA) to successful credit and saving schemes in neighbouring slum communities.

The Spring Saving Group is composed of 3 different groups, mostly consisting of women, some older men and even children, each chaired by an elected committee of three group leaders: a money-keeper, an accountant and a manager. The groups hold monthly public meetings to review the groups financial activities as well as applications for loans. The latter are granted based on the availability of funds and the financial need of the applicants, taking into account that daily saving should amount to at least 500 Dong. Loan rates are determined by the group members (totaling 228 at present) according to a calculation of repayment days converting the interest rate (3 per cent per month) into the number of days in which the loan should be repaid and specifying the daily amount of the loan. Loans issued range from VND 100,000 (US$ 8) to VND 5,000,000 (US$ 400) and saving amounts depend on peoples capacity and whatever they can contribute. The main characteristic that distinguishes the Spring Saving Programme from other credit programmes in HCMC is its autonomy. Group management is extremely flexible and varies across the group according to the needs and capabilities of each group member. Repayment schedules (daily, weekly or monthly) are chosen by borrowers and depend on their individual financial circumstances.

In 5 years time, the Spring Saving Group has been quite successful in sustaining its programme turning the Triangle Community into a fairly rich community consisting of two main roads and offering group members lots of possibilities to do business. The main activities that have evolved over the years as a result of the saving and credit scheme are related to small businesses and trade, including amongst others breakfast and fruit selling stalls and a construction material and stone furniture factory. Besides an increased average family income of group members, their living circumstances have improved as well, due to constructive cooperation with local authorities willing to provide community services (water, electricity etc.) the Triangle Community can afford to pay for. Amongst the group members there is also increased solidarity, trust and confidence to share good and bad experiences. Currently, the Spring Saving Group is trying to combine its efforts with family health care and environment programmes organized by local mass organizations. Another challenge expressed by the saving group is to start saving on a more long-term basis, e.g. for the construction of houses. The saving group would welcome any advise in this matter on how to go about it and how to convince their members to participate in longer term loans and saving schemes. In this respect, the Spring Saving Group is eager to welcome other saving groups and exchange experiences in order to learn from each other.

CREDIT SCHEMES

A credit card is a payment card issued to users as a system of payment. It allows the cardholder to pay for goods and services based on the holder's promise to pay for them.[1] The issuer of the card creates a revolving account and grants a line of credit to the consumer (or the user) from which the user can borrow money for payment to a merchant or as a cash advance to the user.

A credit card is different from a charge card: a charge card requires the balance to be paid in full each month.[2] In contrast, credit cards allow the consumers a continuing balance of debt, subject to interest being charged. A credit card also differs from a cash card, which can be used like currency by the owner of the card. A credit card differs from a charge card also in that a credit card typically involves a third-party entity that pays the seller and is reimbursed by the buyer, whereas a charge card simply defers payment by the buyer until a later date.

The size of most credit cards is 3 2in (85.60 53.98mm),[3] conforming to the ISO/IEC 7810 ID-1 standard. Credit cards have an embossed bank card number complying with the ISO/IEC 7812 numbering standard.

The concept of using a card for purchases was described in 1887 by Edward Bellamy in his utopian novel Looking Backward. Bellamy used the term credit card eleven times in this novel, although this referred to a card for spending a citizen's dividend rather than borrowing.[4]The modern credit card was the successor of a variety of merchant credit schemes. It was first used in the 1940s, in the United States, specifically to sell fuel to a growing number of automobile owners. In 1938 several companies started to accept each other's cards. Western Union had begun issuing charge cards to its frequent customers in 1921. Some charge cards were printed on paper card stock, but were easily counterfeited.

The Charga-Plate, developed in 1928, was an early predecessor to the credit card and used in the U.S. from the 1930s to the late 1950s. It was a 2 in 1 in rectangle of sheet metal related to Addressograph and military dog tag systems. It was embossed with the customer's name, city and state. It held a small paper card for a signature. In recording a purchase, the plate was laid into a recess in the imprinter, with a paper "charge slip" positioned on top of it. The record of the transaction included an impression of the embossed information, made by the imprinter pressing an inked ribbon against the charge slip.[5] Charga-Plate was a trademark of Farrington Manufacturing Co. Charga-Plates were issued by large-scale merchants to their regular customers, much like department store credit cards of today. In some cases, the plates were kept in the issuing store rather than held by customers. When an authorized user made a purchase, a clerk retrieved the plate from the store's files and then processed the purchase. Charga-Plates speeded back-office bookkeeping that was done manually in paper ledgers in each store, before computers.

In 1934, American Airlines and the Air Transport Association simplified the process even more with the advent of the Air Travel Card.[6] They created a numbering scheme that identified the issuer of card as well as the customer account. This is the reason the modern UATP cards still start with the number 1. With an Air Travel Card, passengers could "buy now, and pay later" for a ticket against their credit and receive a fifteen percent discount at any of the accepting airlines. By the 1940s, all of the major domestic airlines offered Air Travel Cards that could be used on 17 different airlines. By 1941 about half of the airlines' revenues came through the Air Travel Card agreement. The airlines had also started offering installment plans to lure new travelers into the air. In October 1948, the Air Travel Card became the first inter-nationally valid charge card within all members of the International Air Transport Association.[7]The concept of customers paying different merchants using the same card was expanded in 1950 by Ralph Schneider and Frank McNamara, founders of Diners Club, to consolidate multiple cards. The Diners Club, which was created partially through a merger with Dine and Sign, produced the first "general purpose" charge card, and required the entire bill to be paid with each statement. That was followed by Carte Blanche and in 1958 by American Express which created a worldwide credit card network (although these were initially charge cards that acquired credit card features after BankAmericard demonstrated the feasibility of the concept).

However, until 1958, no one had been able to create a working revolving credit financial instrument issued by a third-party bank that was generally accepted by a large number of merchants (as opposed to merchant-issued revolving cards accepted by only a few merchants). A dozen experiments by small American banks had been attempted (and had failed). In September 1958, Bank of America launched the BankAmericard in Fresno, California. BankAmericard became the first successful recognizably modern credit card (although it underwent a troubled gestation during which its creator resigned), and with its overseas affiliates, eventually evolved into the Visa system. In 1966, the ancestor of MasterCard was born when a group of banks established Master Charge to compete with BankAmericard; it received a significant boost when Citibank merged its proprietary Everything Card (launched in 1967) into Master Charge in 1969.

Early credit cards in the U.S., of which BankAmericard was the most prominent example, were mass produced and mass mailed unsolicited to bank customers who were thought to be good credit risks. But, "They have been mailed off to unemployables, drunks, narcotics addicts and to compulsive debtors, a process President Johnson's Special Assistant Betty Furness found very like 'giving sugar to diabetics'." These mass mailings were known as "drops" in banking terminology, and were outlawed in 1970 due to the financial chaos they caused, but not before 100 million credit cards had been dropped into the U.S. population. After 1970, only credit card applications could be sent unsolicited in mass mailings.

The fractured nature of the U.S. banking system under the GlassSteagall Act meant that credit cards became an effective way for those who were traveling around the country to move their credit to places where they could not directly use their banking facilities. In 1966 Barclaycard in the UK launched the first credit card outside of the U.S.

There are now countless variations on the basic concept of revolving credit for individuals (as issued by banks and honored by a network of financial institutions), including organization-branded credit cards, corporate-user credit cards, store cards and so on.

Although credit cards reached very high adoption levels in the US, Canada and the UK in the mid twentieth century, many cultures were more cash-oriented, or developed alternative forms of cash-less payments, such as Carte bleue or the Eurocard (Germany, France, Switzerland, and others). In these places, adoption of credit cards was initially much slower. It took until the 1990s to reach anything like the percentage market-penetration levels achieved in the US, Canada, or UK. In some countries, acceptance still remains poor as the use of a credit card system depends on the banking system being perceived as reliable. Japan remains a very cash oriented society, with credit card adoption being limited to only the largest of merchants, although an alternative system based on RFIDs inside cellphones has seen some acceptance. Because of strict regulations regarding banking system overdrafts, some countries, France in particular, were much faster to develop and adopt chip-based credit cards which are now seen as major anti-fraud credit devices. Debit cards and online banking are used more widely than credit cards in some countries.

The design of the credit card itself has become a major selling point in recent years. The value of the card to the issuer is often related to the customer's usage of the card, or to the customer's financial worth. This has led to the rise of Co-Brand and Affinity cards, where the card design is related to the "affinity" (a university or professional society, for example) leading to higher card usage. In most cases a percentage of the value of the card is returned to the affinity group.

Collectible credit cards

A growing field of numismatics (study of money), or more specifically exonumia (study of money-like objects), credit card collectors seek to collect various embodiments of credit from the now familiar plastic cards to older paper merchant cards, and even metal tokens that were accepted as merchant credit cards. Early credit cards were made of celluloid plastic, then metal and fiber, then paper, and are now mostly polyvinyl chloride (PVC) plastic.

How credit cards work

Credit cards are issued by a credit card issuer, such as a bank or credit union, after an account has been approved by the credit provider, after which cardholders can use it to make purchases at merchants accepting that card. Merchants often advertise which cards they accept by displaying acceptance marks generally derived from logos or may communicate this orally, as in "We take (brands X, Y, and Z)" or "We don't take credit cards".

When a purchase is made, the credit card user agrees to pay the card issuer. The cardholder indicates consent to pay by signing a receipt with a record of the card details and indicating the amount to be paid or by entering a personal identification number (PIN). Also, many merchants now accept verbal authorizations via telephone and electronic authorization using the Internet, known as a card not present transaction (CNP).

Electronic verification systems allow merchants to verify in a few seconds that the card is valid and the credit card customer has sufficient credit to cover the purchase, allowing the verification to happen at time of purchase. The verification is performed using a credit card payment terminal or point-of-sale (POS) system with a communications link to the merchant's acquiring bank. Data from the card is obtained from a magnetic stripe or chip on the card; the latter system is called Chip and PIN in the United Kingdom and Ireland, and is implemented as an EMV card.

For card not present transactions where the card is not shown (e.g., e-commerce, mail order, and telephone sales), merchants additionally verify that the customer is in physical possession of the card and is the authorized user by asking for additional information such as the security code printed on the back of the card, date of expiry, and billing address.

Each month, the credit card user is sent a statement indicating the purchases undertaken with the card, any outstanding fees, and the total amount owed. In the US, after receiving the statement, the cardholder may dispute any charges that he or she thinks are incorrect (see 15 U.S.C.1643, which limits cardholder liability for unauthorized use of a credit card to $50. The Fair Credit Billing Act gives details of the US regulations. The cardholder must pay a defined minimum portion of the amount owed by a due date, or may choose to pay a higher amount up to the entire amount owed which may be greater than the amount billed. The credit issuer charges interest on the unpaid balance if the billed amount is not paid in full (typically at a much higher rate than most other forms of debt). In addition, if the credit card user fails to make at least the minimum payment by the due date, the issuer may impose a "late fee" and/or other penalties on the user. To help mitigate this, some financial institutions can arrange for automatic payments to be deducted from the user's bank accounts, thus avoiding such penalties altogether as long as the cardholder has sufficient funds.

Many banks now also offer the option of electronic statements, either in lieu of or in addition to physical statements, which can be viewed at any time by the cardholder via the issuer's online banking website. Notification of the availability of a new statement is generally sent to the cardholder's email address. If the card issuer has chosen to allow it, the cardholder may have other options for payment besides a physical check, such as an electronic transfer of funds from a checking account. Depending on the issuer, the cardholder may also be able to make multiple payments during a single statement period, possibly enabling him or her to utilize the credit limit on the card several times over.

Advertising, solicitation, application and approval

Credit card advertising regulations in the US include the Schumer box disclosure requirements. A large fraction of junk mail consists of credit card offers created from lists provided by the major credit reporting agencies. In the United States, the three major US credit bureaus (Equifax, TransUnion and Experian) allow consumers to opt out from related credit card solicitation offers via its Opt Out Pre Screen program.

Interest charges

Credit card issuers usually waive interest charges if the balance is paid in full each month, but typically will charge full interest on the entire outstanding balance from the date of each purchase if the total balance is not paid.

For example, if a user had a $1,000 transaction and repaid it in full within this grace period, there would be no interest charged. If, however, even $1.00 of the total amount remained unpaid, interest would be charged on the $1,000 from the date of purchase until the payment is received. The precise manner in which interest is charged is usually detailed in a cardholder agreement which may be summarized on the back of the monthly statement. The general calculation formula most financial institutions use to determine the amount of interest to be charged is APR/100 x ADB/365 x number of days revolved. Take the annual percentage rate (APR) and divide by 100 then multiply to the amount of the average daily balance (ADB) divided by 365 and then take this total and multiply by the total number of days the amount revolved before payment was made on the account. Financial institutions refer to interest charged back to the original time of the transaction and up to the time a payment was made, if not in full, as RRFC or residual retail finance charge. Thus after an amount has revolved and a payment has been made, the user of the card will still receive interest charges on their statement after paying the next statement in full (in fact the statement may only have a charge for interest that collected up until the date the full balance was paid, i.e. when the balance stopped revolving).

The credit card may simply serve as a form of revolving credit, or it may become a complicated financial instrument with multiple balance segments each at a different interest rate, possibly with a single umbrella credit limit, or with separate credit limits applicable to the various balance segments. Usually this compartmentalization is the result of special incentive offers from the issuing bank, to encourage balance transfers from cards of other issuers. In the event that several interest rates apply to various balance segments, payment allocation is generally at the discretion of the issuing bank, and payments will therefore usually be allocated towards the lowest rate balances until paid in full before any money is paid towards higher rate balances. Interest rates can vary considerably from card to card, and the interest rate on a particular card may jump dramatically if the card user is late with a payment on that card or any other credit instrument, or even if the issuing bank decides to raise its revenue.

Benefits to customers

The main benefit to each customer is convenience. Compared to debit cards and checks, a credit card allows small short-term loans to be quickly made to a customer who need not calculate a balance remaining before every transaction, provided the total charges do not exceed the maximum credit line for the card.

Different countries offer different levels of protection. In the UK, for example, the bank is jointly liable with the merchant for purchases of defective products over 100.

Many credit cards offer rewards and benefits packages, such as enhanced product warranties at no cost, free loss/damage coverage on new purchases, various insurance protections, for example, rental car insurance, common carrier accident protection, and travel medical insurance. Credit cards can also offer reward points which may be redeemed for cash, products, or airline tickets. Research has examined whether competition among card networks may potentially make payment rewards too generous, causing higher prices among merchants, thus actually deteriorating social welfare and its distribution, a situation potentially warranting public policy interventions.

Detriments to customers

High interest and bankruptcy

Low introductory credit card rates are limited to a fixed term, usually between 6 and 12 months, after which a higher rate is charged. As all credit cards charge fees and interest, some customers become so indebted to their credit card provider that they are driven to bankruptcy. Some credit cards often levy a rate of 20 to 30 percent after a payment is missed. In other cases a fixed charge is levied without change to the interest rate. In some cases universal default may apply: the high default rate is applied to a card in good standing by missing a payment on an unrelated account from the same provider. This can lead to a snowball effect in which the consumer is drowned by unexpectedly high interest rates. Further, most card holder agreements enable the issuer to arbitrarily raise the interest rate for any reason they see fit. First Premier Bank at one point offered a credit card with a 79.9% interest rate, however they discontinued this card February 2011 because of persistent defaults.

Complex fee structures in the credit card industry limit customers' ability to comparison shop, help ensure that the industry is not price-competitive and help maximize industry profits.

Inflated pricing for all consumers

Merchants that accept credit cards must pay interchange fees and discount fees on all credit-card transactions. In some cases merchants are barred by their credit agreements from passing these fees directly to credit card customers, or from setting a minimum transaction amount (no longer prohibited in the United States). The result is that merchants may charge all customers (including those who do not use credit cards) higher prices to cover the fees on credit card transactions. In the United States in 2008 credit card companies collected a total of $48 billion in interchange fees, or an average of $427 per family, with an average fee rate of about 2% per transaction. Research shows that a substantial fraction of consumers (about 40 percent) choose a sub-optimal credit card agreement, with some incurring hundreds of dollars of avoidable interest costs.

Weakens self regulation

Several studies have shown that consumers are likely to spend more money when they pay by credit card. Researchers suggest that when people pay using credit cards, they do not experience the abstract pain of payment. Furthermore, researchers have found that using credit cards can increase consumption of unhealthy food.

Grace period

A credit card's grace period is the time the customer has to pay the balance before interest is assessed on the outstanding balance. Grace periods may vary, but usually range from 20 to 55 days depending on the type of credit card and the issuing bank. Some policies allow for reinstatement after certain conditions are met.

Usually, if a customer is late paying the balance, finance charges will be calculated and the grace period does not apply. Finance charges incurred depend on the grace period and balance; with most credit cards there is no grace period if there is any outstanding balance from the previous billing cycle or statement (i.e. interest is applied on both the previous balance and new transactions). However, there are some credit cards that will only apply finance charge on the previous or old balance, excluding new transactions.

Benefits to merchants

An example of street markets accepting credit cards. Most simply display the acceptance marks (stylized logos, shown in the upper-left corner of the sign) of all the cards they accept.

For merchants, a credit card transaction is often more secure than other forms of payment, such as cheques, because the issuing bank commits to pay the merchant the moment the transaction is authorized, regardless of whether the consumer defaults on the credit card payment (except for legitimate disputes, which are discussed below, and can result in charges back to the merchant). In most cases, cards are even more secure than cash, because they discourage theft by the merchant's employees and reduce the amount of cash on the premises. Finally, credit cards reduce the back office expense of processing checks/cash and transporting them to the bank.

Prior to credit cards, each merchant had to evaluate each customer's credit history before extending credit. That task is now performed by the banks which assume the credit risk. Credit cards can also aid in securing a sale, especially if the customer does not have enough cash on his or her person or checking account. Extra turnover is generated by the fact that the customer can purchase goods and/or services immediately and is less inhibited by the amount of cash in his or her pocket and the immediate state of his or her bank balance. Much of merchants' marketing is based on this immediacy.

For each purchase, the bank charges the merchant a commission (discount fee) for this service and there may be a certain delay before the agreed payment is received by the merchant. The commission is often a percentage of the transaction amount, plus a fixed fee (interchange rate). In addition, a merchant may be penalized or have their ability to receive payment using that credit card restricted if there are too many cancellations or reversals of charges as a result of disputes. Some small merchants require credit purchases to have a minimum amount to compensate for the transaction costs.

Costs to merchants

Merchants are charged several fees for accepting credit cards. The merchant is usually charged a commission of around 1 to 4 percent of the value of each transaction paid for by credit card. The merchant may also pay a variable charge, called an interchange rate, for each transaction. In some instances of very low-value transactions, use of credit cards will significantly reduce the profit margin or cause the merchant to lose money on the transaction. Merchants with very low average transaction prices or very high average transaction prices are more averse to accepting credit cards. In some cases merchants may charge users a "credit card supplement", either a fixed amount or a percentage, for payment by credit card. This practice is prohibited by most credit card contracts in the United States, and is actually illegal in 10 states, although the contracts allow the merchants to give discounts for cash payment.

Merchants are also required to lease processing terminals, meaning merchants with low sales volumes may have to commit to long lease terms. For some terminals, merchants may also need to subscribe to a separate telephone line. Merchants must also satisfy data security compliance standards which are highly technical and complicated. In many cases, there is a delay of several days before funds are deposited into a merchant's bank account. Because credit card fee structures are very complicated, smaller merchants are at a disadvantage to analyze and predict fees.

Finally, merchants assume the risk of chargebacks by consumers.

Parties involved

Cardholder: The holder of the card used to make a purchase; the consumer.

Card-issuing bank: The financial institution or other organization that issued the credit card to the cardholder. This bank bills the consumer for repayment and bears the risk that the card is used fraudulently. American Express and Discover were previously the only card-issuing banks for their respective brands, but as of 2007, this is no longer the case. Cards issued by banks to cardholders in a different country are known as offshore credit cards.

Merchant: The individual or business accepting credit card payments for products or services sold to the cardholder.

Acquiring bank: The financial institution accepting payment for the products or services on behalf of the merchant.

Independent sales organization: Resellers (to merchants) of the services of the acquiring bank.

Merchant account: This could refer to the acquiring bank or the independent sales organization, but in general is the organization that the merchant deals with.

Credit Card association: An association of card-issuing banks such as Discover, Visa, MasterCard, American Express, etc. that set transaction terms for merchants, card-issuing banks, and acquiring banks.

Transaction network: The system that implements the mechanics of the electronic transactions. May be operated by an independent company, and one company may operate multiple networks.

Affinity partner: Some institutions lend their names to an issuer to attract customers that have a strong relationship with that institution, and get paid a fee or a percentage of the balance for each card issued using their name. Examples of typical affinity partners are sports teams, universities, charities, professional organizations, and major retailers.

Insurance providers: Insurers underwriting various insurance protections offered as credit card perks, for example, Car Rental Insurance, Purchase Security, Hotel Burglary Insurance, Travel Medical Protection etc.

The flow of information and money between these parties always through the card associations is known as the interchange, and it consists of a few steps.

This section requires expansion. (April 2010)

Transaction steps

Authorization: The cardholder presents the card as payment to the merchant and the merchant submits the transaction to the acquirer (acquiring bank). The acquirer verifies the credit card number, the transaction type and the amount with the issuer (Card-issuing bank) and reserves that amount of the cardholder's credit limit for the merchant. An authorization will generate an approval code, which the merchant stores with the transaction.

Batching: Authorized transactions are stored in "batches", which are sent to the acquirer. Batches are typically submitted once per day at the end of the business day. If a transaction is not submitted in the batch, the authorization will stay valid for a period determined by the issuer, after which the held amount will be returned to the cardholder's available credit (see authorization hold). Some transactions may be submitted in the batch without prior authorizations; these are either transactions falling under the merchant's floor limit or ones where the authorization was unsuccessful but the merchant still attempts to force the transaction through. (Such may be the case when the cardholder is not present but owes the merchant additional money, such as extending a hotel stay or car rental.)

Clearing and Settlement: The acquirer sends the batch transactions through the credit card association, which debits the issuers for payment and credits the acquirer. Essentially, the issuer pays the acquirer for the transaction.

Funding: Once the acquirer has been paid, the acquirer pays the merchant. The merchant receives the amount totaling the funds in the batch minus either the "discount rate," "mid-qualified rate", or "non-qualified rate" which are tiers of fees the merchant pays the acquirer for processing the transactions.

Chargebacks: A chargeback is an event in which money in a merchant account is held due to a dispute relating to the transaction. Chargebacks are typically initiated by the cardholder. In the event of a chargeback, the issuer returns the transaction to the acquirer for resolution. The acquirer then forwards the chargeback to the merchant, who must either accept the chargeback or contest it.

Secured credit cards

A secured credit card is a type of credit card secured by a deposit account owned by the cardholder. Typically, the cardholder must deposit between 100% and 200% of the total amount of credit desired. Thus if the cardholder puts down $1000, they will be given credit in the range of $500$1000. In some cases, credit card issuers will offer incentives even on their secured card portfolios. In these cases, the deposit required may be significantly less than the required credit limit, and can be as low as 10% of the desired credit limit. This deposit is held in a special savings account. Credit card issuers offer this because they have noticed that delinquencies were notably reduced when the customer perceives something to lose if the balance is not repaid.

The cardholder of a secured credit card is still expected to make regular payments, as with a regular credit card, but should they default on a payment, the card issuer has the option of recovering the cost of the purchases paid to the merchants out of the deposit. The advantage of the secured card for an individual with negative or no credit history is that most companies report regularly to the major credit bureaus. This allows building a positive credit history.

Although the deposit is in the hands of the credit card issuer as security in the event of default by the consumer, the deposit will not be debited simply for missing one or two payments. Usually the deposit is only used as an offset when the account is closed, either at the request of the customer or due to severe delinquency (150 to 180 days). This means that an account which is less than 150 days delinquent will continue to accrue interest and fees, and could result in a balance which is much higher than the actual credit limit on the card. In these cases the total debt may far exceed the original deposit and the cardholder not only forfeits their deposit but is left with an additional debt.

Most of these conditions are usually described in a cardholder agreement which the cardholder signs when their account is opened.

Secured credit cards are an option to allow a person with a poor credit history or no credit history to have a credit card which might not otherwise be available. They are often offered as a means of rebuilding one's credit. Fees and service charges for secured credit cards often exceed those charged for ordinary non-secured credit cards, however, for people in certain situations, (for example, after charging off on other credit cards, or people with a long history of delinquency on various forms of debt), secured cards are almost always more expensive than unsecured credit cards.

Sometimes a credit card will be secured by the equity in the borrower's home.

Prepaid "credit" cards

A prepaid credit card is not a true credit card, since no credit is offered by the card issuer: the card-holder spends money which has been "stored" via a prior deposit by the card-holder or someone else, such as a parent or employer. However, it carries a credit-card brand (such as Discover, Visa, MasterCard, American Express, or JCB etc.) and can be used in similar ways just as though it were a regular credit card. Unlike debit cards, prepaid credit cards generally do not require a PIN. An exception are prepaid credit cards with an EMV chip. These cards do require a PIN if the payment is processed via Chip and PIN technology.

After purchasing the card, the cardholder loads the account with any amount of money, up to the predetermined card limit and then uses the card to make purchases the same way as a typical credit card. Prepaid cards can be issued to minors (above 13) since there is no credit line involved. The main advantage over secured credit cards (see above section) is that the cardholder is not required to come up with $500 or more to open an account. With prepaid credit cards purchasers are not charged any interest but are often charged a purchasing fee plus monthly fees after an arbitrary time period. Many other fees also usually apply to a prepaid card.

Prepaid credit cards are sometimes marketed to teenagers for shopping online without having their parents complete the transaction.

Prepaid cards can be utilized globally. The prepaid card is convenient for payees in developing countries like Brazil, Russia, India and China, where international wire transfers and bank checks are time consuming, complicated and costly

Because of the many fees that apply to obtaining and using credit-card-branded prepaid cards, the Financial Consumer Agency of Canada describes them as "an expensive way to spend your own money" The agency publishes a booklet entitled Pre-paid Cards which explains the advantages and disadvantages of this type of prepaid card.

Features

As well as convenient, accessible credit, credit cards offer consumers an easy way to track expenses, which is necessary for both monitoring personal expenditures and the tracking of work-related expenses for taxation and reimbursement purposes. Credit cards are accepted worldwide, and are available with a large variety of credit limits, repayment arrangement, and other perks (such as insurance protection, rewards schemes in which points earned by purchasing goods with the card can be redeemed for further goods and services or cashback).

Some countries, such as the United States, the United Kingdom, and France, limit the amount for which a consumer can be held liable due to fraudulent transactions as a result of a consumer's credit card being lost or stolen.

Security problems and solutions

Credit card security relies on the physical security of the plastic card as well as the privacy of the credit card number. Therefore, whenever a person other than the card owner has access to the card or its number, security is potentially compromised. Once, merchants would often accept credit card numbers without additional verification for mail order purchases. It's now common practice to only ship to confirmed addresses as a security measure to minimise fraudulent purchases. Some merchants will accept a credit card number for in-store purchases, whereupon access to the number allows easy fraud, but many require the card itself to be present, and require a signature. A lost or stolen card can be cancelled, and if this is done quickly, will greatly limit the fraud that can take place in this way. European banks can require a cardholder's security PIN be entered for in-person purchases with the card.

The PCI DSS is the security standard issued by The PCI SSC (Payment Card Industry Security Standards Council). This data security standard is used by acquiring banks to impose cardholder data security measures upon their merchants.

A smart card, combining credit card and debit card properties. The 3 by 5 mm security chip embedded in the card is shown enlarged in the inset. The contact pads on the card enable electronic access to the chip.

The goal of the credit card companies is not to eliminate fraud, but to "reduce it to manageable levels". This implies that high-cost low-return fraud prevention measures will not be used if their cost exceeds the potential gains from fraud reduction as would be expected from organisations whose goal is profit maximisation.

Internet fraud may be by claiming a chargeback which is not justified ("friendly fraud"), or carried out by the use of credit card information which can be stolen in many ways, the simplest being copying information from retailers, either online or offline. Despite efforts to improve security for remote purchases using credit cards, security breaches are usually the result of poor practice by merchants. For example, a website that safely uses SSL to encrypt card data from a client may then email the data, unencrypted, from the webserver to the merchant; or the merchant may store unencrypted details in a way that allows them to be accessed over the Internet or by a rogue employee; unencrypted card details are always a security risk. Even encryption data may be cracked.

Controlled Payment Numbers which are used by various banks such as Citibank (Virtual Account Numbers), Discover (Secure Online Account Numbers, Bank of America (Shop Safe), 5 banks using eCarte Bleue and CMB's Virtualis in France, and Swedbank of Sweden's eKort product are another option for protecting against credit card fraud. These are generally one-time use numbers that front one's actual account (debit/credit) number, and are generated as one shops on-line. They can be valid for a relatively short time, for the actual amount of the purchase, or for a price limit set by the user. Their use can be limited to one merchant. If the number given to the merchant is compromised, it will be rejected if an attempt is made to use it again.

A similar system of controls can be used on physical cards. Technology provides the option for banks to support many other controls too that can be turned on and off and varied by the credit card owner in real time as circumstances change (i.e., they can change temporal, numerical, geographical and many other parameters on their primary and subsidiary cards). Apart from the obvious benefits of such controls: from a security perspective this means that a customer can have a Chip and PIN card secured for the real world, and limited for use in the home country. In this eventuality a thief stealing the details will be prevented from using these overseas in non chip and pin EMV countries. Similarly the real card can be restricted from use on-line so that stolen details will be declined if this tried. Then when card users shop online they can use virtual account numbers. In both circumstances an alert system can be built in notifying a user that a fraudulent attempt has been made which breaches their parameters, and can provide data on this in real time. This is the optimal method of security for credit cards, as it provides very high levels of security, control and awareness in the real and virtual world.

Additionally, there are security features present on the physical card itself in order to prevent counterfeiting. For example, most modern credit cards have a watermark that will fluoresce under ultraviolet light. Most major credit cards have a hologram. A Visa card has a letter V superimposed over the regular Visa logo and a MasterCard has the letters MC across the front of the card. Older Visa cards have a bald eagle or dove across the front. In the aforementioned cases, the security features are only visible under ultraviolet light and are invisible in normal light.

The United States Secret Service, Federal Bureau of Investigation, and U.S. Postal Inspection Service are responsible for prosecuting criminals who engage in credit card fraud in the United States,[citation needed] but they do not have the resources to pursue all criminals. In general, federal officials only prosecute cases exceeding US$5,000. Three improvements to card security have been introduced to the more common credit card networks but none has proven to help reduce credit card fraud so far. First, the on-line verification system used by merchants is being enhanced to require a 4 digit Personal Identification Number (PIN) known only to the card holder. Second, the cards themselves are being replaced with similar-looking tamper-resistant smart cards which are intended to make forgery more difficult. The majority of smart card (IC card) based credit cards comply with the EMV (Europay MasterCard Visa) standard. Third, an additional 3 or 4 digit Card Security Code (CSC) is now present on the back of most cards, for use in card not present transactions. Stakeholders at all levels in electronic payment have recognized the need to develop consistent global standards for security that account for and integrate both current and emerging security technologies. They have begun to address these needs through organizations such as PCI DSS and the Secure POS Vendor Alliance.[28]Credit card numbering

The numbers found on credit cards have a certain amount of internal structure, and share a common numbering scheme.

The card number's prefix, called the Bank Identification Number, is the sequence of digits at the beginning of the number that determine the bank to which a credit card number belongs. This is the first six digits for MasterCard and Visa cards. The next nine digits are the individual account number, and the final digit is a validity check code.

In addition to the main credit card number, credit cards also carry issue and expiration dates (given to the nearest month), as well as extra codes such as issue numbers and security codes. Not all credit cards have the same sets of extra codes nor do they use the same number of digits.

Credit cards in ATMs

Many credit cards can also be used in an ATM to withdraw money against the credit limit extended to the card, but many card issuers charge interest on cash advances before they do so on purchases. The interest on cash advances is commonly charged from the date the withdrawal is made, rather than the monthly billing date. Many card issuers levy a commission for cash withdrawals, even if the ATM belongs to the same bank as the card issuer. Merchants do not offer cashback on credit card transactions because they would pay a percentage commission of the additional cash amount to their bank or merchant services provider, thereby making it uneconomical.

Many credit card companies will also, when applying payments to a card, do so, for the matter at hand, when applying payments to a card, at the end of a billing cycle, and apply those payments to everything before cash advances. For this reason, many consumers have large cash balances, which have no grace period and incur interest at a rate that is (usually) higher than the purchase rate, and will carry those balances for years, even if they pay off their statement balance each month.

Credit cards as funding for entrepreneurs

Credit cards are a risky way for entrepreneurs to acquire capital for their start ups when more conventional financing is unavailable. It's widely reported that Len Bosack and Sandy Lerner used personal credit cards to start Cisco Systems. It is rumoured that Larry Page and Sergey Brin's start up of Google was financed by credit cards to buy the necessary computers and office equipment, more specifically "a terabyte of hard disks". Similarly, filmmaker Robert Townsend financed part of Hollywood Shuffle using credit cards.[53] Director Kevin Smith funded Clerks in part by maxing out several credit cards. Actor Richard Hatch also financed his production of Battlestar Galactica: The Second Coming partly through his credit cards. Famed hedge fund manager Bruce Kovner began his career (and, later on, his firm Caxton Associates) in financial markets by borrowing from his credit card. UK entrepreneur James Caan (as seen on Dragon's Den) financed his first business using several credit cards.

SBI Advantage Gold Card

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