Archive for November 10th, 2016

As we move from branch banking to digital banking, worries move from branch looting to account hacking…

November 10, 2016

Banking and its security breakers have a Tom and Jerry relationship. The banks keep looking for new ways to increase security and the breakers keep looking for new ways to break the same.

This article argues how one third of accounts of a British small bank have been hacked recently. It also highlights how the issues are not limited to small banks but for larger entities as well:

We’ve seen some pretty strong attacks on banks cyberdefences in the past year. Three major incidents in the SWIFT network; 50 at the Federal Reserve; problems at the Bank of England and many other central banks; a major incident at the Danish payment processorNETS; and big banks like HSBC and JPMorgan have all been affected.

Admittedly, most of these are DDoS – Distributed Denial of Service – attacks, which bring down websites but not banks, yet that’s just the tip of the iceberg.  After all, it used to be that thieves would rob bank branches as that’s where the money was; now, they rob bank servers because that’s where the money is.

These incidents of cybercrime are often unnoticed however, as banks are loathe to go publish and say they were hacked … but one did just that this week.  Tesco Bank.  A hacker got into the bank and compromised 40,000 of their 136,000 accounts.   That’s a third.  Of those compromised, the bank originally thought that 20,000 had been hacked with money taken, bvut it turns out it is 9,000 who lost £2.5 million ($3.2 million).   Even so, the bank had to shut down their internet banking service to all customers for several days, whilst they sorted out the mess, and suspended all online debit card and contactless card transactions.

That is seriously worrying for a bank’s reputation.  They’ve promised to reimburse all customers who were impacted, but to openly say they were hacked is not good for the image.

He says one solution is for the banking industry to cooperate and evolve more robust cybersecurity standards.

But the jerrys will soon figure whatever Tom (or Toms) does and rob the cheese.  This hacking will be a huge concern going ahead across banking. Basically it is the age old relation which is not changing. The medium is changing from robbing branches to hacking accounts on a digital platform.

Indian ‘jugaad’ to beat rupee demonetisation

November 10, 2016

Alternate payment systems and currencies are shaping up as consumers face the denomination heat.

Here is a story from Chennai:

 Cashing in on this, Hotel Saravana Bhavan, a chain of hotels head-quartered in Chennai, having 36 branches across the state, has opted to accept Rs.500 and Rs.1,000 notes from its customer. The hotel’s creative in-charge K. Kamalakannan, said: “We are accepting the notes. We will exchange them when the banks open doors,’’ he said. There is an hitch, however. Tendering change has proved a big challenge for the hotel.

Couple of its customers hit upon an interesting solution for this predicament. Though they are unknown to each other, they chose to share their bills. One of them paid the combined bill, and the other promised him to do an online recharge of his portion!


C. Sivasankaran-promoted nascent taxi hailing company UTOO Customer said it would accept Rs.500 notes but won’t tender change. Instead, it said it would give a credit note, which a customer could use for another trip! “To ease your travel, we will accept account payee cheques as mode of payments,’’ it said.  Even an IOU (I owe you) letter will do, said Mr. Sivasankaran. Tata to an old order, hail the new change!

Then there are transaction arbitrages. There are two kinds of arbitrages going on. First is happening in the Financial markets where people are speculating on impact on bonds, currency, money supply and so on.

Second is the trasnaction arbitrage happening in streets and corners. Here pawn shops/people are trying to take advantage of the situation by offering ease of transactions. An example from Mumbai:

Mumbai saw jugaad kick in at supersonic speed amidst a brave new economic reality in which the two highest-denomination notes are no more legal. While black-money hoarders scurried to offload their cache via sales of cash, distress bullion buying and questionable currency swaps, those enabling the deals flexed the book to make the deals look legit.

The most blatant barter was on at Zaveri Bazaar, where Mirror’s camera caught a currency trader charging 60 per cent to swap the demonetised notes. We have a recording of the conversation in which he is heard saying he can give 100-rupee notes for 500- and 1000-rupee notes after keeping a chunk of the value. “I can give you Rs 400 for a 1,000-note and Rs 200 for a 500-note,” he boasted to us. On normal days, he exchanges tattered notes for new ones.

Then there is this story on Angadias who are basically money carriers from Surat to Bombay.

Fascinating to read all this…Huge economic experiment asking so many questions..

The history of student loans goes back to the Middle Ages

November 10, 2016

Superb piece by Jenny Adams, Associate Professor of English at University of Massachusetts Amherst.

He points how people could take student loans bu givings books as collateral:

Prompted by my own anxiety about educational debt, an anxiety that intensified several years ago with the birth of my own prospective college students, I have been researching the long history of educational loans in order to get a better context for the current student debt crisis. With student loan growth rates spiraling out of control, it behooves us to think through the ways other time periods and cultures have monetized, funded or not funded student labor. 

The history of student loans starts with the establishment of institutions of higher learning in medieval Europe from the late 11th century.

The University of Bologna, considered the first official university, was quickly followed by the University of Paris, Oxford University and Cambridge University. All of these places offered degrees to young men, training them for positions in the Catholic Church and, later, in government.

At first, scholars who needed money did not differ from other borrowers: everyone took loans from the same lenders. But in 1240, Robert Grosseteste, the bishop of Lincoln, used Oxford University money to launch the first documented student loan system. He named it St. Frideswide’s Chest.

St. Frideswide’s Chest was literally a chest. Bound by two different locks, with each key held by a different college magister, or faculty member, it resided at St. Frideswide’s Priory, a religious house in central Oxford, amid the city’s colleges, academic halls and student apartments.

To get a loan from St. Frideswide’s, a borrower had to be a scholar of modest means – and likely took an oath for proving so. He also had to have something of value to deposit in the chest as collateral. From the pledge notes I’ve seen in roughly 100 manuscripts and descriptions of manuscripts, it’s clear that scholars hocked everything from silver spoons to gold plates.

But the most commonly collateralized items were books. Not fancy, illuminated books. Just textbooks. In the late Middle Ages, this included works by Aristotle, the Bible, law codes and medical tracts. Here’s a link to a manuscript at Balliol College that was used as collateral. The lines on the final page record two loans taken out by a scholar, Thomas Chace, in 1423 and 1424. The Merton College manuscript (pictured) contains eight pledge notes from the same century.

Then advent of printing machine made books cheaper and books no more worked as collateral.

Overtime loans were given on future incomes and not collaterals:

Yet even before this, the loan system had started to decline. Although the arrival of the printing press in the late 15th century didn’t have an immediate effect on manuscript production, it would eventually make books cheap and thus no longer worth collateralizing. Even in the chests’ final century of use, the use of gold plate and jewelry was increasing and by 1500 had surpassed the use of books.

Around the same time, bankers began to make loans on the premise of future returns rather than in exchange for real property. The shift toward anticipated future earnings soon came with the England’s 1624 legalization of interest-bearing loans, which pushed even more people into this model of lending.

With their loan chests gone, students again became just like other borrowers. And just like other borrowers, they, too, could end up the notorious debtors’ prisons that began to swell with inmates as early as the 17th century.

Student loans arrived in the United States in the mid-19th century. Like the medieval loan chests at Oxford, these loans started through a singular university, in this case Harvard, which administered them.  This localized system changed in the mid-20th century with the creation by the Department of Education in 1965 of federally guaranteed student loans made by private lenders and available to students across the country.

Students were once again put into a special category. But in this case, this meant they could now collateralize their estimated future incomes (without even knowing what those incomes might be) in order to obtain a degree.

No one is suggesting to go back to middle ages. But we should think why educ has become so expensive? Moreover educ is jeopardizing the very future it is expected to brighten:

I would never advocate a return to the Middle Ages. Yet as we consider the current morass of educational debt, we need to think harder about historical precedent.

True, medieval universities excluded many groups – religious minorities, feudal villeins (a commoner legally tied to a feudal lord in the Middle Ages) and women were barred from entry. Yet poor young men with talent had a chance. Fees were not high. Patrons helped out. And if one needed money, one might be able to pledge a book – not a future.


India was once the hub of education for not just scholars in India but outside as well. How were students financed back then? I am sure some form of student loan existed even back then. It could be pretty thriving one as well..

Probable impact of demonetisation on RBI balance sheet and monetary system…

November 10, 2016

As this blogger was wondering about the economics and logistics of the demonitisation (demon) and some trends too), was woken up by friends from markets. Their worry and sense of excitement was completely different. Keeping these basic problems aside, the interest was mainly in arbitraging from this demon exercise. The questions were what happens now to RBI balance sheet? Will rise in deposits lead to lower or higher money market and G-sec rates? Will it lead to lower or higher liquidity? Whatever it is, financial market players are always looking to arbitrage whatever the situation. Take it or leave it.

One decided to take it and atleast think through the circle of events. Given one’s earlier work on the topic one started from some basics.

Right at the start one must admit that this post is laced with loads of assumptions. In one stroke it is assuming people will find it easy to exchange or deposit cash, have bank accounts and so on. The reality is obviously different. The main purpose is to just understand the flows  in the abstract monetary system.

First of all, demon should mean RBI Balance sheet should decline as that is what leads to money being taken away from the system. But this is not the case here as we have swapping with new notes. So things get complicated. Moreover, the swapping may not be one on one as some might not disclose the entire cash given penalties and charges.

So say before demon RBI Bal sheet is like this:

Liabs                                                Assets
Currency              100                        G-sec                                100
Bank Reserves     100                       Foreign assets (forex)   100

So say 20% of currency does not came back to RBI. This leads to lower liabs.

Liabs                                                Assets
Currency                80                        G-sec                                100
Bank Reserves     100                       Foreign assets (forex)   100

The question is should RBI reserves or give govt profits? Then balance sheet is like this:

Liabs                                                Assets
Currency                80                        G-sec                                100
Bank Reserves     100                       Foreign assets (forex)   100
Profits to Govt       10
Reserves                 10

The higher one time profits will lead to lower fiscal deficit and this will lead to lower yields. This is one of the hypothesis.  However, this defeats the purpose of demon. As any reserves or profits will eventually come back to the system.

For demon to make sense, ideally RBI should cut the assets by 20%. . Come to think of it this is what demon should mean. Mon means rise in reserve money or RBI Bal sheet and demon means decline.

The next q is how does rbi cut assets. Two ways. By reducing GSec or forex.

Liabs                                                Assets
Currency                80                        G-sec                                90
Bank Reserves     100                       Foreign assets (forex)   90

If forex, then RBI sells fores and sucks liquidity. This means  liquidity should tighten and money market rates should go up. There will be downwards pressure on rupee as well.

If G-sec via OMO sales then yields should go up and liq again declines. Either way liquidity declines and in OMO sales we see yields also going up.

What eventually happens will depend on currency coming back and RBI deciding what to do of demon. Though if history is any guide, then the opposite happened. Last time demon happened in 1977-78, we saw both currency in circulation and RBI Balance sheet actually rising in 1978-79! So no case of tight liquidity etc but liquidity actually rising…

Another point is inflation back then. If inflation was high than nominally these values will rise. Mid 1970s inflation was very high due to oil shock and then started to decline a bit. After this demon ideally inflation should have declined but it rose significantly as there was no demon really as explained above. Inflation also rose as we see fiscal deficits also rising from 1978 onwards…

However, story does not end here. Another angle is rise in bank deposits. People are going to exchange currency in two ways. One is the direct exchange and another is deposits via the banking system. The above changes in currency in RBI liabs will happen via the banking system. The cycle is likely to be this:

  1. People come to a bank.
  2. Some choose to exchange. This gets reflected in RBI liabs straight away with some lag.
  3. Others choose to deposit first and then take out money when needed.
  4. So first the deposits with banks go up. This leads to rise in so called CASA balances of the bank. Thus, banks may not need to go for deposits etc for sometime.
  5. This rise in CASA will lead banks to park 4% of proceeds as CRR with RBI.

How does this show in RBI balance sheet eventually. Let us say 50% choose to deposit and 50% choose to exchange. So the Rs 80 aboe is divided into Rs 40 between currency and deposits.

The balance sheet of RBI in near future will be like this:

Liabs                                                Assets
Currency                40                        G-sec                               ??
Bank Reserves      111.6                   Foreign assets (forex)   ??
Total                      151.6

We see steeper decline in balance sheet here from 180 to 152. This is because as explained above it takes time for deposits to be converted to currency. So we have a case for a steeper cash crunch in the economy in near term. So on one hand rise in CASA deposits puts downward pressure on interest rates. On the other as it takes time to be converted back to deposits, it indicates cash crunch at RBI end. It will again depend on net net between central bank and banks. Banks might not be impacted as they have deposits but other players could face the crunch.

Another factor which has to be added is cost of printing these massive number of notes. This cost needs to be taken into account as well which also shrinks the balance sheet.

So lots of stories and linkages. What I have tried to do to best of my ability is to list these linkages. There could be some missing as well. The reality could be very different as seen in 1978. Moreover, what we have tried here is the accountancy angle. We could see no cash crunch at all due to several other known and unknown factors.

Things are different this time as Rs 500 and Rs 1000 notes with many people unlike 1977. How eventually people decide to exchange/deposit is what will matter.

I think I have only confused people more by this post. There are just no easy answers. Markets are dynamic in many ways and will move based on every bit of cue…

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