PATUCK-GALA COLLEGE OF COMMERCE & MANAGEMENT...B Patuck-Gala College of Commerce & Management Santacruz, Mumbai-400 055 ISSN : 2277- 5676 Vol . : 7; Issue : 1 The copyrights are vested

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PATUCK-GALA COLLEGE OF COMMERCE & MANAGEMENT Affiliated to University of Mumbai

NAAC Re-accredited : B++ Grade

Annual Peer Reviewed Research Journal

October, 2016

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Patuck-Gala College of Commerce & Management

Santacruz, Mumbai-400 055

ISSN : 2277- 5676 Vol . : 7; Issue : 1

The copyrights are vested solely with the publishers, and no

content, partially or fully maybe reproduced by any means

without obtaining prior written permission from the publisher.

DISCLAIMER

The views expressed in the Journal are purely the personal

judgement of the authors and they are solely responsible for it.

The content does not in any way reflect the views of this Institute

or the Institute with which the authors are associated.

All efforts are made to ensure that the published information is

correct. The Publisher is not responsible for any errors caused

due to oversight or otherwise.

Published and Printed by


Patuck Campus, Rustomba Patuck Marg,

100 Nehru Road,

Santacruz (E)

October, 2016

Editors Dr. (Mrs.) Meeta Pathade

In-charge Principal

Mrs. Renita Vazirani Convenor-Research & Publication Cell

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ACKNOWLEDGEMENT

The Research & Publication Cell at our College has been conceived with the

objective to encourage research culture among the teaching fraternity within

and outside the Institution. Over the years, we have been able to achieve

quite a milestone, with recreating the journal into an ISSN peer reviewed

journal. And for this, we extend our heartfelt gratitude to all our peer

reviewers who have honourably accepted to be a part of the development

process. Their valuable and insightful inputs have helped us make a big

difference and has helped us improve and sustain the quality of the Journal.

The Management of the Institute has imbibed and maintained the culture of

philanthropy ever since its inception. Teachers are encouraged to publish

their papers at no cost. We truly extend our gratitude to the Management for

supporting all the initiatives of the Research & Publication Cell. In the true

spirit, the Cell is encouraged to disseminate research culture among the

teaching fraternity. Each year the research papers received are multifaceted

and have enormous academic value. We thank all our research paper authors

for their efforts to provide good quality research papers. The Journal would

not have evolved without their worthy inputs.

We are thankful to our Chairman, Shri Adil J. Patuck and our Principal, Dr.

(Mrs.) Meeta Pathade for extending their continuous support to the Research

& Publication Cell. Initiatives desired to be undertaken by the Cell get a

positive nod and appropriate guidance to complete the same.

Dr. Shobha Menon, Principal, Cosmopolitan Valia College, a name heard

well among researchers was gracious to accept our request to peer review the

papers received. We extend our sincere gratitude to her for conducting a

detailed review of each paper and providing us with appropriate guidelines to

improvise on the effectiveness of the papers.

We thank the editors for compiling the Journal and undertaking corrections

in the papers which makes the Journal a thorough academic read. This

October 2016, issue will be our 7th

issue and we are very thankful to all who

have directly and indirectly contributed to the Journal. We have received

tremendous value addition to our research initiative.

Thank you

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ABOUT US

Patuck-Gala College of Commerce & Management is affiliated to

University of Mumbai. At the time of its inception in 2002, the College

offered Bachelor of Commerce (B.Com). In the academic year 2003-04, the

College spread its wings and commenced Bachelor of Management Studies

(BMS) and to meet the increasing demand in the market, the College started

B.Com (Banking & Insurance) in the academic year 2009-10. Our College is

NAAC accredited since 2010. In August 2016, the College underwent the

second cycle of accreditation and was graded a B++ (CGPA 2.77) by the

NAAC peer team.

We have professional well-qualified teaching and non teaching staff

members who would bring a total delight to our stakeholders. The College

functions smoothly with the help of various committees and associations.

Our College has several facilities like Library, Sports Room cum Common

Room for boys and girls separately, Canteen, Computer Lab, Playground,

Common Room for Girls and Boys and a spacious Auditorium. The

infrastructure is continually improvised to meet the growing needs.

We are keen to provide for the overall development of our students and

hence we encourage them to participate in a number of inter-collegiate

events. The grooming ensures our students of awards and laurels that not

only make us proud but also boosts the confidence of our students to do try

and do their best in their lives.

The College initiatives have always been to contribute to the area of

education and research and for the all round development of the students.

Each year Faculty Development Programs are conducted on campus to

ensure the facilitation of faculty all round development.

Beginning this academic year, the Research & Publication Cell, has

introduced a Student Research Journal, which consists of research papers

authored by students. The objective of this initiative is to imbibe research

culture among students and to facilitate value added academic inputs to

them.

A 360 degree approach is adopted at the College, with development and

welfare of administrative staff, faculty members, class IV employees and

students being catered to.

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EDITORIAL

“The greatest part of a writer's time is spent in reading, in order to write: a

man will turn over half a library to make one book.”

- Samuel Johnson

Research comprises, creative work undertaken on a systematic basis in order

to increase the stock of knowledge, including knowledge of humans, culture

and society, and the use of this stock of knowledge to devise new

applications.

This Annual Peer Reviewed Research Journal titled, ‘Insight Management

Review’, has been initiated to provide a platform to the teaching fraternity to

indulge into research and disseminate it to the rest of the intelligentsia. This

Journal achieves a dual objective of improving the knowledge through

reading and writing of academic value and developing in teachers a craving

for in-depth knowledge.

This is the seventh issue of the research Journal. While still sustaining the

quality of the Journal, it has always attempted to cater to the expert

researchers as well as the novices in research. It provides a platform to the

first timers to indulge in research paper writing and entering the discussion

forum.

The papers provide a good amount of value addition to the readers and may

intrigue in them many exploratory questions which might provide further

scope for research.

We thank all our readers and hope they derive ample knowledge from the

Journal. We also request our readers to feel free and provide their valuable

suggestions and feedback to the editorial team, so as to enable us to improve

the effectiveness of the Journal.

The Editorial Team

https://en.wikipedia.org/wiki/Knowledge

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CONTENTS

Sr.

No.

Title of the Paper Author Page

No.

1 Setting Up E-Commerce In India -

Choosing An Ideal Payment

Gateway Partner

Rajni Mathur &

Navendu Prakash

01

2 E- Banking : A Safe And Secured

Mode of Transaction

Seema Thakur 10

3 Corporate Governance And Business

Ethics For MSMEs In India

Byshi Panikar 17

4 The Study of Liquidity In The

Indian Money Market

Koel

Roychoudhury

26

5 Co-operative Banking In India - A

Case Study of Shamrao Vithal Co-

operative Bank

Dipti Menezes 37

6 Dynamism in English Language

Shivangi Sharma 48

7 Study of Acculturative Stress - A

Literature Review

Priyeta

Priyadarshini

52

8 Emotional Intelligence - Unravelling

Self - Awareness

Dr. Ujjal

Mukherjee

61

Insight Management Review

Vol. : 7 ; Issue : 1 ISSN : 2277-5676 2016

1 Annual Peer - Reviewed Research Journal of Patuck - Gala College of Commerce & Management

SETTING UP E-COMMERCE IN INDIA - CHOOSING

AN IDEAL PAYMENT GATEWAY PARTNER Rajni Mathur Navendu Prakash

Assistant Professor Key Account Manager

Bharati Vidyapeeth Institute of Salespro Business Solution Management and Research

Abstract This paper covers the various aspects of payment gateway options available

in India. It provides an insight into the costing details along with the other

related features. An endeavour has been made to give a statistical and

logical dimension to the research. Comparisons have been derived to

directly interpret the cost differences. On reading the paper, one will observe

that an equal inclination has been established towards the macro factors like

security problems, integration issues, etc. along with the micro economic

factors.

Keywords : E-Commerce, Payment Gateway, Bank _____________________________________________________________

Research Objective

The objectives of the paper are :

to understand how e-commerce is set up in India

to identify the intricacies, process and legal framework required to set up an e-commerce unit

to comprehend and analyze the best payment option based on the comparative analysis of the existing payment gateways

Research Methodology

The research methodology includes secondary resources. Data has been

collected from the internet, journals and the respective company websites.

Introduction The internet era has significantly changed the way people and organizations

around the world interact with each other. What was earlier only a medium

of transferring data or communication has now become the gateway for trade


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and commerce. Buying products and services are now just a click away.

Secure online transactions provided by vendors like Visa and MasterCard as

well as net-banking have only added to the confidence of audiences willing

to participate in online commerce. The emergence of web 2.0, social

networks and group buying has further fuelled this trend. Vendors around the

world have started setting up shops over the web. The entire market place

for trade and commerce have sprung up online.

E-commerce Setup In India

Although there exists no standard definition for the term e-commerce, it is

generally used in the sense of denoting a method of conducting business

through electronic means rather than through the conventional physical

means. Such electronic means include ‘click & buy’ methods using

computers as well as ‘m-commerce’ which make use of mobile devices or

smart phones. This term takes into account not just the act of purchasing

goods and / or availing services through an online platform but also includes

all other activities which are associated with any of the below given

transactions :

- Delivery - Payment facilitation - Supply chain and service management

An electronic payment system, modelled for an e-commerce business, may

sound simple – a customer chooses a product to buy online, clicks ‘pay’,

enters certain credit card / bank details, and the entire transaction is

complete. However, electronic payment systems are often more complex

than traditional payment methods, as they typically involve a number of

players :

- a payer : the customer - a payee : the merchant - an issuing bank : the customer’s bank - an acquiring bank : the merchant’s bank - entities such as Master or Visa – typically associations of banks /

financial institutions, which provide an array of payment products to

financial institutions

- one or more payment processors / payment gateways - that provide technology for the receipt and processing of payment instructions and

settlement, or actually receive and hold funds received from the

customer for onward payment to the merchant and


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- certification authorities, such as Payment Card Industry Security Standards Council.

The story in India is no different. Slowly trade portals and online travel

portals joined the bandwagon. Although by most references India only

accounts for approximately 2 percent of the e-commerce in the Asia-Pacific

region. It is necessary to have an Indian Bank account for integration with

any of the Indian Payment Gateway vendors and to open an Indian Bank

account, it is necessary to have a registered Indian entity.

Net banking which comprises of ECS and NEFT forms a major chunk online

e-commerce transactions in India. Operational discrepancies developed

between the banks and the Reserve Bank of India (RBI) which also supports

only credit cards, which happens to be a smaller chunk of the online

transaction in India.

India as an e-commerce market offers two prominent ways to do the

business, one is the second party system as followed by major banks like the

HDFC and ICICI Banks and the other is the third party system followed by

other organizations like CC Avenue, Bill Junction, etc.

A detailed analysis of each payment gateway option has been obtained and

presented further in the paper to equip the testimony.

Electronic Clearing Service (ECS)

It is a mode of electronic funds transfer from one bank account to another

bank account using the services of the Clearing House. This can be used

both for making payments like distribution of dividend, interest, salary,

pension, etc., or for collection of amounts for purposes such as payments to

utility companies like telephone, electricity, or charges such as house tax,

water tax, etc., or for payment of loan installments to financial institutions /

banks or regular investments of persons. ECS (Credit) is used for affording

credit to a large number of beneficiaries by raising a single debit to an

account. And ECS (Debit) is used for raising debits to a number of accounts

of customers / account holders for crediting a particular institution.

National Electronic Funds Transfer (NEFT)

It is a nation-wide system that facilitates individuals, firms and corporate to

electronically transfer funds from any branch of a bank to any individual,


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firm or corporate having an account with any other branch of a bank in the

country. Individuals, firms or corporate maintaining accounts with a bank

branch can receive funds through the NEFT system. It is, therefore,

necessary for the beneficiary to have an account with the NEFT enabled

destination bank branch in the country.

Payment Gateways - What To Look For?

It is always smart to work on the certain criteria for selecting the best among

the available options. In the extensive browsing session, the researcher

encountered one of such set, which is given as follows :

1. Security and Risk Mitigation : There are several facets to security that a Payment Gateway must take care of. Beginning with the physical

and data center security (where the Payment Gateway Servers are

hosted), OS and application security, firewall and Intrusion Detection

Systems at the OS and application layer, database security, and

finally transaction security. Ideally units should choose a Payment

Gateway which offers users Fraud Detection Tools apart from just

AVS and CVV2. The RBI Notification on additional security for

credit card transactions has mandated additional authentication /

validation for all VISA and Master card transactions users, to be

verified by Visa and MasterCard Secure Code. This is an additional

user intervention in the transaction authentication process.

2. Branding and Customization : Associating with payment gateways which are known for downtime, vulnerability and slow response can

impact a company’s brand image and user preference to use the

platform. The level of customization the gateway offers to integrate

the payment feature within the website is also an important aspect.

Making sure to check on the feasibility of the integration process in

detail, before zeroing down on the particular Payment Gateway is

obligatory.

3. Transaction Features : There are various modes of transaction that can be performed, such as, Auth-Capture, sale mode, reversal, partial

captures, partial reversals etc,. It is important that the Payment

Gateway supports all the possible transaction modes. Various

business occasions require a combination of one or more of these

transaction modes. Hence the payment gateway should necessarily

be supportive, whether the mode is used singularly or in a

combination.


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4. Comprehensive Merchant Interface : Reports should be readily and easily available for any kind of searching transactions, processing

captures, refunds, requesting withdrawals etc.

5. Technical Capabilities and Supported Platforms : Many payment gateways support only limited platforms for integration like PHP,

JSP or ASP. Hence, depending on the current development platform,

it is recommended that the technical integration aspect should also be

verified while choosing the vendor.

6. Hidden Costs : Most providers charge fees without disclosing them at the beginning of the contract. Fees like - chargeback fees, reversal

fees, termination fees, hidden set up charges, insufficient funds fees,

statement fees, extra charges for extra services, customer support

fees, withdrawal charges etc. Care needs to be taken and the aspect

needs to be clarified early.

7. Withdrawals : While most payment gateways may maintain reserves for risk mitigation, it is essential to estimate much in advance the

timeframe or time limit within which the user can have access to the

funds.

8. Technical Support : It is necessary to ensure that the payment gateway provides round the clock support with having sufficient and

well-trained at the Helpdesk so that 24 x 7support can be provided to

the customers.

Payment Gateways In India

Presently, there are two types of payment gateway options available:

Merchant account through a major bank : Major banks like ICICI and HDFC provide this service. Low transactional but high Installation

charges make them suitable for big businesses while proving to be an

expensive option for small ones.

Third party vendors : In this approach, a third party opens merchant accounts with various banks and also accepts credit cards, debit cards

and cash cards. Some of the prominent companies providing this

service in India are : CC Avenue, PayU, Billdesk, Citrus, Pay zippy,

EBS etc.

Payment Processing

Typically all payment vendors offer varied payment cycle ranging from a

week to a month and basically have two primary payment options :


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- Direct Pay through net banking - Payment through cheque

The transaction process when online payment is done by an user is as

follows :

User places the order on the website and it is sent to the merchant's web server in encrypted format. This is usually done via SSL (Secure

Socket Layer) encryption

The transactions details are then forwarded to the concerned payment gateway

The transaction information is then passed on to the merchants' acquiring bank by the payment gateway

Merchants' acquiring bank then forwards the transaction information to the issuing bank (one that issued the credit card to the user)

Then the card issuing bank sends a response back to the payment gateway. The response includes information that whether the

payment has been approved or declined. In case of a decline, the

reason is also sent in the response.

The response is then forwarded by the payment gateway to the merchant's server.

At the merchant's server, the response is encrypted again and is relayed back to the customer. This allows the customer to know that

if the order has been placed successfully.

The entire abovementioned process typically takes less than 5 seconds. At

the end of the bank day (or settlement period), the acquiring bank (or card

issuing bank) deposits the total of the approved funds in to the merchant's

nominated account, and the cycle of transaction is complete.

Regulatory Framework

Payment systems, both traditional and electronic in India are regulated by the

Payment and Settlement Systems Act, 2007 (PSS Act). This Act defines a

‘payment system’ as follows : “a system that enables payment to be effected

between a payer and a beneficiary, involving clearing, payment or

settlement of services or all of them but does not include a stock exchange”.

The PSS Act explains that for the purpose of the definition, “payment

system” includes the systems enabling operations of credit card, debit card,

smart card, money transfer or similar operations The PSS Act empowers the

RBI to govern payment systems operational in the country.


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A Comparative Analysis


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Conclusion The e-commerce market in India has experienced a phenomenal growth of

almost 50 percent in the past five years. Although the trend of e-commerce

has been making rounds in India for the past fifteen years and the appropriate

ecosystem has only now started to fall in place. The considerable rise in the

number of internet users, growing acceptability of online payments, the

proliferation of internet-enabled devices and favorable demographics are the

key factors driving the growth story of e-commerce in the country.

E-commerce takes into account not just the act of purchasing goods and / or

availing services through an online platform but also all other activities

which are associated with any transaction such as delivery, payment

facilitation and supply chain management. E-commerce industry is well

regulated by RBI through the PSS Act and all the processes are well

controlled by RBI. For setting up an e-commerce unit, the certain factors

that need to be kept in mind for deciding a payment gateway are support,

affordable payments, technology with risk mitigation, simple pricing, user

friendly system and easy reconciliation of payments. As per the analysis of

the data received, CC Avenue and PayU are better options. Citrus has

advantages over the mentioned two in terms of mobile device integration and

application based payments. But it also depends on the how each payment

gateway company positions its services to different customers.

References

Bansal R.; Growth of the Electronic Commerce in China and India: A Comparative Study; Journal of Asia-Pacific Business, Vol. 12, 2011

Dubey R.; E-Commerce poised for a leap in 2012; January 2012, Article Featured on exchange4media.com

Lallana E., Quimbo R., Zorayda R.; Chapter - An Introduction to e-commerce, in the book 'E-Commerce and E-Business', 2000,

Wikibooks.

Joshi M.; E-Commerce in India: A Review, IJCST Vol. 3, Issue 1, 2012

Kaur R.; E-Commerce in India; Asian Journal of Research in Business Economics and Management; Vol. 2, Issue 6; 2012

Sharma S., Mittal S.; Prospects of E-Commerce in India; ISCET; 2010.


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Chanana N., Goele S.; Future of E-commerce in India; International Journal of Computing & Business Research; ISSN (Online): 2229-

6166.

Web Resources

http://www.nishithdesai.com/fileadmin/user_upload/pdfs/Research%20Papers/E-Commerce_in_India.pdf

http://www.theworldreporter.com/2014/03/setup-an-ecommerce-company-in-india.html

http://www.ey.com/Publication/vwLUAssets/Rebirth_of_e-Commerce_in_India/$FILE/EY_RE-

BIRTH_OF_ECOMMERCE.pdf

www.forrester.com

http://www.nishithdesai.com/fileadmin/user_upload/pdfs/Research%20Papers/E-Commerce_in_India.pdfhttp://www.nishithdesai.com/fileadmin/user_upload/pdfs/Research%20Papers/E-Commerce_in_India.pdfhttp://www.theworldreporter.com/2014/03/setup-an-ecommerce-company-in-india.htmlhttp://www.theworldreporter.com/2014/03/setup-an-ecommerce-company-in-india.htmlhttp://www.ey.com/Publication/vwLUAssets/Rebirth_of_e-Commerce_in_India/$FILE/EY_RE-BIRTH_OF_ECOMMERCE.pdfhttp://www.ey.com/Publication/vwLUAssets/Rebirth_of_e-Commerce_in_India/$FILE/EY_RE-BIRTH_OF_ECOMMERCE.pdfhttp://www.ey.com/Publication/vwLUAssets/Rebirth_of_e-Commerce_in_India/$FILE/EY_RE-BIRTH_OF_ECOMMERCE.pdfhttp://www.forrester.com/


Vol. : 7 ; Issue : 1 ISSN : 2277-5676 2016


E-BANKING : A SAFE AND SECURED MODE OF

TRANSACTION Seema Thakur

Ph. D. Scholar

JJT University

Abstract

The Indian banking system has undergone a transition since the evolution of

technology usage in banks. Banking has now evolved into e-banking system,

which is bringing ease and convenience in the hands of users. This paper

studies the various technological changes that have been introduced in the

banking industry in India and also analyzes the advantages and

disadvantages of the use of technology in banking processes and

transactions.

Keywords : Banking, E-banking, Technology

_____________________________________________________________

Introduction In simple words, Banking can be defined as the business activity of

accepting and safeguarding money owned by other individuals and entities,

and then lending out this money in order to earn a profit. However, with

the passage of time, the activities covered by banking business have widened

and now various other services are also offered by banks. The banking

services these days include issuance of debit and credit cards, providing safe

custody of valuable items, lockers, ATM services and online transfer of

funds across the country / world. A sound and effective banking system is

the backbone of an economy. The economy of a country can function

smoothly and without many hassles if the banking system backing it is not

only flexible but also capable of meeting the new challenges posed by the

technology and other external as well as internal factors. The technology

holds the key to the future success of Indian Banks. Thus, “Electronic

Banking” is the need of the hour, which cannot be lost sight of except at the

cost of elimination from the competition. The existence of Electronic

banking also becomes inevitable due to the standards required to be matched

at the international level. Thus, the domestic as well as the international

standards, mandates the adoption of Electronic banking at the earliest

possible moment.


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Technology is enabling banks to provide the convenience of anytime -

anywhere - banking. Banks are now re-engineering the way in which their

services can be reached to their customers by bringing in flexibility in their

"distribution channels". The earlier brick-and-mortar branch is no longer

sufficient. Technology is now taking banks to the homes and offices, 24

hours a day and 365 days a year, through ATMs, tele-banking and PC

banking. The financial supply chain is undergoing a strategic fundamental

change.

Non - Branch Banking

Traditionally, consumers could do their banking only by coming to the bank

branch. The brick-and-mortar building of the bank branch defined the

periphery of service delivery of banking products.

The trend of Non - Branch - Service Delivery in banking started with the

growing popularity of electronic payment services. It started with Electronic

Funds Transfers (EFT). Then came the advent of credit cards. ATMs and

smart cards were next in the evolutionary history. Gradually, with the

advance of computing technology - telephone banking and Computer

Telephony Integration (CTI) became a powerful medium of delivering

banking services. The latest product is electronic banking, where the

technology and other issues are under continual evolution.

These new technologies have broken the paradigm of branch banking.

Customers, whether individual consumers or business or corporate, are no

longer required to go to the bank to do their business transactions. It can be

done from home, using the PC or the telephone, or even at the shopping

markets by using plastic money.

Some banks have now also started door-to-door delivery of services. As a

result, it is now possible to order cash or demand drafts to be delivered at

home. Consumers wishing to open accounts with banks or to apply for

durable loans can call up the Direct Sales Associates (DSAs) of banks and

their representatives will complete the necessary documentation at the

customer's convenience, at the customer's desired place und time. These are

the elements of the new flexible financial supply chain.


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Technology Used In E-Banking

The Electronic Fund Transfer (EFT) : This facility offers the account holder

to make payments to account holders of other banks in an efficient and fast

manner. As against the physical clearing, where the cheques are cleared on

presenting of the physical instrument at the clearing house. With EFT the

transactions are settled electronically. EFT also provides the account holder

with an opportunity to move the collections to an electronic platform,

whereby one can instruct the dealers to pay through EFT, thus reducing the

time for realization of funds. Presently, the electronic fund transfer facility

is available in two modes and one can avail either of the following modes to

transfer funds :

National Electronic Fund Transfer (NEFT) : This is the faster mode of fund

transfer in which the funds are credited to the beneficiary’s account on the

same day. It is offered by computerized branches of certain banks.

EFT : This is the normal electronic fund transfer facility offered by the

banks. It is similar to NEFT in all respects with the exception of the

transaction cycle time – an EFT transaction takes a minimum of 3 working

days to be credited to the beneficiary’s account whereas in NEFT, the

amount is credited on the same day of the transaction. The end-to-end

transaction can be done through the Corporate Electronic banking wherein

the request can be submitted online, either as a single transaction or through

file uploads.

Other Technological Additions

Automated Teller Machines : These machines are installed, now-a-days, at

every nook and corner, in most of the towns and cities. These are meant for

balance enquiries, cash withdrawals and many other facilities depending

upon the policies of the bank. This requires a valid Customer Id and

password to login and is therefore safe to be used.

Debit Card : This is another technological addition of the electronic banking.

These cards are the multi-purpose cards and can be used in ATMs for

balance enquiry and cash withdrawal or can be used for easy shopping at

various counters and shops. Debit Cards ensure the automatic deduction of

amount from the account just by swiping it on the machine. It makes it easier

for the consumers to go shopping with and even avoids the burden of

carrying a lot of hard cash with them.


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Credit Card : This, unlike debit cards, provide credit to the consumers. A

credit card system is a type of retail transaction settlement and credit system,

named after the small plastic card issued to users of the system. A credit card

is different from a debit card in that it does not deduct money from the user's

account soon after every transaction. In the case of credit cards, the issuer

lends money to the consumer (or the user). It is also different from a charge

card (though this name is sometimes used by the public to describe credit

cards), which requires the balance to be paid in full each month. In contrast,

a credit card allows the consumer to 'revolve' their balance, at the cost of

having interest charged. Most credit cards are the same shape and size, as

specified by the ISO 7810 standard.

Smart Cards: A card that is used for storing and retrieving personal

information. Normally it is the same size of a credit card and contains

electronic memory and possibly an embedded integrated circuit. The card

can be used to do many tasks.

Payment and Settlement Systems and Information Technology : The

development of payment and settlement systems conforming to the best

international standards has been a key objective of the Reserve Bank of

India. A milestone was achieved during 2003-04 with the commencement of

the Real Time Gross Settlement (RTGS) as a facility available for quick,

safe and secure electronic mode of funds transfer. Preparation of the draft

legislation relating to payment and settlement systems was another important

development. The legislation aims at providing a sound legal basis to

various payment and settlement systems operating in India and empowers the

Reserve Bank of India to regulate and supervise such systems. It profiles the

significant expansion of activity in the payment systems in India and the key

drivers being, retail payments and the rising popularity of card - based

transactions and large value payments propelled by rising turnover in the

inter-bank clearing, Negotiated Dealing System (NDS) and foreign exchange

clearing segments.

Noteworthy landmarks in the evolution of payment systems are the

implementation of Real Time Gross Settlement (RTGS) system, the Special

Electronic Funds Transfer (SEFT) system and the foundation being laid for

the constitution of a Board for Payment and Settlement Systems as an apex

regulatory authority. Reviewing developments in the settlement systems in


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India in 2003-04, there is still the continuing preponderance of paper - based

(cheque) clearing and the preparatory steps being taken to introduce cheque

truncation to improve the speed and efficiency of paper-based settlement

systems. The implementation of Online Tax Accounting System (OLTAS)

to IT, enables tax payment as well as tax administration.

Advantages of the Technology

The benefits and advantages of information technology for the smooth and

efficient functioning of the banking business cannot be disregarded and side-

lined. Its proper and methodical use can bring the following advantages:

An electronic delivery system brings an integrated trade services and cash management system to one'a desktop. This system delivers

continuously updated information to trade and cash account

transactions.

Export LCs issued in one's favour, receipt of import bills and notification of discrepant documents, status of one's import and

export bills, credit and debit advices, and copies of schedules and

tracers are electronically transmitted to one's own systems for

updating or further analysis.

Letters of credit initiation and amendments are easily handled as also the initiating of direct collection letters and applications for export

bills.

It ensures a Sound Payment System without any disruption in the flow of money supply in the economy. The payments in India are

largely cash based although there are non-cash based payments as

well. The various forms of electronic based payment, such as credit

cards, Automated Teller Machines (ATMs), Debit Cards etc., are

emerging at an incredible speed. Many banks have made initiatives

aimed at electronic modes of funds movement.

It also ensures monetary and financial Stability. One of the critical activities undertaken by the Central bank of India, to ensure monetary

and financial stability is to provide the banking sector with finality of

settlement. The payment and settlement systems are the conduits

through which monetary policy measures are transmitted to the

financial sector and then to the real economy. The information

technology revolution has given rise to an extraordinary increase in

financial activity across the globe. The progress of technology and


Vol. : 7 ; Issue : 1 ISSN : 2277-5676 2016


the development of worldwide networks have significantly reduced

the cost of global funds transfer.

Disadvantages of the Technology

The information technology in itself is not a panacea and it has to be

effectively utilized. The concept of Electronic banking cannot work unless

and until there is a centralized body or institution, which can formulate

guidelines, regulate and monitor effectively the functioning of Electronic

banking. The most important requirement for the successful working of

Electronic banking is the adoption of the best security methods. This

presupposes the existence of a uniform and the best available technological

devices and methods to protect electronic banking transactions. In order for

computerization to take care of the emerging needs, the recommendations of

the Committee on Technology Up-gradation in the Banking Sector (1999)

may be considered. These are as given below :

1. Need for standardization of hardware, operating systems, system software, application software to facilitate interconnectivity of

systems across branches

2. Communication and networking – use of networks which would facilitate centralized databases and distributed processing

3. Need of Payment systems which use information technology tools. The Reserve Bank of India has played a lead role in this sphere of

activity - with the introduction of cheque clearing using the MICR

(Magnetic Ink Character Recognition) technology in the late eighties.

Conclusion Thus, the information Technology Act, 2000 has laid down the basic legal

framework conducive to the Internet banking in India. In case of any doubt

or legal problem, the provisions of the Act can be safely relied upon. It must

be noted that the object of the Act is to facilitate e-commerce and e-

governance, which are essential for the functioning of Internet banking in

India. There may be challenges of Internet banking which cannot be tackled

appropriately with the existing legal framework. To meet such challenges

appropriate amendments can be made either to the Act itself or a separate

new law dealing specifically with the Internet banking may be enacted.


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References

www.allbankingsolutions.com/banking-tutor/what -is-banking.shtml

http://www.bis.org/publ/bcbs98.htm

http://www.bharatbook.com/bookdetail.asp

http://www.abnamro.co.in/ProductsnServices/Wholesale/electronic.html

http://ebusiness.icicibank.com/imarkets/common

www.findarticles.com/p/articles

http://perry4law.blogspot.com/2005/12/internet-banking-and-its-challenges-in.html

http://www.rbi.org/

http://www.part11.org.uk/content/glossary.htm

http://en.wikipedia.org/wiki/Credit_cards

http://www.arraydev.com

http://www.bis.org/publ/bcbs98.htmhttp://www.abnamro.co.in/ProductsnServices/Wholesale/electronic.htmlhttp://www.abnamro.co.in/ProductsnServices/Wholesale/electronic.htmlhttp://perry4law.blogspot.com/2005/12/internet-banking-and-its-challenges-in.htmlhttp://perry4law.blogspot.com/2005/12/internet-banking-and-its-challenges-in.htmlhttp://www.rbi.org/http://www.part11.org.uk/content/glossary.htmhttp://en.wikipedia.org/wiki/Credit_cards


Vol. : 7 ; Issue : 1 ISSN : 2277-5676 2016


CORPORATE GOVERNANCE AND BUSINESS ETHICS

FOR MSMEs IN INDIA Byshi Panikar

BMS & BBI Co-ordinator


Abstract Corporate governance is a concept which includes the suitable management

and control structure of an enterprise. The prime intent of the present paper

is to study the good governance framework for Micro Small and Medium

Enterprises (MSMEs). In India, corporate governance initiatives have been

undertaken by the Ministry of Corporate Affairs and the Securities and

Exchange Board of India (SEBI). MSMEs are critical for developing

countries because of their role in economic development and scarcity

reduction. The objective of this paper is to explain the characteristics of

corporate governance. Business is a part of society and as such ethics is also

relevant in the context of business. Hence business ethics should be given

special attention due to specific problems and opportunities faced by the

businessmen. Ethics relates to morals and the treating and approach used

towards moral questions.

Keywords : Corporate Governance , India, MSMEs

Introduction Corporate Responsibility refers to the balanced development and

management of environment, social and economic facts in an enterprise, in

co-operation with stakeholders. The various dimensions of responsibility are

closely integrated. In case of responsible and consistent managing of the

enterprise focused on long term goals, responsibility supports business

activities. Each enterprise defines the most suitable focus points and

implementation methods for its business activities. MSMEs are engines of

growth in prosperous and growth economy and play an important role in

creating economic growth.

MSMEs contribute to economic development by creating employment for

the rural and urban population. They also provide flexibility and innovation


Vol. : 7 ; Issue : 1 ISSN : 2277-5676 2016


through entrepreneurship and increase the country's international trade by

diversifying economic activity.

Corporate Governance for MSMEs

It is basically a set of relationship between a company’s board management,

its shareholders and the society within an institutional framework. These

relationships evolve in to the corporate governance framework - which is the

system by which companies are directed and controlled. It is essential to

recognize that every company operates within a unique jurisdiction of its

stakeholders including investors, creditors, employees, managers and

regulators. Good corporate governance seek to create an institutional

framework that encourages all participants to contribute towards better

corporate performance aligned with good governance practices.

Corporate Governance : A Framework for Implementation

Corporate governance is concerned with holding the balance between

economic and social goals and between individuals and social goals and

between individuals and communal goals.

The governance framework is there to encourage the efficient use of

resources and equally requires accountability for the stewardship of those

resources. Good corporate governance leads to development of a frame

work that provide adequate protection to the interest of stakeholders and

reinforces the fiduciary responsibilities of those vested with the authority to

act on behalf of the stakeholders. Corporate governance encourages

companies and those who own and manage them to achieve their corporate

objectives through a more efficient use of resources. Moreover corporate

governance framework should recognize the rights of stakeholders as

established by law. Corporate Governance is a significant factor in

improving economic efficiency and growth. It has been empirically tested

that good governance practices of a company gives a positive signals to

investors. With the globalization of markets, international capital flows have

become extremely valuable source of financing. It is essential for companies

to observe good corporate governance standards in order to competitively

operate in global capital market and to attract long term foreign capital.

Foreign Direct Investment which leads to transfer of technology, is an

important factor for economic progress of developing countries. Both the

foreign and local investors give importance to good governance practices. In

this regard both individual and institutional investors are quite significant.


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Therefore good governance is likely to reduce the cost of capital, encourage

more stable source of financing and facilitate the broadening and deepening

of local capital markets.

Boards of directors are responsible for the governance of the companies. The

shareholders role in governance is to appoint the directors and auditors, a

way to ensure themselves that appropriate governance structure is in place.

The responsibilities of the directors include setting the company’s strategic

aims, providing the leadership to put them in to effect, supervising the

management of the business and reporting to the shareholders on their

stewardship. The board’s actions are subject to laws regulations and the

stakeholders is a set of systems, processes and principles which ensure that a

company is governed in the best interest of all stakeholders. It is about

promoting corporate fairness, transparency and accountability . In other

words good corporate governance is simply good business.

It ensures:

Adequate disclosure and effective decision making to achieve corporate objectives

Transparency in business transactions

Statutory and legal compliances

Protection of shareholders interest

Commitment to values and ethical conduct of business

Characteristics of Corporate Governance

Discipline - commitment by the organization's senior management to comply with widely accepted standards of correct and proper

behaviour.

Transparency - the ease at which an outsider can meaningfully analyse the organization's actions and performance

Independence - the extent to which conflict of interest are avoided, so that the organization’s best interests prevail at all times

Accountability - addressing shareholders' rights to receive and if necessary query information relating to stewardship of the

organization’s assets and its performance

Responsibility - acceptance of all consequences of the organization’s performance


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Fairness - acknowledgement of respect for the balance between rights and interest of the organization's various stakeholders

Social responsibility - the organization's demonstrable commitment to standard and its appreciation of the social and economic impact of

its activities on the community it operates in

Importance of Corporate Governance for Business

It is necessary that the business provide necessary and the desired level of

comfort by compliance with principles and requirements of corporate

governance as well as provide relevant information to all stakeholders

regarding the performance, policies and procedures of the company in a

transparent manner.

Following are various benefits which can be achieved by the enterprise and

its promoters from the implementation of good and proper corporate

governance mechanism :

Growth and stability - adoption of good corporate governance measured, can lead to robust growth and stability of the business. A

corporation is a congregation of various stakeholders like customers,

employees, investors, vendor partners, government and society. Its

growth requires the cooperation of all stakeholders

Ability to attract cheap capital from global pools - corporate governance practices are being looked at by rating agencies and they

have impacted the cost of capital as well as they are able to attract

and retain the best human capital from various parts of the world.

Corporate objective - corporate governance enables corporations to achieve their corporate objectives, protect shareholders right, meet

requirements and demonstrate to the wider public how they are

conducting their business.

Higher values for shareholders - investors pay large premium for companies with effective corporate governance and hence it will

enable the company to create a value for the investments.

Investor confidence - the creditability offered by good corporate governance procedure also helps maintain the confidence of

investors, both foreign and domestic, to attract more long term

capital. This will ultimately induce a more stable source of

financing.


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Improvement in reporting standards - the instances of financial crisis have brought the subject of corporate governance to the surface. The

emphasis has shifted on compliances with substance and brought to

sharper focus the need of intellectual honesty and integrity.

Business Ethics

It is defined as a process for integrating value such as honesty, trust,

transparency and fairness in to company's policies, practices and decision

making. Business ethics is therefore inherently linked with corporate

governance. The importance of business cannot be denied.

The old English proverb, “As you sow so shall you reap”, is indicative of

the significance of business ethics. A firm which applies ethical practices

also expects to be dealt ethically. These expectations and consequent

adoption of ethical practices create a chain effect in terms of promoting

ethical practices. While the larger firms have already developed their

reputations by adopting these ethics, MSMEs around the world are

increasingly becoming aware of the importance of good, trusting relations

with customers, employees, suppliers and the community at large. Moreover

due to their linkages with larger firms through supply chains, MSMEs are

increasingly asked about their social and environmental policies when

establishing their ventures with large firms .

The advantages of adopting business ethics include :

Investors use corporate practices and value as primary considerations in their decision making

As customers are becoming increasingly aware of their rights they value ethical practices.

Adopting ethics can help build reputations of business

Promoting reputation can help in building customer loyalty and increase in revenue.

It helps in attracting talented workforce. Also it can result in improved performance of existing employees with increasing

productivity.

Compliances with regulations e.g., labour laws and environment laws

It can enable collaborations with other firms, both, domestically and internationally.


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MSMEs in the developing countries lack awareness and understanding of the

importance of business ethics and its advantages. Some of its advantages

may not be visible to these MSMEs in the short term. For example, these

enterprise would argue that the reputation or brand management is important

for them. This is the result of absence of long term vision and focus on

survival only in the short term. In the developing countries, MSMEs are

generally suppliers of products for which the end user is either the large firm

or in some cases also the individual consumer. When these MSMEs are

linked with larger firms through supply chain., then being ethical becomes an

important consideration to win the trust of the collaborating partners.

Good Governance

MSMEs do not generally adopt governance due to following reasons :

Lack of awareness: there is generally a lack of awareness among MSMEs regarding corporate governance being related to corporate

performance. Further the MSMEs are also not aware about the

benefits of the implementation of corporate governance system in the

organization. They consider it needed only for bigger organizations.

Cost of implementation of governance systems: the costs for implementing corporate governance systems are considered by the

MSMEs, too high as compared to its benefits. In developing

countries of South Asia, corporate governance was only recently

introduced. Even the larger firms have only recently been

encouraged to adopt corporate governance. It will be some more

time before the benefits of adopting it will emerge into the open.

Fear the loss of control: most of the MSMEs in India are family owned and family managed business. Usually in such family owned

firms, the family has requisite voting power to unilaterally dismiss

boards of management to overrule their decisions. Thus the concept

of independent directors does not prevail in these firms. The family

usually wants to retain control over the business and looks at outside

directors with apprehension. The approach of the family owners is

that they do not see anything external without a threat factor.

Fear of loss of proprietary information / trade secrets: another apprehension that MSMEs have is that they do not want to share any

information about their business with outsiders. They consider that

sharing may give rise to threat of increased competition.


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Improper accounting: MSMEs generally lack in following proper accounting and control methodologies. In many of these enterprise

accounting is done by the owners or unqualified staff, who are also

not aware of the changing accounting standards. The accounting

transactions is carried out in the best interest of the family

shareholders. Such an accounting system is a threat to an external

investor or lender and also to the other stakeholders. MSMEs are

reluctant to change their system of accounting for fear of tax liability.

The entrepreneurs fail to understand that such systems of improper

accounting etc., will hinder the growth of the company in the long

run.

Surveys indicate that one third of this category of companies collapse after

three years for the following reasons :

Absence of planning and forward thinking

Inadequate leadership and management skills at senior management level

Lack of future business plans for growth and new investment plans

Problems with cash flows

Inability to innovate with present ideas for business growth plans and new investment plans

Inability to innovate, present ideas for business development and cope with ever changing business environment and economic

conditions

Inadequate access to technical assistance

Looking to scarcity of resources, corporate governance in MSMEs in brief,

may be implemented in phases in the following manner

by separating ownership from roles and responsibilities of business owners, partners and other stakeholders

by creating a balanced board and invite non-executive directors who would be of value to the board. Non executive directors play an

important role in ensuring integrity of the financial data provided to

the board and in protecting shareholder's interest. They also exercise

control over executive management and reduce the risks arising from

poor management practices or gross negligence

by creating proper framework for ensuring timely compliance of applicable rules and laws


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by putting in place an efficient and effective financial management system

by introducing a code of business conduct

by raising corporate culture with a focus on benefits of corporate governance

by developing senior management, administrative and technical employees' skills particularly, in areas such as strategic planning and

leadership

by creating organization charts

Conclusion MSMEs are critical for developing countries as they facilitate economic

activity and provide employment, thus contributing to poverty reduction.

However they face a lot of challenges related to access to finance, forging

international linkages and access to new technology. Governance of these

enterprise has peculiar characteristics and issues. Business ethics forms a set

of generally accepted standards in the context of business. In fact business

ethics and organizational ethics is a part of the broader study of ethics.

Corporate governance enhances competitiveness of MSMEs by playing an

important role in resource mobilization. The government should facilitate

access to financing and equity markets for firms which implement corporate

governance. In order to promote entrepreneurial culture, there should there

should be a venture capital enabling regulatory and facilitating environment.

The judicial and legal system should ensure investor protection.

References

Annual Report (2011-12), Ministry of Micro Small and Medium Enterprises, Government of India

British Council United Nations Development Programme (UNDP) Confederation Indian Industry (CII) , New Delhi

Banerjee P., (2005) Corporate Governance and Competence in SMEs in India, CACCI Journal, Vol. 1

European Commission (2003): Responsible Entrepreneurship - A Collection of Good Practice Cases Among Small and Medium Sized

Enterprises.

Fisher C. M, Shitole R & Bhupatkar AP (2001) Ethical Stances in Indian Management Culture. Personnel Review 2001:30, 5/6


Vol. : 7 ; Issue : 1 ISSN : 2277-5676 2016


Kumar R, Murphy D. F., Balasari V. (2001), The 2001 State of Corporate Responsibility in India Poll, Tata Energy Research

Institute, New Delhi.


Vol. : 7 ; Issue : 1 ISSN : 2277-5676 2016


THE STUDY OF LIQUIDITY IN THE INDIAN MONEY

MARKET Koel Roychoudhury

Principal In-charge

S. I. E. S. College of Arts, Science and Commerce

Abstract The Indian money market is an important segment of the Indian financial

system. From the mid 1980s onwards, various reforms have been directed

towards deepening this market. In order to study the liquidity in the money

market, the Amihud liquidity ratio has been applied in three segments of the

money market, viz., Call, CBLO and market repo. The Amihud liquidity

ratio measures liquidity as the ability to trade with little price impact. The

ratio gives the absolute (percentage) change per rupee of daily trading

volume or the daily price impact of the order flow. Results show that while

CBLO market is the most liquid followed by the Call money market, Market

repo is the most illiquid market.

Keywords: Money Market, Market Liquidity, Amihud Liquidity ratio

_____________________________________________________________

Introduction The Indian money market is an important segment of the financial system.

The RBI places an important role on the money market in its pursuit of

monetary policy objectives. Efficient functioning of the short - term markets

like Call, market repo and Collateralized Borrowing and Lending

Obligations (CBLO), are important for the effectiveness of monetary policy.

Short term rates like Call, CBLO and Repo, help market participants to even

out excess and shortage of liquidity at a price appropriate to the liquidity in

the system. Short - term money market rates are sensitive to the liquidity

availability in the system. In order to study liquidity in the money market,

the concept of Amihud liquidity ratio has been applied to three segments of

the money market i.e., the Call money, CBLO and the market repo.

The remaining of the paper is organized as follows; Section 2 gives a brief

history of reforms in the money market in India. In Section 3, empirical

analysis based on the Amihud liquidity ratio is conducted. Section 4 provides

the advantages, limitations and conclusion of the study.


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Reforms in Indian Money Market

The Indian money market prior to the 1980s was characterized by paucity of

instruments, lack of depth and dichotomy in the market structure (RBI,

Currency Report 2005-06). The money market consisted of the interbank

call market, treasury bill, commercial bill and participation certificates. The

money market was represented by the inter-bank call market, where activity

was mainly driven by the banks’ demand for reserves for meeting their

statutory commitments. Strong seasonality in demand for money and credit

during agricultural seasons influenced market activity. Due to ‘the skewed

distribution of liquidity’, call money rates remained highly volatile,

necessitating imposition of interest rate ceilings.

The reforms in the financial market began with the Committee to Review the

Working of the Monetary System (Chakravarty Committee, 1985). On the

basis of the Chakravarty Committee recommendations, RBI adopted a

monetary targeting framework. In 1987, RBI set up a Working Group on the

Money Market (Vaghul Committee) to develop the money market.

Following the recommendations of the Reserve Bank’s Internal Working

Group (1997) and the Committee on Banking Sector Reforms (Narasimham

Committee II, 1998), a comprehensive set of measures were undertaken by

the Reserve Bank of India, to develop the money market. Efforts were made

to transform the call money market into a pure interbank market while

encouraging other market participants to migrate towards collateralized

segments of the market. Beginning in June 2000, the RBI introduced a full-

fledged liquidity adjustment facility (LAF) and it was operated through

overnight fixed rate repo and reverse repo rates since November 2004. This

helped to develop the interest rate as an important instrument of monetary

transmission. The development of the money market over the years and

relative stability in the call money market has enabled the RBI to move away

from quantity-based instruments to price-based instruments under its

multiple indicator approach (Mohanty, 2012).

Empirical Analysis

Using the illiquidity measure proposed by Amihud (2002), the paper

examines the liquidity over time in selected money markets. According to

Amihud and Mendelson (1986) and Amihud (2002), illiquidity reflects the

impact of order flow on price. The measure proposed by Amihud is the

daily ratio of absolute stock return to its dollar trading volume averaged over

a given period. This can be interpreted as the daily stock price response


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associated with one dollar of trading volume. With this measure, Amihud

(2002) examines the relationship between illiquidity and stock returns and

finds that illiquidity not only affects stock returns cross-sectional but also

over time.

Stock illiquidity has been defined as the average ratio of the daily absolute

return to the (dollar) trading volume on that day. It is denoted as

|Riyd|/VOLDiyd., where Riyd is the return on stock (i) on day (d) of year (y)

and VOLDiyd is the respective daily volume in dollars. This ratio measures

the absolute (percentage) price change per dollar of daily trading volume, or

the daily price impact of the order flow.

The annual average is given as

ILLIQiy= 1/ | / VOLDivyd

Where Diy is the number of days for which data are available for stock (i) in

year (y).

This measure of illiquidity has been empirically tested for NYSE stocks

during the period 1964-1997. The results show that the illiquidity has a

positive and high effect on expected returns. The advantage of this ratio is

that it enables construction of time series of illiquidity over a longer period

of time which is necessary for the study of the effects of illiquidity over time.

In India, there have been limited studies of liquidity based on the Amihud

concept. Nath (2005) has used this concept to estimate illiquidity in the Call,

CBLO and repo markets for the period January 2004 to February 2005. The

study found that the short-term money market segment has seen higher

liquidity during this period. The CBLO market was relatively illiquid during

the initial years but the illiquidity costs have come down during this period.

This paper concluded that while liquidity cost decreased for the Call money

market, market repo market, the reduction in liquidity costs in the CBLO

market was substantial.

The Amihud liquidity ratio measures liquidity as the ability to trade with

little price impact. Liquidity is defined as the average ratio of the daily

absolute return to the trading volume on a particular day. The ratio gives the

absolute (percentage) change per rupee of daily trading volume or the daily

price impact of the order flow.


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The illiquidity is defined as the average ratio of the daily absolute return to

the trading volume. The daily return in terms of yield is calculated as the

difference between yield of day t and day t-1. Unlike the case of prices,

since the yields are in percentage terms, the researcher did not take the

difference in natural logs of the yields.

The Amihud liquidity ratio is called an illiquidity measure, since a high

estimate indicates low liquidity (high price impact of trades). Thus, the

Amihud liquidity ratio captures how much the price moves for each rupee

unit of trade. Moreover, a high price impact suggests that the market depth

is low, such that a smaller volume is needed to move the price.

The Amihud liquidity ratio can be written as

Data Description

For the empirical exercise, the researcher considers three segments of the

money market; Call money market, the CBLO market and the market repo

market. The daily data is used on weighted average market rates and the

trading volume of Call, CBLO and market repo market. The period that has

been covered is April, 2 2013 to June, 30 2016. The data has been obtained

from the monthly newsletter of CCIL, Rakshitra. Major features of the data

on money market rates and volume are presented in the below given Table 1.

Table 1: Descriptive Statistics of the short-term money market rates and

trading volume (Rates in Percentages and Volume in ` Crores)


Vol. : 7 ; Issue : 1 ISSN : 2277-5676 2016


Call

rate

CBLO

rate

Market

Repo

Rate

Call

Volume

CBLO

Volume

Market

Repo

Volume

Mean 7.4739

29

8.47157

0

6.6477

83

49413.9

1

243415.

3

99107.5

7

Median 7.3700

00

7.39000

0

7.2800

00

14108.0

5

77552.0

5

33563.9

0

Maximum

13.480

00

868.000

0

10.350

00

288526.

5

110891

0.

337765

6.

Minimum

0.0000

00

0.00000

0

0.0000

00

0.00000

0

0.00000

0

0.00000

0

Std. Dev.

1.3142

55

30.1547

3

2.7844

28

69784.5

2

308449.

7

172623.

5

Skewness

-

1.91897

5

28.3980

8

-

1.67235

9

1.48349

4

1.25564

4

9.14811

1

Kurtosis

15.866

60

809.955

7

4.6073

76

3.66972

3

2.88338

6

161.749

3

Jarque-

Bera

6137.0

10

222769

77

468.78

08

314.937

9

215.149

1

869291.

6

Probability

0.0000

00

0.00000

0

0.0000

00

0.00000

0

0.00000

0

0.00000

0

Sum

6106.2

00

6921.27

3

5431.2

39

403711

66

1.99E+

08

809708

81

Sum

Sq.Dev.

1409.4

48

741995.

1

6326.4

80

3.97E+

12

7.76E+

13

2.43E+

13

Observatio

ns 817

817 817 817 817 817

The data in Table 1 is interesting. While the mean of the interest rates show

co-movement, the mean value of the CBLO market is higher than the

remaining two, reflecting greater depth. Skewness indicates asymmetry and

deviation from a normal distribution while kurtosis indicates distribution

analysis as a sign of flattening or "peakedness" of the distribution. The

measures of skewness and kurtosis can be used to determine whether the


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variables follow a normal distribution.1 The values of skewness and

kurtosis suggest that the rates and volumes are not normally distributed.

Skewness reflects a right skew. The kurtosis is greater than 3 (Leptokurtic

distribution) where values are concentrated around the mean and the thicker

tails. This means high probability for extreme values which is a

characteristic of financial market data. This is further supported by the

Jarque-Bera test that reflects deviation from the normal distribution.

The descriptive statistics of Amihud liquidity ratio is given in Table 2.

Table 2: Descriptive Statistics of Amihud liquidity ratio

Call Market CBLO Market Repo market

Mean 0.305367 0.040314 2.877235

Median 0.011756 0.001907 0.000706

Maximum 19.37500 4.011271 1180.000

Minimum 0.000000 0.000000 0.000000

Std. Dev. 1.086179 0.212106 42.38015

Skewness 9.089110 14.54296 23.91178

Kurtosis 125.6409 254.2147 643.7285

Jarque-Bera 598837.8 2491573. 16082785

Probability 0.000000 0.000000 0.000000

Sum 285.5180 37.69371 2690.215

Sum Sq. Dev. 1101.918 42.01950 1677536.

Observations 935 935 935

Call money: The Call money market is essentially an interbank market. The

average illiquidity cost in the call money market as measured by the Amihud

liquidity ratio increased from 0.037076 in 2013-14 to 0.291047 in the year 1For normal distribution , Skewness = 0 and kurtosis = 3


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2015-16. This is due to liquidity deficit in the money market. The liquidity

cost is higher in this market as compared to the CBLO market. Figure 1

below shows the Amihud liquidity ratio for the Call money market.

CBLO Market: CBLO has become the flagship product of the short-term

market with more participants using this market because of its flexibility and

liquidity. This is the most liquid of the three markets as measured by the low

liquidity cost. The CBLO market has witnessed greater volumes with a large

number of participants migrating to this market from the Call money market.

The average illiquidity cost in the CBLO market as measured by the Amihud

liquidity ratio is lowest among the three segments of the money market. The

Amihud liquidty ratio is 0.047522 in 2015-16. This is on account of the

migration of market participants from the uncollateralized call money market

to the collateralized CBLO market. Figure 2 below reflects the Amihud

liquidity ratio for the CBLO market.


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Market repo: The market repo is relatively illiquid and hence the liquidity

cost is high as measured in terms of the Amihud illiquidity factor. For most

of the period under study, the repo rate has remained high as compared to

the Call and CBLO market. The average illiquidity cost in the repo market

as measured by the Amihud liquidity ratio was 5.034391 in 2015-16. Figure

3 below depicts the Amihud liquidity ratio for the market repo.


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Advantages And Limitations

Advantages

The advantages of the Amihud liquidity ratio are that it can be estimated

from data available over a long period of time. Another advantage is that it

includes concepts of liquidity such as trading quantity, trading costs and

price impact. It can be easily applied to study the liquidity cost across

different markets over a long period of time.

Limitations

Though the Amihud liquidity ratio is useful in measuring liquidity cost over

a long period of time, there are two limitations while applying it to the Indian

money market. Firstly, the data available for applying the concept is limited

to the period after 2005. Except for the Call money market, most of the

other markets are of recent development. Therefore, time series data over a

long period is not available. Secondly, it cannot be applied to other markets

like treasury bills, CD and CP, due to non-availability of daily data on price

and trading volume. Therefore comparison of liquidity cost across various

segments of the money market is not possible.

Conclusion

The short term money market segments like call, CBLO and repo have

witnessed higher liquidity in recent years. The illiquidity cost as measured by

the Amihud liquidity ratio has come down drastically for all the segments.

The study shows that liquidity cost decreased for all the markets but for

CBLO the reduction is substantial. This also reflects the developments in the

money market as market participants move from the uncollateralized

segment to the collateralized segment of the money market.

References

Books

Gopalan, M.S. (2000), Indian Money Market, Structure, Operation and Developments, Deep & Deep Publications Pvt. Ltd, New Delhi.

Gujarati, D.N, and Sangeetha (2007), Basic Econometrics, Fourth Edition, Tata Mcgraw Hill Education Private Limited.

O’Hara, M. (1995), Market Microstructure Theory, Blackwell, Cambridge MA.


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Journals

Amihud,Y. (2002), ‘Illiquidity and stock returns: cross section and time series effects’, Journal of Financial Markets, Vol. 5, No. 1, pp.

31-56.

Amihud, Y, Mendelson, H. (1988), ‘Liquidity and Asset Prices: Financial Management Implications’, Financial Management, Vol.

17, No. 1, pp. 5-15.

Amihud, Y, Mendelson, H. (1991), ‘Liquidity, Asset Prices and Financial Policy’, Financial Analysts Journal, Vol. 47, No. 6 (Nov. -

Dec., 1991), pp. 56-66.

Amihud, Y, Mendelson, H and Pedersen, H. (2005), ‘Liquidity and asset prices’, Foundations and Trends in Finance, Vol.1, No.4,

pp.269-364.

Amihud, Y., and Mendelson, H. (2006), ‘ Stock and bond liquidity and its effect on prices and financial policies’, Financial Markets and

Portfolio Management, Vol.20 No.1,pp. 19-32.

Jarque, C. M., & Bera, A. K. (1987), ‘A test for normality of observations and regression residuals,’ International Statistical

Review, Vol.55, No.2, pp. 163-172.

Madhavan, A. (2000), ‘Market microstructure: A survey’, Journal of Financial Markets, Vol. 3, No.3, pp. 205-258.

Mohan, R. (2006), ‘Financial sector reforms and monetary policy’, Paper presented at the conference on Economic policy in Asia

organised by Stanford Center for International Development and

Stanford Institute for Economic Policy Research, Stanford, 2 June

2006.

Mohanty, D. (2012), “Money Market and Monetary Operations in India”, At the Seminar on Issues in Financial Markets, Mumbai,

December15.

Nath, G.C. (2005), ‘Liquidity in the short-term money market in India’, Collection of Articles, CCIL Publications.

Newsletters and Reports

Raja, A and Nath, G.C. (2012), ‘Money Market Dynamics’, Monthly Newsletter ‘Rakshitra’, February 2012 Clearing Corporation of India.

Report of the Committee on Banking Sector Reforms-RBI, July 1998.


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Report of the Committee on the Financial System –RBI, November 1991.

Report of the Technical Group on Money Market – RBI May, 2005.

Report of the Technical Group on Phasing out of Non-banks from Call/ Notice Money Market-RBI, March 2001.

Report of the Working Group on the Mo

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