Chapter 2 TREND AND PROGRESS OF BANKING IN INDIA
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Chapter 2
TREND AND PROGRESS OF BANKING IN INDIA
TREND AND PROGRESS OF BANKING IN INDIA
2.1 Banking System in India: An Overview
Banking in India has evolved over the years passing through various phases.
The period leading up to Independence was a difficult period for Indian banks. A large
number of small banks sprang up with low capital base. Many banks failed during the
period. Apart from global factors, several other factors were also at play. Partly to address
the problem of bank failure, the Reserve Bank of India was set up in 1935. At the time of
independence, the entire banking was in the private sector. The banking scenario in the
early independence phase raised three main concerns: (i) bank failures had raised concern
regarding the soundness and stability of the banking sector; (ii) there was large
concentration of resources in a few business families; and (iii) the share of agriculture in
total bank credit was miniscule. Although the issue of bank failure was addressed, two or
three major issues at the time of independence continued to raise concern. Accordingly,
with a view to aligning the banking system to the needs of planning and economic policy,
the policy of social control over the banking sector was adopted in 1967, which marked the
beginning of the next phase. Fourteen major banks were nationalised in 1969 and six in
1980. With this, the major segment of the banking sector came under the control of the
Government. The next big change came with the entry of banking sector reforms
introduced on the recommendations of Narasimham Committee (1991). This marked the
entry of unprecedented competition in the banking space with the debut of new generation
private sector banks, more branches of foreign banks, spurt in capital market activities,
entry of mutual funds, exacerbated commodities market and heightened activities of Non-
bank finance companies. In the situation of these changes banking system has flourished
well serving its customers with innovative ideas. This led to significant performance of
banks. The growth parameters will help us understand the various dimensions of growth
and resultant dynamics of facilities to customers and enhanced commitment to provide
value to customers in the form of ‘Quality Service'.
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2.1.1 Performance of Banking System
Banking system in India is made up of Public Sector Banks (PSBs), Private Banks,
Foreign banks, Regional Rural Banks and Cooperative banks. Among them, the share of
PSBs accounted for 72.6% of total advances of all Scheduled Commercial Banks (SCBs) as
on 31st March 2008. PSBs have rapidly expanded their footprints after nationalization of
banks in India. Moreover, the post reform period in banks witnessed speedy
entry/expansion of private sector banks and foreign banks in India. These developments
have created a systemic force to set a new benchmark for customer service standards in
banks. PSBs have quickly fallen in line with their private sector peers showing a high
degree of resilience. As a result, SCBs in India have shown an impressive growth in
deposits mobilization over the years. (Total deposit grown at Compounded Annual Growth
Rate CAGR of 19.6% from FY03-FY08). Among the group of banks, private sector and
foreign banks deposits have grown at a higher CAGR of 26.7% and 22.5%, respectively
from FY03 to FY08. Deposit as a percentage to GDP has increased steadily to 67.8% by
FY08 mainly due to rapid expansion by PSBs, entry of private and foreign banks and
growing financial literacy among people with respect to savings habit.
Computerized Branches
Narasimahm Committee-II has recommended full computerization of the branches in
1998. Indian new private sector banks and foreign banks have entered in banking industry
in 1996- 97 with fully computerized system but public sector banks and old private sector
banks are still in mounting stage. Table 2.1 depicts the analogous picture as fully IT-
oriented banks are fully computerized from birth whereas partially IT-oriented banks have
not computerized even 50 pc of the total branches on an average in pre-ebanking period
and hence industry also record just 57.88 pc branches computerized but gains 91.31 pc
average computerization during post-ebanking period. Partially IT-oriented banks also
creep a look recording an admirable growth of nearly 50 pc where G-I proves an explosive
improvement i.e.57.68 pc from 24.82 pc in pre-ebanking period to 82.50 pc average in
post-ebanking period. G-II and industry also witness excellent growth i.e. 47.36 pc and
33.43 pc respectively. Combined average also portrays a similar picture where industry has
76.11 pc averages during the whole study period. Post-ebanking period confirms
remarkable speed of computerization of the branches but still partially IT-oriented banks
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are not harmonized with fully IT-oriented banks. This is also a major factor for superior
productivity of these banks, therefore partially IT-oriented banks should also gain target of
full computerization of all the branches and IT should be the potency not be a limitation of
these banks.
Table 2.1 Computerized Branches as percentage of Total Branches
Internet Banking Branches
Today’s internet banking is also a much popular approach of banking. During post-
ebanking period also, bank groups perk up average to a great extent where G-III with 74.68
PC average takes an attention moreover industry records just 14.87 pc average in
compatible of partially IT-oriented banks. Combined average proves that partially IT-
oriented banks accounts a larger distance from fully IT-oriented banks nearly 6 to 7 times
that are noteworthy. Constructive gap confirms an impressive growth in internet-banking
all through post-ebanking period where G-III tops with 38.09 pc expansion and G-IV
follows. Although, partially IT-oriented banks witness 11 to 15 pc growth, but it is not
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enough since fully IT-oriented banks are 6 to 7 times ahead of these banks and this gap is
much higher to be bridged early with effectual efforts. Overall, it is concluded that post-
ebanking period is steadier since more average of internet banking and more is the stability
as is evidence from the records. It is whole IT’s outcome, an important artifact of
transformation and, along with other factors, it has pitched a banking business to the
commanding heights.
Table 2.2 Internet Banking Branches as percentage of Total Branches
Source: Information Collected through IT Department , IBA,Mumbai
IT Index
IT index is a combination of all e-channels which represents the performance of the
banks in IT usage. During post-ebanking period, G-IV leads (62.04) through a 2 points
more average than G-III whereas industry reports 45 scores average, almost 15 points
lesser than fully IT oriented banks but incompatible with partially IT-oriented banks.
Combined average concludes that partially IT-oriented banks even industry are laggards by
15 points of fully IT oriented banks. Post-ebanking period is a testimony of volatile growth
in IT usage in whole banking industry with admirable response of G-IV which proves 10
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scores rise whereas industry grows by just 4 points. It is important to note that although,
partially IT-oriented banks witness smaller average, still confirm impressive improvement
but not synchronized with fully IT-oriented banks. The data proves incessant growth in
technology usage for banking services as post-ebanking period is steadier. Overall, it is
concluded that relatively fully IT-oriented banks are much users of IT and individual e-
channels like ATMs and Credit Cards are the most popular channels of G-IV whereas
internet, mobile and tele-banking services are more preferred of G-III. It demonstrates that
fully IT-oriented banks are more technically sound, strength to manage the current
transformation, an outcome of globalization. Hence, IT is the most productive stick to meet
the competition and our partially IT-oriented banks also required to be favour for. This is
only the way to survive and give strong hand in this competitive environment.
Table 2.3 IT Index
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2.2 Current Status and Development of the Indian Banking
Sector
The Indian economy’s liberalisation in the early 1990s has resulted in the conception
of various private sector banks. This has sparked a boom in the country’s banking sector in
the past two decades. The revenue of Indian banks grew four-fold from US$ 11.8 billion to
US$ 46.9 billion, whereas the profit after tax rose nearly nine-fold from US$ 1.4 billion to
US$ 12 billion over 2001-105. This growth was driven primarily by two factors. First, the
influx of Foreign Direct Investment (FDI) of up to 74 per cent with certain restrictions.
Second, the conservative policies of the Reserve Bank of India (RBI), which have shielded
Indian banks from recession and global economic turmoil. Figure 2.1 compares the
country’s Banking Index (Bankex) with the Sensex. The Bankex is an index tracking the
performance of important banking sector stocks, and has grown at a compounded annual
growth rate (CAGR) of approximately 20 per cent over 2003-126. The Figure below shows
that the Bankex and the Sensex have had similar growth trends over the past decade.
Source: Bombay Stock Exchange
Fig. 2.1 Performance of Bankex Over 2002-12
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Source: Bombay Stock Exchange
Fig.2.2 Performance of Sensex Over 2002-12
The high CAGR exhibited by India’s Bankex demonstrates the industry’s resilience
to recession and economic instability. This resilience primarily stems from two factors.
First, the highly regulated Indian banking sector restricts exposure to high risk assets and
excessive leveraging. Second, Indian economy’s overall growth rate has been much higher
than other economies worldwide. However, the recent crisis in the eurozone is likely to
affect the Indian economy and in particular the country’s banking sector. The RBI’s
Financial Stability Report estimates the claim of European Banks on India at approximately
8.6 per cent of the country’s GDP, while some analysts estimate the figure to have reached
15 per cent of the GDP. Further, the recent implementation of the Basel III guidelines may
also force European banks to deleverage significantly. Data from the International
Monetary Fund (IMF) suggests that these banks will deleverage up to US$ 2.6 trillion by
the end of 2013 especially from the sale of securities and non-core assets. This will see the
credit supply to businesses shrinking by 1.7 per cent8, thereby driving Indian companies to
borrow from the Indian banks at a higher cost in times of inflation and in a period of
depreciation in the value of rupee. The non performing assets (NPAs) of banks were
pegged at 2.9 per cent in the fourth quarter of 2011, and are expected to rise to 3.5 per cent
by 2012. All these factors might hamper the performance of the Indian banking sector.
However, amongst positive initiatives taken by the government, the RBI mandated banks to
maintain 70 per cent of the provision coverage ratio of their bad loans as on September
2010, thereby mitigating the effect of NPAs to a certain extent.
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Source: IndiaBudget.nic.in, Reserve bank of India Statistics
Fig.2.3 Contribution of banking (including insurance) to the GDP (at current prices)
Fig.2.4 Market Shares of leading players (based on total credit) and split
between government, private and foreign banks in India
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Source: ICRA
Fig-2.5 Assessing the performance of India’s leading banks
The State Bank of India (SBI), Punjab National Bank (PNB) and Bank of Baroda
(BoB) had the first, second and third largest credit portfolios, respectively. HDFC emerged
as among the best performers with a strong NIM ratio and the lowest NPA ratio, whereas,
ICICI (with the fourth largest credit portfolio) reported a high NPA ratio in 2011. Financial
Inclusion and technological transformation in banking A World Bank Survey conducted in
2011 revealed that only 35 per cent of all adults in India had a bank account with a formal
banking institution, while this figure stood at 21 per cent in the poorest income quantile.
This represents a massive opening that financial institutions in the country can leverage
upon for future growth. Further, the policies of the Reserve Bank have prioritized financial
inclusion, presenting an opportunity that might not manifest itself again. The Indian
government has advised banks to open at least one branch in villages with a population of
more than 2,000, and also cover the peripheral villages. Banks are also required to
formulate a board approved Financial Inclusion Plan (FIP), the implementation of which
will be monitored by the RBI30.
The Indian government can bring in financial inclusion by setting up ATMs and
providing mobile/online banking facilities. Further, experts suggest that the number of
ATMs need to increase by 5 times to reach 160,000-190,000 in the coming decade31. The
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mobile banking channel in India is also untapped, with close to 900 million mobile
connections, and only 400 million bank accounts. With mobile connections expected to
grow to 1,150 million by 2020, mobile banking is a key growth prospect and an important
channel for financial inclusion. The following Figure gives a perspective on the transaction
costs of various banking channels and highlights the cost saving that can be achieved
through mobile, online and ATM banking.
Source: KPMG Report – Technology Enabled Transformation in Banking
Fig-2.6 Transaction Costs by Banking Channels
2.2.1 Significance of Customer Service in Banks
Customer service has great significance in the banking industry. The banking
system in India today has perhaps the largest outreach for delivery of financial services and
is also serving as an important conduit of financial intermediation. While the coverage has
been expanding day by day, the quality and content of dispensation of customer service
also have been getting aligned to the expectations of the customers. The vast network of
branches spread over the entire country with millions of customers, a complex variety of
products and services offered, the varied institutional framework – all these add to the
enormity and complexity of banking operations in India giving umpteen opportunities to
banks to make constant improvement in the services. Any initiatives for betterment of
service needs a thorough understanding of the customer perceptions, their needs and
changing aptitude of consumers. Such efforts of banks are evidenced by a series of studies
conducted by various committees such as the Talwar Committee, Goiporia Committee,
Tarapore Committee etc. to bring in improvement in performance and procedure involved
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in the delivery of hassle-free improved customer service. In the whole process of
improving customer service, the efforts of banks were adequately supplemented by Reserve
Bank, as the regulator of the banking sector. It has been actively guiding, supporting and is
actively engaged from the very beginning in the review, examination and evaluation of
customer service in banks. It has constantly brought into sharp focus the need for quality
and introduced framework to ensure that banking services are available to common people.
It also stressed the need to benchmark the current level of service, review the progress
periodically, enhance the timeliness and quality, rationalize the processes taking into
account technological developments, and suggest appropriate incentives to facilitate change
on an ongoing basis through its directives. Thus the role of Reserve Bank of India has been
a critical catalyst in improving customer service in banks. Thus depositors' interest forms
the focal point in evolving policies for better customer service in banks.
2.2.2 Impact of Competition
Reforms in the banking sector over the years have gradually heightened competition
in banks. Improvement in the quality of customer service received top most priority and
emerged as the key business differentiator to compete. Right from customization of
products to suit the customer appetite, expansion of range of products/services, wider use
of technology to make banking more accessible at customer's call, right up to the minute
customer needs have received bank's attention. The rigorous homework of banks to
improve the face of banking is visible in the bank branches. The transformation in the
approach and attitude of the employees towards customers is evident. PSBs too fast
changed their service delivery model/style to compete with their private peers. Technology
which was until now making inroads in a small way suddenly picked up pace to gain a
strategic position as a business enabler in shaping up banking services. It did not take much
time for even bank employees to realize how technology could make their life more
comfortable at work place. Thus technological innovation not only enabled a broader reach
for consumer banking but also enhanced its capacity to create more value for the
customers.
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2.2.3 Entry of Technology in Global Banking
The rapid advancement in Information and Communication Technology (ICT) has
had a profound impact on the banking industry and the wider financial sector over the last
two decades and it has now become a tool that facilitates banks' organizational structures,
business strategies, customer services and other related functions. The recent "IT
revolution" has exerted far-reaching impacts on economies, in general, and the financial
services industry, in particular. Within the financial services industry, the banking sector
was one of the first to embrace technology and benefit significantly from IT development.
Tracing the beginning, we can observe that technological revolution in banking started in
the 1950s, with the installation of the first automated bookkeeping machines at banks. This
was well before the other industries became IT savvy. Automation in banking became
widespread over the next few decades as bankers quickly realized that much of their labor-
intensive information-handling processes could be automated with the use of computers.
The first Automated Teller Machine (ATM) is reported to have been introduced in the USA
in 1968, and it was only a cash dispenser. The advent of ATMs helped both to improve
customer convenience and reduce costs. ATMs enabled facilities of withdrawing funds,
accounts inquiries and transferring funds between accounts making face-to-face interaction
between bank staff and customers as optional.
2.2.4 Technology in Indian Banking System
Technology is key to servicing all customer segments – offering convenience to the
retail customer and operating efficiencies to corporate and government clients. The
increasing sophistication, flexibility, and complexity of product and servicing offerings
makes the effective use of technology critical for managing the risks associated with the
business. Developing or acquiring the right technology, deploying it optimally, and then
leveraging it to the maximum extent is essential to achieve and maintain high service and
efficiency standards while remaining cost-effective and delivering sustainable returns to
shareholders. Early adopters of technology acquire significant competitive advantage.
Managing technology is, therefore, a key challenge for the Indian banking sector. Wide
disparities exist between various banks as far as technology capabilities are concerned; the
sector as a whole needs to make significant progress on this front. Building knowledge-
driven, learning organizations is important in the current scenario of rapidly evolving
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operating environments. Knowledge and assimilation of new ideas and trends are essential
to keep the organization ahead on the curve. This is true for banking as it is for all other
sectors. Banks must continuously seek to be aware of cutting edge practices in banking
internationally and institutionalize this learning across the organization.
The foundation for large-scale induction of IT in the banking sector was provided
by the recommendations of the committees headed by Dr. C. Rangarajan, in 1984 and
1989. Subsequently, in 1994, the Reserve Bank constituted a committee on 'Technology
Upgradation in the Banking Sector”. The committee made a number of recommendations
covering payment systems including setting up of an autonomous centre for development
and research in banking technology. The Institute for Development and Research in
Banking Technology (IDRBT), Hyderabad, was created .It has established and operates the
Indian FInancial NETwork (INFINET), conducts research in banking technology and
provides consultancy services apart from providing educational and training facilities for
the banking sector. It plays the role of an incubator for bringing innovation in banking
technology. Banks will also come under increasing pressure to diversify their revenue
streams. Since capital market competes with the banking system closely, which otherwise
is termed as ‘disintermediation,’ the importance of bank lending could be expected to
decline. As a result, the share of interest income in banks’ revenue would come down
necessitating them to look for other sources of revenue. Fee-based income would emerge as
an important revenue stream as would income from cross selling of products. To drive
down costs, banks may outsource non-core services. This will help in maintaining lower
manpower which can be more focused on core services and reduce operating expenses. In
Indian banking, technology has become an ‘enabler’ and is moving on to become a ‘driver’
of business. Large scale computerization of branches and operations has enabled the banks
to capture more of their business on computers resulting in operational efficiencies
including better customer service. If this can be called the ‘first phase’ of technology
adoption, it has been quite successful insofar as banks have been able to adopt IT
effectively to carry out front-office operations. This phase has also seen a reorientation of
the staff in terms of newer skills albeit at a lower level. But, such large scale
computerization, per se, will not help in other operational areas like back-office function-
At the same time, smaller private sector banks, MIS, fraud prevention, value addition,
marketing, and higher business. With customers demanding speed, efficiency, and lower
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costs, use of technology has proliferated. Banks have now taken up the ‘second phase’
where they are aiming at achieving connectivity between branches, setting up of Central
Data Repository, generation of MIS, prevention of frauds, evolving value-added products,
reducing transaction costs, and new initiatives like cross selling, CRM, etc.
2.2.5 Pace of Technology Adoption in Banks
The stand alone IT infrastructure in banks in early 2000 began to migrate to core
banking platform for integration of banking transactions among bank branches to provide
the facility of access to bank account from anywhere. Thus going beyond the gathering,
processing, analyzing and providing service at the counters locally within the bank, IT
moved to provide anywhere any time banking. The big change came from the move from
localized banking to universalisation of banking service through core banking solution,
which provided the ultimate comfort to customers.
Accordingly, in order to provide global standard of service, most Banks have
migrated to Core Banking Solution and introduced e-banking products and set up on-site
and offsite ATMs. Currently, 67% of Bank branches are on CBS mode, while around
35000 ATMs are located off-site. The service charges on use of other bank's ATMs have
been dispensed with. Core banking solution refers to a common IT solution wherein a
central shared database support the entire banking application. Business processes in all the
branches of a bank update a common database in a central server located at Data centre,
which gives a consolidated view of the bank's operations. Branches function as delivery
channels providing services to the customer of the bank. Core Banking Solution is an
integrated application that supports real time, multi-banking and multi-channel strategies.
The single biggest achievement of implementing the Core Banking Solution is that each
customer is truly the customer of the Bank and not just the customer of the Branch, where
his / her account is maintained. The Indian banking and financial scene witnessed dramatic
changes in recent years, partly due to the thrust of liberalisation and partly due to the
dynamism imparted by innovative ideas and products. The main driving force of such
heightened activity is the need to provide first class service to customers of banks and other
financial entities at affordable costs. And customers, on their part, have also become
sophisticated and have articulated very convincingly of their needs and the appreciation
they have for prompt and value-added service. Banks therefore, have devoted considerable
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attention to the processes that help their products to be acceptable. Technology provided
the key to such processes.
In the last few years, it is no wonder that the banking sector has seen a virtual
cornucopia of new products: credit cards, tele-banking, ATMs, quick collection facilities
for outstation cheques, retail EFT, Electronic Clearing Services – ECS – Debit and Credit
for repetitive payments like dividend, interest, utility bills, Internet Banking, etc. Now there
are indications of moving towards the introduction of smart cards, debit cards, on-line
banking for e-commerce and financial EDI for straight through processing.
The Reserve Bank has initiated many reforms to further the speed and reliability of
financial operations and to contain financial risks of the system, through the carrier of
information technology. The RBI has, over the years, given guidance on the Introduction
and spread of computerisation in banks. Since about the early eighties, a number of
Committees set up by RBI have given their recommendations on various issues relating to
computerisation including the feasibility of introducing MICR / OCR technology for
cheque processing, mechanisation in the banking industry, communication network for
banks and SWIFT implementation, computerisation in banks, technology issues relating to
payments system, cheque clearing and securities settlement in the banking industry.
Electronic funds transfer and other electronic payments are being developed. The banking
sector has benefitted greatly by implementing some of these recommendations; decision
making is gradually becoming technology-driven with a view to optimising the profitability
and efficient customer service. It is also becoming increasingly obvious that computers and
communications are essential to revolutionise the very nature of payment products, their
clearing and settlement.
Computerisation efforts among the Public Sector Banks (PSBs) in India, which
account for over 80% of the assets of the entire banking system, has been substantial. Of
the 45,439 branches of the PSBs as on September 30, 1998, as many as 3,668 branches
serving customers directly had been fully computerised with a complement of more than
65,000 computer nodes/PCs. A total of 6961 branches have been partially computerised –
with Advanced Ledger Posting Machines, Electronic Accounting Machines and Personal
Computers. Of the 336 service branches, 149 had been fully computerised and 166 had
been partially computerised.
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The PSBs had installed 194 Automated Teller machines (ATMs) all over the
country; they had issued over 8.5 lakh credit cards and over 32,000 debit cards. The latest
in this area of activity has been the issue of SMART cards.
For international interconnectivity of computers and for cross-border transactions,
568 branches have been connected to the S.W.I.F.T. Internal interconnectivity of branches
has been established at 571 branches using internal captive networks while148 branches are
on the RBINET.
As the central bank, one of the primary concerns of the Reserve Bank is the
operation of a safe and efficient payment system for the efficient conduct of monetary
policy. In a modern economy, the link between economic activity and money is effected
through the payment process whose efficiency is determined largely by the efficiency of
the payment system. Inefficiencies in the payment process create time lags between the
initiation and the completion of a payment transaction. By providing a means for quick,
safe and efficient movement of funds and information, INFINET would help to improve
the effectiveness of monetary policy.
2.2.5.1 The Indian Financial Network (Infinet)
The Indian Financial Network, a VSAT-based communication back-bone for the
national payment system, was equipped with a full transponder on the INSAT-3B satellite
to carry out its operations. This was spearheaded by the Institute for Development and
Research in Banking Technology (IDRBT), a Hyderabad-based research institute promoted
by the Reserve Bank of India, is currently undergoing major changes. INFINET can be
used for both intra and interbank applications. Banks can develop and port intra bank
applications on their own. Interbank applications are being developed together by the
Reserve Bank of India, IDRBT and member banks. The INFINET is a Closed User Group
(CUG) Network and uses a blend of communication technologies such as VSATs and
Terrestrial Leased Lines. The network consists of over 700 VSATs located in 127 cities of
the country and utilizes one full transponder on INSAT 3B.
Very Small Aperture Terminals (VSATs) have been installed in all the sixteen
offices of the Banking Department of the Reserve Bank, at the Ministry of Finance in New
Delhi and at selected sites of the public sector banks. The INFINET would give impetus to
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bank computerisation to cover bulk of banking business and to interface with the banking
system. The computerisation now available in the banking sector will give added emphasis
on standardisation of Hardware, Operating system software, software – which would all
help in better housekeeping. Because housekeeping itself would more or less get
standardised for the entire banking sector. Interconnectivity would ensure optimal
utilisation of funds and also availability of VSAT – not only for funds transfer but also for
information flow which would result in better supervision, monitoring at the level of
controlling offices, and decision making at the corporate level.
The INFINET is the most secure platform that technology can provide. Here are its
salient features:
INFINET being a CUG, it provides a high level of security against intruders.
Outsiders cannot enter or penetrate the network. In the case of VSAT
Network, the IP Addresses for IDUs at the remote VSAT locations are allotted
and maintained by the Hub and cannot be changed by the end users. This
takes care of the network integrity and security.
In the space segment, the data transmission, even in broadcast mode, is
encrypted using proprietary standards and the packets cannot be opened at any
VSAT location except the one specified as the destination VSAT.
In the case of Leased Line Network (LLN) IPSEC 56 will be used to provide
state-of-the-art encryption and security.
Apart from the above layers of network security, there will be a host of in-
built security mechanisms in each application that is deployed on the
INFINET - like password, access control, encryption, digital signatures and
certification and in some applications there will be smart card and/or bio-
metric authentication as well.
Application level Security at par with international standards is provided through
Symmetric Key and Public Key Cryptography and IDRBT will act as the Certification
Authority for the Banking and Financial Sector.
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All major bank branches in commercially important cities of India should be
brought under total computerisation as expeditiously as possible. The next step is the
linking of all computerised branches to their service branches, Treasury / Funds
departments and controlling offices. Connectivity to Treasury / Funds department will
ensure optimal utilisation of funds and connectivity to controlling offices will aid in
empirical decision making. All banks should aim at putting in place such intra-bank
hierarchical networks. Once intra-bank connectivity is complete, and with inter-bank
connectivity being provided by the Against the background of the incipient use of new
technologies, the Reserve Bank appointed in September 1998 a Committee on Technology
Upgradation in the Banking Sector, with membership drawn from the Government, the
RBI, banks and academic institutions associated with information technology. The main
purpose of the Committee was to examine the scope and methods for technological up
gradation in the banks and financial institutions, and the associated aspects such as
suggestions for legislative amendments, establishment of standards related to platforms,
messages, security, etc. The recommendations given by the Committee cover various areas
such as communication infrastructure and usage of the INFINET, standardisation and
security, outsourcing of technology and services, computerisation of Government
transactions, data warehousing, data mining, management information systems, legal
framework for electronic banking and other related issues.
Applications such as Real Time Gross Settlement, Central Funds Management
System, Security Settlement System, Electronic Clearing System and Electronic Funds
Transfer, being developed by the RBI will be ported on the INFINET and in a true sense;
the INFINET will become the backbone for the National Payment Systems. Some of the
applications, which the members are using on the network, are Any Branch Banking (Multi
Branch Banking), Fast Collection of Cheques, Cash Management Products, ATM Network,
Interbank reconciliation, Corporate E-mails etc.
2.2.5.2 Real Time Gross Settlement (RTGS)
RTGS is an electronic settlement system of Reserve Bank of India without
involvement of papers. To facilitate an Efficient, Secure, Economical, Reliable and
Expeditious System of Fund transfer and clearing in the Banking sector throughout India.
Real time gross settlement systems (RTGS) are a funds transfer mechanism where transfer
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of money takes place from one bank to another on a "real time" and on "gross" basis.
Settlement in "real time" means payment transaction is not subjected to any waiting period.
The transactions are settled as soon as they are processed. "Gross settlement" means the
transaction is settled on one to one basis without bunching with any other transaction. Once
processed, payments are final and irrevocable.
2.2.5.3 Electronic Clearing Service
Electronic Clearing Service is another technology enhancement happened in the
banking industry. The customer willing to use this facility is required to fill in the mandate
form from the corporate/any utility service institution for ECS mode of credit and debit.
The customer needs to prepare the payment date and submit it to the “sponsor Bank” and
after that everything happened electronically. So customer can thereby make payments as
well as receive all incomes electronically.
2.2.5.4 Automated Teller Machine (ATM)
ATM is designed to perform the most important function of bank. It is operated by
plastic card with its special features. The plastic card is replacing cheque, personal
attendance of the customer, banking hour’s restrictions and paper based verification. There
are debit cards. ATMs used as spring board for Electronic Fund Transfer. ATM itself can
provide information about customers account and also receive instructions from customers
- ATM cardholders. An ATM is an Electronic Fund Transfer terminal capable of handling
cash deposits, transfer between accounts, balance enquiries, cash withdrawals and pay bills.
It may be on-line or 0ff-line. The on-line ATM enables the customer to avail banking
facilities from anywhere. In off-line the facilities are confined to that particular ATM
assigned. Any customer possessing ATM card issued by the Shared Payment Network
System can go to any ATM linked to Shared Payment Networks and perform his
transactions.
2.2.5.5 Credit Cards/Debit Cards
The Credit Card holder is empowered to spend wherever and whenever he wants
with his Credit Card within the limits fixed by his bank. Credit Card is a post paid card.
Debit Card, on the other hand, is a prepaid card with some stored value. Every time a
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person uses this card, the Internet Banking house gets money transferred to its account
from the bank of the buyer. The buyers account is debited with the exact amount of
purchases. An individual has to open an account with the issuing bank which gives debit
card with a Personal Identification Number (PIN). When he makes a purchase, he enters his
PIN on shops PIN pad. When the card is slurped through the electronic terminal, it dials the
acquiring bank system - either Master Card or VISA that validates the PIN and finds out
from the issuing bank whether to accept or decline the transactions. The customer can
never overspend because the system rejects any transaction which exceeds the balance in
his account. The bank never faces a default because the amount spent is debited
immediately from the customers account.
2.2.5.6 Smart Card
Banks are adding chips to their current magnetic stripe cards to enhance security
and offer new service, called Smart Cards. Smart Cards allow thousands of times of
information storable on magnetic stripe cards. In addition, these cards are highly secure,
more reliable and perform multiple functions. They hold a large amount of personal
information, from medical and health history to personal banking and personal preferences.
2.2.6 Benefits of Integrated CBS Operations
Core Banking Solutions
Core Banking Solutions is new jargon frequently used in banking circles. The
advancement in technology especially internet and information technology has led to new
way of doing business in banking. The technologies have cut down time, working
simultaneously on different issues and increased efficiency. The platform where
communication technology and information technology are merged to suit core needs of
banking is known as Core Banking Solutions. Here computer software is developed to
perform core operations of banking like recording of transactions, passbook maintenance,
interest calculations on loans and deposits, customer records, balance of payments and
withdrawal are done. This software is installed at different branches of bank and then
interconnected by means of communication lines like telephones, satellite, internet etc. It
allows the user (customers) to operate accounts from any branch if it has installed core
banking solutions. This new platform has changed the way banks are working. Now many
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advanced features like regulatory requirements and other specialised services like share
(stock) trading are being provided.
1. Customer data is stored in a centralized location; more time is available to the
branches for front office activities like attending to customers, product
promotion, marketing, business expansion and cross selling of products. This
benefits customers as they get more attention of banks. Single window service
for the varied needs of the customers is made available at the branches. This
enhances the quality and speed of customer service at the branch.
2. There is a uniform approach to the branch rules / operations for handling
customer needs.
3. Branches can innovate methods to better satisfy the customers by customizing
services.
4. A look alike internal ambience and layout of branches is possible at the end
state so that customers feel good to experience the enhanced services.
5. Branches are not to spend their time in attending to trouble shooting of
systems, database and servers. They serve customers with a full service
orientation as service stations.
6. Anywhere / anytime branch banking is available to the customers.
7. As multiple delivery channels are facilitated, Internet banking, online access to
all ATM network, tele-banking facility, bill payment facility etc. are made
available to the customers. Customers need not necessarily visit branches as the
multiple e-delivery channels enable them to transact basic banking even from
the comfort of home / office.
8. Availability of MIS at a central location enhances the decision support to help
modify products/services for better customer satisfaction.
9. There will be effective control and monitoring of branch banking and
surveillance of customer service quality is improved.
10. Faster introduction of customer centric products from the central location
ensures sustained efforts to bring improvements.
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2.2.7 Advantages of Technology In Improving Banking Services
Overall, technological innovation has brought about speedy processing and
transmission of information, easy marketing of banking products, enhancement of customer
access and awareness, wider networking and, regional and global links on an
unprecedented scale. IT development has thus changed the product range, product
development, service channels and type of banking services, as well as the packaging of
such services, with significant efficiencies not only in the banks, but also the ancillary and
feeder services to banks. The financial services industry has thus become virtually
dependent on IT development. Most banks make visible efforts to keep up with new
systems and processes and thus deliver improved services to customers. Further
development of multi-functional ICT has also enabled banks to provide more diversified
and convenient financial services, even without adding many physical branches as hitherto.
The present day ATMs can be scaled up into sophisticated machines that can scan the
identity of customer and like a bank teller, accept cash or cheques, facilitate deposit of
funds in loan accounts and can be developed to allow for face-to-face discussion with a
service representative via video. Remote connectivity with the call centers can make these
services possible. The development of Internet services, which is an extensive, low-cost
and convenient financial network, has facilitated delivery of banking services to customers,
anywhere and anytime. Along with Internet and Web-based services, a need for changing
core-banking architecture has emerged. The introduction of new core banking systems by
some banks and their links with the improved telecommunication network has enabled
banking transactions to be done online, in contrast to the batch-processing mode used
earlier. The integration of e-trading with internet banking and banks' websites is also a
notable feature. These IT advancements have enabled banks to gradually replace manual
work by automated procedures with on-line real time processing. Banks in India started
from a disparate IT infrastructure in general and moved over to consolidation and
virtualization of databases and servers gradually over the years in order to achieve
efficiency, better customer service. Use of technology in a large way provides relief in the
form of more effective work processes, capacity building to handle larger volume of
transactions with remarkable ease. There is no pressure of incremental rise in the volume of
transactions and number of customers / users would not feel the presence of such large
number of transactions unlike in the manual mode where the physical queue always poses
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discomfort. Such increased use of technology led to delivery of neat and accurate banking
service to the customers. Computerized pass book printing, statement of accounts, auto
printing of standard letters to customers, quick access to information on personal computers
provided a huge value and satisfaction to the customers who were struggling to read
different handwritings of bank employees manning the counters. Though technology was
introduced as a customer convenience tool, it began to become a cost cutting tool by
transforming human intensive banking to technology intensive banking. Thus taking the
help of technology, banks are fast moving from 'brick and mortar' banking to virtual
banking though physical presence is going to stay in India due to the unique nature of
Indian banking and varied Indian democratic structures. Personal touch and relationship
management in banks in India continues to hold significance as a value proposition to
customers despite the massive automation of banking services.
While banks are moving towards attaining higher standards of customer service, the
customer needs too are increasing because of globalizing environment. As a result, banks
have to chase moving target in meeting customer aspirations. While the technology brings
sophistication and speed, the element of human relationship holds more value in
strengthening business ties. PSBs provide the much needed personal service to customers
respecting the age and profile of customers. Banks are gearing up to provide a suitable
service environment to different class of customers. Setting up of specialized branches is a
step to meet customer expectations.
2.2.8 Challenges for Banks in Integrating IT
Banks enhance the quality of customer service by providing IT enabled services but
in the process have to confront several challenges, which have a direct bearing on the
performance of banks. Banks have to increasingly address certain challenges relating to
providing IT related infrastructure in the branches, resolve the software and hardware
glitches and tackle obsolescence of technology, which, if not addressed, can result into
tremendous loss and operational risk. It can precipitate into a threat to provide hassle - free
customer service at the branches. Identifying right vendors / IT providers, who are capable
to operate on global best practices and who can deliver affordability, availability,
reliability, adaptability, convenience and operational comfort is of paramount importance.
Inadequate alignment of IT platforms with business requirements, system failures,
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connectivity, backup support, data mining, unauthorized access, malicious activities like
hacking, phishing, cost overruns and data integrity among others, are some of the issues to
be addressed. Making customers comfortable in using technology based products and
services will be yet another challenge to educate customers to shift transactions from
manual mode to technology mode to enable optimum use of IT infrastructure. Unless
customers extensively use technology platform, there is absolutely no pay back for banks.
In the environment of subdued usage, banks will not be encouraged to bring further
improved technology. Since technology suffers from fast obsolescence, replacement has to
be fast and hence pay back is essential. Those using technology centric services in banks
should become partners in spreading education on usage of electronic banking. The cost of
a bank transaction on manual mode is estimated to be in the range of Rs.45 to Rs.50 while
it is around Rs.15 on ATM and Rs.4 on e banking. Banks will get mileage only if more and
more transactions are handled through electronic mode. In the long term interest and
convenience, migrating to electronic banking services is a good option. Information
technology and infrastructure technology are the two vital pillars, which can be utilized to
effectively increase access to the masses. One creates capability to serve the customers and
the other provides information for qualitative improvement of services. Banks have to
focus on data quality and application driven planning and budgeting for better-cost
management to bring about more customer centric products / services.
2.3 Technological Adoption in Context of Internet Banking
Banking system in modern times has become part and parcel of life and one cannot
do anything without banking. In the age of information technology, the banking systems
have reengineered and have changed its total functioning. The use of information
technology therefore seen as boost for other service sectors like Insurance, Hospitals, postal
services, Income tax and other tax payments etc. The banking sector of all types viz.
private ,public ,cooperative have all been in the race for deployment of latest technology
solutions . Technology is emerging as a key driver of business in the financial services
industry. The advancements in computing and telecom have revolutionized the financial
industry and banking on the net is fast catching on. Banks are developing alternative
channels of delivery like ATMs, telebanking, remote access, internet banking, etc.
Technology is unsettling the earlier business processes and customer behavior is
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undergoing change. These have enhanced the forces of competition. To survive under these
conditions, the public sector banks will have to undertake business process reengineering,
redefine their strategy, and reorient their organization structure. Besides, they will have to
align their IT strategy and HR strategies to the overall business strategy. Due to adoption of
technology, alternative channels of delivery would become more active. This, in turn,
would result in a leaner branch network and better skilled workforce. Technology,
therefore, will impact on the business model strongly by cutting down costs of delivery and
transaction. The emphasis will be on acquiring new customers and maximizing
opportunities for cross-selling. Technology has brought about strategic transformation in
the working of banks. With years, banks are also adding services to their customers. The
Indian banking industry is passing through a phase of customers market. The customers
have more choices in choosing their banks. With stiff competition and advancement of
technology, the service provided by banks has become more easy and convenient.
2.3.1 Internet Banking (E-Banking)
Technology plays a vital role in improving the quality of services provided by the
business units. One of the technologies which really brought information revolution in the
society is internet Technology and is rightly regarded as the third wave of revolution after
agricultural and industrial revolution. Advent and adoption of internet by the industries has
removed the constraint of time, distance and communication making globe truly a small
village. Financial sector being no exception, numerous factors such as competitive cost,
customer service, increase in education and income level of customers, etc. influence banks
to evaluate their technology and assess their electronic commerce and internet banking
strategies. Internet banking allows banking from anywhere, anytime and is used for
transactions, payments, etc. over the internet through a bank, a credit union or society’s
secure website. Customer satisfaction, customer retention and new customer acquisition are
the key factors in internet banking system.
Internet banking or E-banking means any user with a personal computer and a
browser can get connected to his banks website to perform any of the virtual banking
functions. In internet banking system the bank has a centralized database that is web-
enabled. All the services that the bank has permitted on the internet are displayed in menu.
Any service can be selected and further interaction is dictated by the nature of service. The
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traditional branch model of bank is now giving place to an alternative delivery channels
with ATM network. Once the branch offices of bank are interconnected through terrestrial
or satellite links, there would be no physical identity for any branch.
It would a borderless entity permitting anytime, anywhere and anyhow banking.
The network which connects the various locations and gives connectivity to the central
office within the organization is called intranet. These networks are limited to organizations
for which they are set up.
‘Internet banking’ refers to systems that enable bank customers to access accounts
and general information on bank products and services through a personal computer (PC)
or other intelligent device. Internet banking products and services may include wholesale
products for corporate customers as well as retail and fiduciary products for consumers.
Ultimately, the products and services obtained through internet banking may mirror
products and services offered through other bank delivery channels. Other internet banking
services may include providing internet access as an internet service provider (ISP). A
national bank subsidiary may provide home banking services through an internet
connection to the bank’s home banking system and, incidental to that service, may also
provide internet access to bank customers using that service.
Historically, banks have used information systems technology to process checks
(item processing), drive ATM machines (transaction processing), and produce reports. In
the past, customers rarely noticed the computer systems that made the information systems
operate. Today, websites, electronic mail, and electronic bill presentment and payment
systems are an important way for banks to reach their customers. National banks have
experimented with various forms of online banking for many years. Some of the early
experiments involved closed systems where the customers accessed banks through a dial-in
or cable TV connection. These systems limited a bank’s potential customer base because
they required out of area customers to either incur long-distance charges on their phone
bills or subscribe to a particular cable TV service to access the bank. Today, with the
widespread growth of the internet, customers may use this technology anywhere in the
world to access a bank’s network. Moreover, with cyber cafes and kiosks springing up in
different cities, access to the net is becoming easy. The internet, as an enabling technology,
has made banking products and services available to more customers by eliminating
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geographic and proprietary systems barriers. With an expanded market, banks also may
have opportunities to expand or change their product and service offerings. Internet
banking is the latest in this series of technological wonders in the recent past involving use
of internet for delivery of banking products and services. Internet banking is changing the
banking industry and is having major effects on banking relationships. Banking is now no
longer confined to the branches were one has to approach the branch in person, to withdraw
cash or deposit a cheque or request a statement of accounts. In true internet banking, any
inquiry or transaction is processed online without any reference to the branch at any time.
2.3.2 The Entry of Indian Banks into Net Banking
Internet banking, both as a medium of delivery of banking services and as a
strategic tool for business development, has gained wide acceptance internationally and is
fast catching up in India, with more and more banks entering the fray. India may be said to
be on the threshold of a major banking revolution with net banking having already been
unveiled. A recent study has revealed banks in India are providing internet banking
services at different levels. However, the growth potential is of internet banking in India is
immense.
With gradual adoption of information technology (IT), the bank puts up a website
that provides general information on the banks, its location, services available, for instance,
loan and deposits products, application forms for downloading and e-mail option for
enquiries and feedback. A few banks provide the customer to enquire into his demat
account holding details, transaction details and status of instructions given by him. Some of
the banks permit customers to interact with them and transact electronically with them.
Such services include request for opening of accounts, requisition for cheque books, stop
payment of cheques, viewing and printing statements of accounts, movement of funds
between accounts within the same bank, querying on status of requests, instructions for
opening of letters of credit and bank guarantees. Some private and public sector banks have
gone a step further within the transactional stage of internet banking by allowing transfer of
funds by an account holder to any other account holder of the bank.
Banks providing internet banking services have been entering into agreements with
their customers setting out the terms and conditions of the services. The terms and
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conditions include information on the access through user-id and secret password,
minimum balance and charges, authority to the bank for carrying out transactions
performed through the service, liability of the user and the bank, disclosure of personal
information for statistical analysis and credit scoring also, non-transferability of the facility,
notices and termination and the likes.
Table 2.4: India’s Net banking almanac
Bank Name Technology Vendor Service offering
ABN AMRO Bank Infosys (Bank Away) Net Banking
Abu Dhabi Commercial Bank Infosys (Bank Away) ADCB NetLink
Bank of India I-flex BOIonline
Centurion Bank Logica MyCBOL
Citibank Orbitech (now Polaris) Citibank Online
Corporation Bank I-flex CorpNet
Federal Bank Sanchez FedNet
Global Trust Bank Infosys (BankAway) ibank@gtb
HDFC Bank i-flex/ Satyam NetBanking
HSBC Online@hsbc
ICICI Bank Infosys, ICICI Infotech Infinity
IDBI Bank Infosys (BankAway) i-net banking
IndusInd Bank CR2 IndusNet
Punjab National Bank Infosys (BankAway)
Standard Chartered Bank In-House Me Standard Chartered Online
State Bank of India Satyam/Broadvision onlinesbi.com
UTI Bank Infosys (BankAway) iConnect
2.3.3 Development of Internet Banking In India
The financial reforms that were initiated in the early 1990s and the globalisation
and liberalization measures brought in a completely new operating environment to the
banks. The bankers are now offering innovative and attractive technology-based services
and products such as ‘Anywhere Anytime Banking’, ‘Tele-Banking’, ‘Internet Banking’,
‘Web Banking’, etc. to their customers to cope with the competition. The process started in
the early 1980s when Reserve Bank of India (RBI) set up two committees in quick
succession to accelerate the pace of automation of operations in the banking sector. A high-
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level committee was formed under the chairmanship of Dr. C. Rangarajan, then Governor
of RBI, to draw up a phased plan for computerisation and mechanisation in the banking
industry over a five-year time frame of 1985–1989. The focus by this time was on customer
service and two models of branch automation were developed and implemented. Having
gained experience in the earlier mode of computerisation, the second Rangarajan
committee constituted in 1988 drew up a detailed perspective plan for computerisation of
banks and for extension of automation to other areas such as funds transfer, e-mail,
BANKNET, SWIFT, ATMs, i-banking, etc. The Government of India enacted the
Information Technology Act, 2000 (generally known as IT Act, 2000), with effect from 17
October 2000 to provide legal recognition to electronic transactions and other means of
electronic commerce. RBI had set up a ‘Working Group’ on internet banking to examine
different aspects of internet banking. The Group had focused on three major areas of
internet banking such as (1) technology and security issues, (2) legal issues and (3)
regulatory and supervisory issues. RBI had accepted the recommendations of the ‘Working
Group’, and accordingly issued guidelines on ‘internet banking in India’ for
implementation by banks.
Internet banking in India is currently at a nascent stage. While there are scores of
companies specializing in developing internet banking software, security software and
website is the first one to have introduced internet banking for a limited range of services
such as access to account information, correspondence and, recently, funds transfer
between its branches. ICICI is also getting into e-trading, thus offering a broader range of
integrated services to the customer. Several finance portals for provision of non-banking
financial services, e-trading and e-broking have come up. Commercial applications such as
Electronic Bill Presentment (EBP) and Procurement systems may not be introduced in
India immediately, but are likely to have a greater impact than the retail applications. The
corporate sector is adequately computerised and has already recognised the important role
of e-commerce in future. Increasingly, companies are setting up websites even where there
are no immediate tangible benefits to them from doing so.
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2.3.4 Banking Services through Internet
(A). Levels of Banking services
Broadly, the levels of banking services offered through INTERNET can be categorized
in three types:
(i) The Basic Level Services use the banks' websites which disseminate
information on different products and services offered to customers and
members of public in general. It may receive and reply to customers' queries
through e-mail,
(ii) In the next level are Simple Transactional Websites which allow customers
to submit their instructions, applications for different services, queries on
their account balances, etc, but do not permit any fund-based transactions on
their accounts,
(iii) The third level of Internet banking services are offered by Fully
Transactional Websites which allow the customers to operate on their
accounts for transfer of funds, payment of different bills, subscribing to other
products of the bank and to transact purchase and sale of securities, etc.
Most of the banks providing Internet banking products and services offer, to a large extent,
an identical and standard package of banking services and transactional capabilities.
(B) Structure of Banking services
In general, Internet banking products are offered in a two-tiered structure.
A basic tier of Internet banking products includes customer account inquiry, funds
transfer and electronic bill payment.
A second or premium tier includes basic services plus one or more additional
services such as 1) Brokerage. 2) Cash management. 3) Credit applications. 4)
Credit and debit cards. 5) Customer correspondence. 6) Demat holdings. 7)
Financial advice 8) Foreign exchange trading. 9) Insurance. 10) Online trading. 11)
Opening accounts 12) Requests and intimations. 13) Tax services. 14) E-shopping.
15) Standing instructions. 16) Investments. 17) Asset management services etc.
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2.3.5 E-Banking Transactions
The following are some of the basic functions in Internet Banking:
Account Enquiry
Fund Transfer
Payment of Electricity, Water and Telephone bills
Online payment for transactions actually performed through Internet
Request for issuance of cheque books, demand drafts etc.
Statement of accounts
Access to latest schemes
Access to rates of interest and other service charges
Advantages of Internet Banking
(i) Round the clock banking
E-banking facilitates performing basic banking transactions by customers round the
clock globally. In fact there is no restricted office hours for E-banking.
(ii) Convenient Banking
Customers can perform basic banking transactions by simply sitting at their office or at
home through PC or LAPTOP. No personal visit to the branch is required for routine
basic transactions.
(iii) Low Cost Banking
The operational costs have come down due to technology adoption. The cost of
transactions through internet banking is much less than any other traditional mode.
There is also much saving on the cost of infrastructure as the banks can have access to a
greater number of potential customers without the commitment costs of physically
opening branches. Moreover, requirements of staff at the banks get reduced to a greater
extent.
(iv) Profitable Banking
The increased speed of response to customer requirements can enhance customer
satisfaction and consequently can lead to higher profits as a result of handling more
number of customer accounts.
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(v) Quality Banking
Internet banking allows the possibility of improved quality and an enlarged range of
services being made available to customers.
(vi) Speed Banking
The increased speed of response to customer requirements will lead to greater customer
satisfaction and handling a large number of transactions at a lesser time. Thus, it
increases the customers' convenience to a greater extent and facilitates better customer
retention.
(vii) Service Banking
Internet banking (I-banking) is the newest delivery channel for banking services. By use of the internet it is possible for banks to offer a number of banking services, such as checking status of account, fund transfer, bill payment and banking services 24 hours a day. Internet based services are believed to be superior to those delivered through the regular channels due to convenience, interactivity, relatively low costs etc. In recent years more and more number of traditional brick and mortar banks has been moving to the internet, in order to sustain their competiveness in the global market place. Promoting quick response, just in time deliveries of services in electronic market place improve information sharing between the bank and its customers. Instead of banks controlling the relationship with the customer, today customers have more control of their banking needs via interaction with website. Banking online is both convenient and time saving .Customer satisfaction has always been a necessary condition of this organization.
The Reserve Bank of India constituted a working group on Internet Banking. The
group divided the internet banking products in India into 3 types based on the levels of
access granted. They are:
Information Only System - General purpose information like interest rates, branch
location, bank products and their features, loan and deposit calculations are provided in the
banks website. There exist facilities for downloading various types of application forms.
The communication is normally done through e-mail. There is no interaction between the
customer and bank's application system. No identification of the customer is done. In this
system, there is no possibility of any unauthorized person getting into production systems
of the bank through internet.
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Electronic Information Transfer System - The system provides customer-specific
information in the form of account balances, transaction details, and statement of accounts.
The information is still largely of the read only format. Identification and authentication of
the customer is through password. The information is fetched from the bank's application
system either in batch mode or off-line. The application systems cannot directly access
through the internet.
Fully Electronic Transactional System - This system allows bi-directional capabilities.
Transactions can be submitted by the customer for online update. This system requires high
degree of security and control. In this environment, web server and application systems are
linked over secure infrastructure. It comprises technology covering computerization,
networking and security, inter-bank payment gateway and legal infrastructure.
BENEFITS OF INTERNET BANKING
Benefits from the bank point of view
The first benefits for the banks offering Internet banking services is better branding
and better responsiveness to the market. Those banks that would offer such services would
be perceived as leaders in technology implementation. Therefore, they would enjoy a better
brand image. The other benefits are possible to measure in monetary terms. The main goal
of every company is to maximize profits for its owners and banks are not any exception.
Automated i-banking services offer a perfect opportunity for maximizing profits.
Benefits from the customers’ point of view
The main benefit from the bank customers’ point of view is significant saving of time
by the automation of banking services processing and introduction of an easy maintenance
tools for managing customer’s money.
The main advantages of i-banking for corporate customers are as follows
Reduced costs in accessing and using the banking services.
Increased comfort and timesaving-transactions can be made 24 hours a day, without
requiring the physical interaction with the bank.
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Quick and continuous access to information. Corporations will have easier access to
information as, they can check on multiple accounts at the click of a button.
Better cash management. I-banking facilities speed up cash cycle and increases
efficiency of business processes as large variety of cash management instruments
are available on Internet sites of Indian banks. For example, it is possible to manage
company’s short-term cash via Internet banks in India (investments in over-night,
short- and long term deposits, in commercial papers, in bonds and equities, in
money market funds).
Private customers seek slightly different kind of benefits from I-banking. In the study
on online banking drivers Aladwani (2001) has found, that providing faster, easier and
more reliable services to customers were amongst the top drivers of i-banking
development. The main benefits from i-banking for private customers are as follows:
Reduced costs. This is in terms of the cost of availing and using the various
banking products and services.
Convenience. All the banking transactions can be performed from the comfort of
the home or office or from the place a customer wants to.
Speed. The response of the medium is very fast; therefore customers can actually
wait till the last minute before concluding a fund transfer.
Funds management. Customers can download their history of different accounts
and do a “what-if” analysis on their own PC before affecting any transaction on
the web. This will lead to better funds management.
Economic benefits
The impact of the New Economy on the entire economic growth has been studied in
several research projects. Pohjola (2002) shows, that the contribution of the use of
information communication technology to growth of output in the Finnish market sector
has increased from 0.3 percentage points in early 1990s to 0.7 points in late 1990s.
However, unlike the US, there has been no acceleration in the trend rate of labor
productivity in Finland. According to the recent research conducted in Estonia (Aarma and
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Vensel, 2001), bank customers use bank office services on average 1.235 times per month,
and wait in queue in bank office on average for 0.134 hours. Simple calculation shows, that
making payments via e-banking facilities (for instance using Internet bank) rather than in
the bank offices create overall economy savings in the amount of 0.93% of GDP.
2.3.6 Drivers of Change
Advantages previously held by large financial institutions have shrunk considerably. The
Internet has leveled the playing field and afforded open access to customers in the global
marketplace. Internet banking is a cost-effective delivery channel for financial institutions.
Consumers are embracing the many benefits of Internet banking. Access to one's accounts
at anytime and from any location via the World Wide Web is a convenience unknown a
short time ago. Thus, a bank's Internet presence transforms from 'brouchreware' status to
'Internet banking' status once the bank goes through a technology integration effort to
enable the customer to access information about his or her specific account relationship.
The six primary drivers of Internet banking includes, in order of primacy are:
Improve customer access
Facilitate the offering of more services
Increase customer loyalty
Attract new customers
Provide services offered by competitors
Reduce customer attrition
Emerging Challenges
By the year of 2010, a large sophisticated and highly competitive Internet Banking Market
will develop which will be driven by
Demand side pressure due to increasing access to low cost electronic
services.
Emergence of open standards for banking functionality.
Growing customer awareness and need of transparency.
Global players in the fray
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Close integration of bank services with web based E-commerce or even
disintermediation of services through direct electronic payments.
More convenient international transactions due to the fact that the Internet
along with general deregulation trends eliminates geographic boundaries.
Move from one stop shopping to 'Banking Portfolio' i.e. unbundled product
purchases.
Certainly some existing brick and mortar banks will go out of business. But that's
because they fail to respond to the challenge of the Internet. The Internet and it's underlying
technologies will change and transform not just banking, but all aspects of finance and
commerce. It represents much more than a new distribution opportunity. It will enable
nimble players to leverage their brick and mortar presence to improve customer satisfaction
and gain share.
Benefits of internet to the banking industry and economy
Improved services: Demand for both wire and wireless internet services as
customers become more aware about the convenience has created the need
for banks that are not yet offering the services to do so.
Customers demands for sophisticated services forces banks to become
innovative e.g. use of mobile phones to pay utility bills, effecting payments,
buying goods etc.
Penetration of the services: Use of the internet services technology is going
to be used to provide banking services to remote areas where putting up a
branch would be un-economical.
Time saving: Customers will have time to invest in other activities as they
do not have to visit the bank to transact.
Challenges facing banks on provision of internet banking services
Provision of uninterrupted services: Heavy reliance on telecommunication
companies for provision of services is unavoidable.
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System security: Keeping the system free of hackers is a major challenge in
internet banking. A substantial amount of money has to be spent to
adequately secure the systems.
Virus infection: Chances of receiving virus infections are high. Substantial
amounts have to be spent on anti-virus protection.
Building Customer Confidence: It takes time to build customer confidence
with internet services in terms of security of their funds. This is so in
particular with those not very educated.
Challenges facing banks on provision of internet banking services
Internet frauds: These are equally on the increase and are not easily
detected. A lot of customer security awareness is required to keep them low.
Dispute handling: Because of the paperless nature of transactions,
sometimes the dispute handling becomes a problem.
Legislation: Because technology advancement is very dynamic, the laws in
most cases take much longer to be put in place to regulate the industry.
Rapid technological changes: The rapid changes in technology are a costly
affair to the banks as the technology they put in place becomes obsolete in
rather short period of time.
Lack of technical knowledge: Rapid changes in technology results to heavy
training costs for the technical staff to keep abreast with the changes.
Cost of running the internet services: The cost of running internet services is
relatively high.
2.3.7 Information Technology in Banking and E-Security
No innovation is without challenges - IT is no exception to this rule. The most
prominent challenge arising from these innovations relates to the concept of security. With
the delivery channels relating to funds based services - such as movement of funds
electronically between different accounts of customers - taking place with the use of
technology, the requirements relating to security also need to undergo metamorphosis at a
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rapid pace. Various concepts such as digital signatures, certification, storage of information
in a secure and tamper-proof manner all assume significance and have to be part of the
practices and procedures in the day-to-day functioning of banks of tomorrow.
The Reserve Bank of India has taken upon itself the setting up of a safe, secure and
efficient communications network for the exclusive use of the banking sector. Named the
INFINET (for the Indian Financial Network), this network is already being used by a large
number of banks for funds and non-funds based message transfers, and is made available
by the Institute for Development and Research in Banking Technology (IDRBT),
Hyderabad. INFINET is perhaps among the few networks in the world which uses the latest
in technology and security called Public Key Infrastructure - PKI, which is not only state-
of-the-art and robust but also well within the legal requirements of the Information
Technology Act, 2000. For all these systems to be effective, there is a need for an effective
security policy which would offer a shared vision of how the controls in the workplace
should be implemented with the objective of protecting data, information and eventually,
the economic value of the organisation. This has to be supplemented by education and
training in these areas and reinforced by the actions and concerns of the top management so
that a culture of security can be created. These controls have to be supported by
surveillance, monitoring and auditing to detect unusual usage patterns and deficiencies. It is
here that e-Security gains significance. Yet another factor which is the driving force behind
the use of technology in banking relates to the ever increasing expectations of the
customers. Today's customers are more demanding and are also more techno-savvy
compared to their counterparts of the yester years. They demand instant, anytime and
anywhere banking facilities. Unless the banks recognize this and reorient themselves, they
will have no future. It is information technology which enables banks in meeting such high
expectations of the customers. The future lies not in mere use of technology by banks in the
form of computers and related equipment but in the use of networked computing resources.
Both these factors require the usage of Information Systems which not only perform their
assigned functions, but also provide for seamless interaction across different segments
between the customer of a bank and the banker, after passing through many layers of
network based communication and countless number of systems. It is here that the integrity
of the message and its safe delivery - without any distortion or change - becomes of
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paramount significance. E-Security has a definitive and substantive role to play here and all
large IT users are now actively and seriously addressing such security concerns.
Traditionally, IT has been providing solutions to banks to take care of their
accounting and back office requirements. This has, however, now given way to large scale
usage in services aimed at the customer of the banks. IT also facilitates the introduction of
new delivery channels - in the form of Automated Teller Machines, Net Banking, Mobile
Banking and the like. Further, IT deployment has assumed such high levels that it is no
longer possible for banks to manage their IT implementations on a stand alone basis. To
leverage the benefit of the IT revolution, banks are increasingly interconnecting their
computer systems not only across branches in a city but also to other geographic locations
with high-speed network infrastructure, and setting up local area and wide area networks
and connecting them to the Internet. As a result, information systems and networks are now
exposed to a growing number and a wider variety of threats and vulnerabilities.
The Reserve Bank of India constituted a 'Working Group for Information System
Security for the Banking and Financial Sector' in 2001. The Group's recommendations have
been the basis for the Information Systems Audit Policy for many banks and other financial
entities. As increasing dependence on information systems develops, the need for such
systems to be reliable and secure also becomes more essential. As growing numbers of
ordinary citizens use computer networks for banking, shopping, etc., network security is
potentially a massive problem. Over the last few years, the need for computer and
information system security has become increasingly evident, as web sites are being
defaced with greater frequency, more and more denial-of-service attacks are being
reported, credit card information is being stolen, there is increased sophistication of
hacking tools that are openly available to the public on the Internet, and there is increasing
damage being caused by viruses and worms to critical information system resources.
At the organisational level, institutional mechanisms have to be designed in order to
review policies, practices, measures, and procedures to review e-security regularly and
assess whether these are appropriate to their environment. It would be helpful if
organisations share information about threats and vulnerabilities, and implement
procedures for rapid and effective co-operation to prevent, detect and respond to security
incidents.
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The banking sector is poised for more challenges in the near future. Customers of
banks can now look forward to a large array of new offerings by banks. From an era of
mere competition, banks are now cooperating among themselves so that the synergistic
benefits are shared among all the players. This would result in the formation of shared
payment, offering payment services beyond the existing time zones. The Reserve Bank is
also facilitating new projects such as the Multi Application smart card project which, when
implemented, would facilitate transfer of funds using electronic means and in a safe and
secure manner across the length and breadth of the country, with reduced dependence on
paper currency. The opportunities of e-banking or e-power in general need to be harnessed
so that banking is available to all customers in such a manner that they would feel most
convenient and if required, without having to visit a branch of a bank. All these will have to
be accompanied with a high level of comfort, which again boils down to the issue of e-
security.
One of the biggest advantages accruing to banks in the future would be the benefits
that arise from the introduction of RTGS. Funds management by treasuries of banks would
be helped greatly by RTGS. With almost 70 banks having joined the RTGS system, more
large value funds transfers are taking place through this system. The implementation of
Core Banking solutions by banks is closely related to RTGS too. Core Banking will make
anywhere banking a reality for customers of each bank, while RTGS bridges the need for
inter-bank funds movement. Thus, the days of depositing a cheque for collection and a long
wait for its realisation would soon be a thing of the past for those customers who would opt
for electronic movement of funds, using the RTGS system, where the settlement would be
on an almost instantaneous basis. Core Banking is already in vogue in many private sector
and foreign banks; while its implementation is at different stages amongst the public sector
banks.
IT would also facilitate better and more scientific decision making within banks.
Information systems now provide decision makers in banks with a great deal of information
which, along with historical data and trend analysis, help in the building up of efficient
Management Information Systems. This, in turn, would help in better Asset-Liability
Management (ALM) which, in today's world of hairline margins is a key requirement for
the success of banks in their operational activities. Another benefit which e-banking could
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provide for relates to Customer Relationship Management (CRM). CRM helps in
stratification of customers and evaluating customer needs on a holistic basis which could be
paving the way for competitive edge for banks and complete customer care for customers
of banks.
2.4 Growth and Development of Banking in Orissa
Orissa’s economy has been following a high growth path in recent years. In real
terms at 1999-2000 prices, Orissa reported an average annual growth rate of 9.51 percent
for the 10th Five Year Plan against a target of 6.20 percent and achievement of 5.30 percent
for the 9th Plan. The State economy has grown, in real terms at 2004-05 prices, at an
average annual rate of 9.57 percent during the first three years of the 11th Plan. This
bounce-back is remarkable and is in line with national trends. India’s economy has also
achieved high growth in 2009-10 after growth recession in 2008-09. In terms of real per
capita income, the State has lagged behind the national average ever since independence. In
1950-51, Orissa’s real per capita income was about 90 percent of the national average, but
in 2002-03 it came down to about 61 percent of the national average. This long-term falling
trend in real per capita income since 2004- 05 has not only been arrested, but reversed as
well. The State per capita income has started rising and the gap with the average national
per capita income is reducing steadily.
The service sector dominates the State’s economy, its share in real GSDP being
about 54 percent in recent years and has been growing at higher rates in a comparatively
stable manner. This sector recorded an average annual growth rate of 9.95 percent, in real
terms at 2004-05 prices, in the first three years of the 11th Plan. The sector comprises of
sub-sectors such as banking and insurance, real estate, public administration, trade, hotels
and restaurants, construction, transport and communications and other services. The
banking and insurance sub-sector constitutes about 6 percent of the service sector.
However, it provides invaluable indirect benefits to the economy in the form of financial
infrastructure. The average population serviced by a bank branch is roughly equal to
15,000, which is better than that in many states in India. It is a fact worth mentioning that
59 percent of all bank branches are located in rural and semi-urban areas. It is heartening to
note that the growth rate of total bank deposits in the State is rising. Orissa is catching up
with the nation in terms of per capita bank deposits in commercial banks. Cooperative
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banks focus on rural areas and the agriculture sector. For all types of banks operating in the
State, the recovery rate stands at about 50 percent. Recovery position of bank loans needs
to be improved.
Fig.2.7: Composition of the service Sector in Orissa’s Economy (2010-11)
The beginning of commercial banking was made in Orissa in the early part of the
twentieth century, with the establishment of the Puri Joint Stock Bank in the year 1909
more than a century after the establishment of the 1st bank in India in the year 1770, in the
city of Calcutta by the English agency houses (Misra, S. N. ,1984). Subsequently two other
banks –the Cuttack Joint stock Bank and the Jaganath Bank were established in the years
1913 and 1919 respectively. The imperial bank of India, formed after the amalgamation of
three presidency Banks opened its first branch in Orissa in Berhampur in the Year 1921 and
the second branch at Cuttack in the same year. It was both banker’s bank and a banker to
government. The imperial bank of India was converted into the State Bank of India in the
year 1956.
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On the eve of the Second World War a fresh attempt was made in the State to
promote commercial banking on private enterprise. This time, the lead was taken by the
Maharaja of Mayurbhanj, who started State Bank on 2nd May 1938, with moderate capital
subscribed by the durbar. As on 31st March 1994, the total working capital and deposits of
the bank stood at Rs. 34 lakhs and Rs 32 lakhs respectively. After merger in 1949, the
Mayurbhanj State Bank functioned as a banking unit under the control of the state
government. The bank was amalgamated to State bank of India In the year 1961. These
banks primarily concentrated their activities in mobilizing deposits from the state and
channelised these deposits for use in places outside the state, particularly the true sense of
them. A large number of joint stock banks that went into liquidation in the State prior to the
year 1949.Many factors were responsible for th slow growth of commercial banking in the
state prior to the year 1949. The most important among them being bank failures and low
level of banking habit in the state. It was found there were 17 non-scheduled banks
operating in Orissa as on December 1949. Besides this there were factors that hastened the
downfall of banks in the state. These factors were higher rates of interest on short-term
deposits, lower rate of return on investments, lack of efforts to build up strong and adequate
reserves by ploughing back a portion of the profits accrued to banks, utilization of short
term deposits for long term investment not covered by adequate securities, poor and
inefficient management by banks by untrained and non-professional class of banker’s.
In the period of 1996-1991 , the number of banks increased slightly, but savings
were successfully mobilized in part because relatively low inflation kept negative real
interest rates at a mild level and in part because the number of branches was encouraged to
expand rapidly(Shirai S, 2001).Further in 1992-1993 ,non-performing assets of 27 public
sector banks amounted to 24% of total credit , only 15 public sector banks achieved a net
profit , and half of the public –sector banks faced negative net worth.
The development and working of commercial banking in orissa during the post
nationalization period (1970-79) deserves a special treatment (Misra S N, 1984). In the first
place the , the period covers both the 4th five year plan and 5th five year plan of Orissa.The
avowed objectives of the plans were stable growth with social justice, removal of poverty
and creation of large scale employment opportunities etc. Accordingly, the plans aimed at
achieving higher growth rate of State income and increased standard of living for the
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people in the state. In order to fulfill the objectives, the plans aimed at higher rate of
investment in the economy. Secondly, the period alos witnessed nationalization of
commercial banks on 19th July-1969. Nationalization of banks was considered essential in
order to gain control over the commanding heights of economy and utilize the banking
system as an effective instrument of economic development.
As compared to the public sector banks, the percent of share of bank offices opened
by private sector banks was only 65 of the total bank offices at the state level both in the
year 1972, and 1979.It was observed between 1972 and 1979, the increase in the number of
offices by 14 nationalized banks was 42.02 % of the total net increase in the number of
offices in the State as against 20.4 % of the total offices in the state as whole in case of
State Bank of India. It was observed Regional rural Banks that came into existence in the
year 1979, accounted for 23% of the total offices in the State in the year 1979.
Since 1980, there has been no further nationalization, and indeed the trend appears
to be reversing itself, as nationalized banks are issuing shares to the public, in what
amounts to a step towards privatization, (Banerjee A.V et al, 2004).
Orissa has improved its commercial bank density from 16,000 in 2001- 02 to
15,000 in March 2009 and fares better than several states including West Bengal, Rajasthan
and UP.
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660611
1819
0
500
1000
1500
2000
Rural Semi Urban Urban
Fig.2.8: Distribution of Branches in Rural and
Urban Areas (2009-10)
Credit Deposit ratio of Commercial banks
56.34
70.54
51.32
62.85
0
10
20
30
40
50
60
70
80
Public Sector Private Sector RRBs CommercialBanks
CD
Rat
io % Public Sector
Private Sector
RRBs
Commercial Banks
Fig.2.9: Credit-Deposit Ratio Commercial Banks (2009-10)
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Table 2.5: Banks in Orissa
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The State is served by a good network of bank branches. Thirty six commercial
banks (CBs) with their 1,942 branches, 5 Regional Rural Banks (RRBs) with their 875
branches, the Short Term Cooperative Credit Structure with the Orissa State Cooperative
Bank Ltd. (OSCB) at the Apex and 17 District Central Cooperative Banks (DCCBs) having
a total number of 328 branches and 2,494 affiliated Primary Agricultural Cooperative
Societies (PACS), 213 Large Size Adivasi Multi-Purpose Societies (LAMPS) and 7
Farmers‟ Service Societies (FSS) at the grass root level and the Long Term Cooperative
Credit Structure with the Orissa State Cooperative and Rural Development Bank Ltd.
(OSCARD Bank) at the apex and 46 affiliated CARD Banks, form the vast network of the
credit delivery system in the State.
Table 2.6: Total Banks in Orissa
The total number of bank branches in the state reached 3824 as on 31.03.2013.
Rural branches consist 53.74%, Semi-Urban branches 26.70 % of total branches. He
informed that many banks are opening a number of branches in the state & requested Banks
to open more rural branches particularly in under-banked districts. e-FMS (scheme for
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Electronic Benefit Transfer for MGNREGS beneficiaries) has been rolled out to all the 30
districts in the state and MGNREGA wages in the entire state are now being paid
electronically through RECS on T+1 basis. As on April 20, 2013, Odisha stands first in the
country with 24 lakh transactions followed by Karnataka with 16 lakh transactions and
Gujarat with 2 lakh transactions for the same period.
Table 2.7: Banking at a Glance in Orissa for the Year 2011-12 Sl. No
Subjects As on 31.03.2007
As on 31.03.2008
As on 31.03.2009
As on 31.03.2010
As on 30.12.2011
As on 30.06.2012
1
Total No. of Branches 2735 2846 2990 3152 3472 3607
Rural Branches 1703 1737 1773 1819 1922 1976 Semi Urban
Branches 525 539 611 673 845 904
Urban Branches 507 570 606 660 705 727
2 Total Deposits (in Crore) 43164.00 54694.00 70681.00 86544.38 117571.46 132770.26
3 Total Advance (in Crore) 34319.00 40460.00 45537.00 56435.59 86440.99 102299.34
4 Total Business (Deposit + Advance)
77483.00 95154.00 116218.00 142979.97 204012.45 235039.60
5 Credit Deposit (CD) Ratio (in
%) 79.51 73.98 64.43 65.21 71.88 77.05
6 Total PS Advance (in Crore)
20218.00 25243.00 27234.00 34279.95 38712.78 41611.37
7 % of PS Advance to Total Advance
58.91 62.39 59.81 60.74 59.73 59.02
8 Agriculture Advance (in
Crore) 8859.00 12124.00 13716.00 17827.99 19074.46 20439.17
9 % of Agril.
Adv. To Total Advance
25.81 29.97 30.12 31.59 28.68 28.99
10 MSME
Advance (in Crore)
3115.00 3909.00 7228.33 13795.38 14320.25
11 % of MSME Advance to
Total Advance 7.70 8.58 12.8 19.88 20.31
Source: 128th State Level Bankers’ Committee Meeting Agenda Notes; 2012)
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2.5 Conclusion
Internet banking is changing the banking industry and is having the major effects on
banking relationships. The net banking, thus, "now is more of a norm rather than an
exception in many developed countries" due to the fact that it is the economical way of
providing banking services. Banking is now no longer confined to the traditional brick and
mortar branches, where one has to be at the branch in person, to withdraw cash or deposit a
cheque or request a statement of accounts. There is need to scan and analyse the market
and respond to the needs of customers and to generate awareness regarding advantages of
internet banking. In true Internet banking, any inquiry or transaction is processed online
without any reference to the branch (anywhere banking) at any time. Providing internet
banking is increasingly becoming a 'need to have' than a 'nice to have' services. A sound
and effective banking system is the backbone of an economy. There is an urgent need for
not only technology up gradation but also its integration with the general way of
functioning of banks to give them an edge in respect of services provided to the customers,
better housekeeping, optimizing the use of funds and building up of management
information system for decision making. The technology has the potential to change
methods of marketing, advertising, designing, pricing and distributing financial products
and services and cost savings in the form of an electronic, self-service product-delivery
channel. The technology holds the key to the future success of Indian Banks. Thus, internet
Banking is the need of the hour, which may not be lost sight of except at the cost of
elimination from the competition. The existence of internet 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 internet banking at
the earliest possible moment.
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