BANKING SECTOR – SURVIVAL OF THE FITTEST

By REMYA.R.S, CS Finalist

The banking environment has suddenly become quite challenging after

the subprime crisis that surfaced last year and which has resulted in an
unprecedented global liquidity crunch.

The flattening of the world has dramatically impacted both the dynamics
and the pace of global banking business. Mergers, acquisitions,
consolidation, expansion, diversification of lines of business, shifting
customer orientation and the changing regulatory environment are
building up the pressure for banks to explore new possibilities by
abandoning the familiar and embracing the unconventional. Competition
is compelling banks to be agile and innovate everyday. In this milieu, what
really enables banks to build a lasting competitive advantage is the ability
to continuously innovate, achieve differentiation and respond quickly to
dynamic business challenges.

The banking sector has witnessed wide ranging changes under the
influence of the financial Sector reforms initiated during 2008. The
approach to such reforms in India has been one of gradual and non-
disruptive progress through a consultative process. The emphasis has
been on deregulation and opening up the banking sector to market forces.
The Reserve Bank has been consistently working towards the
establishment of an enabling regulatory framework with prompt and
effective supervision as well as the development of technological and
institutional infrastructure. Persistent efforts have been made towards
adoption of international benchmarks as appropriate to Indian conditions.
While certain changes in the legal infrastructure are yet to be effected,
the developments so far have brought the Indian financial system closer
to global standards.

BANKING ACTIVITIES
Banks' activities can be divided into retail banking, dealing directly
with individuals; business banking, providing services to mid-size
business; corporate banking dealing with large business entities; private
banking, providing wealth management services to High Net Worth
Individuals; and investment banking, relates to helping customers raise
funds in the Capital Markets and advising on mergers and acquisitions.
Banks are now moving towards Universal Banking, which is a combination
of commercial banking, investment banking and various other activities
including insurance.

TECHNOLOGICAL DEVELOPMENTS

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.

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 inter bank applications. Banks can develop
and port intra bank applications on their own. Inter bank 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.
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. These applications will use
the SFMS platform. 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.

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 endusers. 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.

Internet Banking (E-Banking)

Internet banking (or E-banking) means any user with a personal

computer and a browser can get connected to his bank -s 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 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. SWIFT is a
live example of intranet application.

Internet banking in India

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.

 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.

 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 hours 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.

 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 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.

 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.

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 advanced features like
regulatory requirements and other specialised services like share (stock)
trading are being provided.

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 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.

Electronic Clearing Service

Electronic Clearing Service is another technology enhancement
happened in the banking industry. The customer willing to use this facility
are 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 every thing happened electronically.so customer can there by
make payments as well as receive all incomes electonically.

Mobile banking
Mobile banking (also known as M-Banking, mbanking, SMS Banking etc.) is
a term used for performing balance checks, account transactions,
payments etc. via a mobile device such as a mobile phone. Mobile
banking today (2007) is most often performed via SMS or the Mobile
Internet but can also use special programs called clients downloaded
to the mobile device. Mobile Banking Services:

Account Information

Payments, Deposits, Withdrawals, and Transfers

Investments (Portfolio management services, Real-time stock quotes,

personalized alerts and notifications on security
prices)

BASEL II HOW GEARED ARE BANKS??

BASEL II is a new capital adequacy frame work applicable to
scheduled commercial banks in India, as mandated by the RBI.. The Basel
capital accord (BASEL II) guideline promulgated by the BIS to establish
Capital adequacy requirements and supervisory standards for banks and
structured by three pillars.
In a nut-shell, BASEL II –

 Provide effective assessment method

 Incorporates Sensitivity to banks.
 Makes better business standards
 Reduce losses to the banks

The 3-Pillar Approach of BASEL II

BASEL II
CAPITAL
ACCORD

Pillar I pillar II pillar III

Minimum Supervisory Market

Capital Review Discipline &
Requirement Process Disclosure

Strengthening & safeguarding Financial Systems

ENHANCING COMPETITIVE EQUALITY

The BASELII is designed to facilitate a more comprehensive, sophisticated

and risk sensitive approach for banks to calculate regulatory capital. The
basic objective of BASEL II is to create an international standard.
CAMEL TOOL FOR MEASURING THE PERFORMANCE OF BANKS

An international bank-rating system where bank supervisory

authorities rate institutions according to six factors.
The six factors are represented by the acronym "CAMELS." The six factors
examined are as follows:

C - Capital adequacy reflects the overall financial condition of a bank

& also the ability of the management to meet
the need for additional capital.

A - Asset quality to ascertain the component of non performing

assets as a percentage of the total asset

M - Management quality to measure the efficiency of the

management

E – Earnings to assess the quality of income generated

by core activity

L – Liquidity to measure the ability of a bank to meet

the demand from demand deposits in a
particular year

On the Basis of CAMEL rating Top Ten Banks in Performance During 2007-2008

Public sector Banks Private sector Banks Foreign Banks

Bank of India
Corporation Bank
Union Bank of India
Andhra bank
State bank of patiala
Bank of Baroda
Indian Overseas Bank
State Bank of Hyderabad
Punjab & Sind Bank
Indian Bank
Karur vysya bank Shinhan bank
Yes bank Abu Dhabi commercial bank
City Union Bank Mashreqbank P S C
Tamil Nadu Mercantile Bank Antwerp Diamond bank N V
South Indian bank Bank of Tokyo-Mitsubishi U F J
Federal Bank Calyon Bank
Jammu & Kashmir Bank Krung Thai Bank Public Co.
Dhanalakshmi Bank State Bank of Mauritius
Karnataka Bank Bank of America National Trust
Kotak Mahindra Bank Mizutto Corporate Bank

SWOT ANALYSIS Banking Sector

 Strength Weakness
Aggression towards development Poor Technology
infrastructure
the existing standards by banks.

Strong regulatory impact by central Ineffective risk measures

Bank to all the banks.

Presence of intellectual capital to face Presence of more number of

smaller
the change in implementation with banks that would likely
to be
good quality. Impacted adversely

Opportunities Threats

Increasing Risk management Expertise. Inability to meet the

additional Capital
Requirements

Need significant Connection among, loss of Capital to the entire

banking business Credit & risk management system due
to merger and acquisitions
and Information Technology.

Advancement of technologies. Huge investments in

Technologies.
Strong Asset Base would help in bigger
growth.

ROLE OF COMPANY SECRETARY IN BANKING INDUSTRY

Resource mobilisation Compliance Officer Liation in the audit

Strategy Process

Formulation of corporate Advice to the Board of

Management policies Company Directors
Secretary
Conducting corporate meetings Risk management
Functions

Active contributory to corporate Formulation of

Governance Practices recovery policy
Merger/Acquisition process

LATEST ISSUE
APPLICATION SUPPORTED BY BLOCKED AMOUNT (ASBA)
SEBI has introduced the facility of making application through
“APPLICATION SUPPORTED BY BLOCKED AMOUNT” process, in book built
public issue. ASBA is an application containing an authorization to block
the application money in the bank account, for subscribing to an issue. If
an investor is applying through ASBA, his application money shall be
debited from the bank account only if his/her application is selected for
allotment after the basis of allotment is finalized, or the issue is
withdrawn/failed. In case of rights issue his application money shall be
debited from the bank account after the receipt of instruction from the
registrars. Merchant bankers, Registrars and Self Certified syndicate
banks(SCSBs) are advised to provide the ASBA facility in rights issues with
suitable modifications to ASBA process specified by SEBI for public issue
through book building route, as deemed fit. SCSB is a bank which is
recognized as a bank capable of providing ASBA services to investors.

The list of SCSBs are as below.

• Axis Bank
• Bank of Baroda
• Corporation Bank
• HDFC Bank
• ICICI Bank Ltd
• IDBI Bank Limited
• Kotak Mahindra Bank
• State Bank of Bikaner & Jaipur
• State Bank of India
• Union Bank of India
• Yes Bank Limited

The objective of introducing ASBA is to ensure that the investor's funds

leave his bank account only upon allocation of shares in public issues. The
ASBA process also ensures that only the requisite amount of funds are
debited to the investor's bank account on allotment of shares. In this
mechanism, the need for refunds is completely obviated.

Conclusion

“Success is the sweetest thing in this world”….the future of banking

industry depends on efforts of all concerned parties such as service
providers, service facilitators, regulatory system and customers. The
banking Business has always been different from other business because
it comes under service industry and financial industry category. Every one
making a financial transaction is anxious about the security of his money.
Hence the bank, regulatory authorities and other organisations must try
their best to make banking sector as secure as possible.

Reference: Chartered secretary, The Analyst, The Hindu Business Line,

www.rbi.org.in

Paper presented as part of CIER PAPER PRESENTATION COMPETITION in RECENT TRENDS

& DEVELOPMENTS IN BANKING SECTOR held on 05.12.2008. R S Remya is a CIER
Student & was awarded a special prize for this paper presentation.