1

PROJECT REPORT

On

“MODERNISATION IN BANKING SYSTEM IN INDIA”

SEMESTER (VI)

SUBMITTED BY:

NAVED NOOR SAYYED

Roll no. :- 24

UNDER THE GUIDANCE OF

Prof. KUNDAN TIWARI

K.M. AGRAWAL COLLEGE

ADDRESS : GANDHARE, PADGHA RD.

KALYAN (W) 421-301, DIS-THANE

ACADEMIC YEAR 2022 - 2023

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DECLARATION BY LEARNER

I, the undersigned Mr. NAVED NOOR SAYYED Here by Declare that the work done
in this project work titled “MODERNISATION IN BANKING SYSTEM IN INDIA”
Forms my own contribution to the research work carried out under the guidance of prof.
KUNDAN TIWARI is a result of my own research work and has Not been previously
submitted to any other University for any other Degree/ Diploma to this or any other
University.

Wherever reference has been made to previous works of others, it has been clearly
Indicated as such and included in the webliography.

I, Here by further declare that all information of this document has been obtained and
Presented in accordance with academic rules and ethical conduct.

Name and Signature of the learner

Certified by

Name:

Signature:
 3
K.M. AGRAWAL COLLEGE
ADDRESS : GANDHARE, PADGHA RD.
KALYAN (W) 421-301, DIS-THANE

CERTIFICATE

This is to certify that Mr. NAVED NOOR SAYYED has worked and duly completed
his Project Work for the degree of Bachelor of Banking and Insurance under the Faculty of
Commerce and his project is entitled “ MODERNIZATION IN BANKING SYSTEMS IN
INDIA” under my supervision.

I further certify that the entire work has been done by the learner under my guidance
and that no part of it has been submitted previously for any Degree or Diploma of any
University.

It is his own work and facts reported by his personal findings and investigations.

PRINCIPAL
DR. ANITA MANNA
COURSE CO-ORDINATOR
PROF. SUJEET SINGH

EXTERNAL EXAMINER SIGN

Guiding Teacher

Prof. KUNDAN TIWARI

Date of submission :-
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ACKNOWLEDGMENT

I would like to acknowledge the following as being idealistic channels and fresh dimensions in the
completion of this project

I take this opportunity to thank the University of Mumbai for giving me chance to do this project.

I would like to thank my Principal, Dr. ANITA MANNA for providing the necessary facilities
required for completion of this project.

I take this opportunity to thank our Coordinator Prof. SUJEET SINGH, for her moral support and
guidance.

I would also like to express my sincere gratitude towards my project guide Prof. KUNDAN TIWARI
Whose guidance and care made the project successful.

I would like to thank my College Library, for having provided various reference books and magazines
related my project .

Lastly, I would like to thank each and every person who directly or indirectly helped Me in the completion of
the project especially my Parents and friends who supported Me throughout my project
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SUMMARY

In the organizational context, innovation may be linked to performance and growth through
improvements in efficiency. Productivity, quality, competitive positioning, market share, etc. All
organizations can innovate, including for example hospitals. Universities, and local governments.

Over the last three decades the role of banking in the process of financial intermediation has been
undergoing a profound transformation, owing to changes in the global financial system. It is now clear that a
thriving and vibrant banking system requires a well developed financial structure with multiple intermediaries
operating in markets with different risk profiles. Taking the banking industry to the heights of international
excellence will require a combination of new technologies, better processes of credit and risk appraisal,
treasury management, product diversification, internal control and external regulations and not the least,
human resources. Fortunately, we have a comparative advantage in almost all these areas. Our professionals
area the forefront of technological change and financial developments all over the world. It is time to harness
these resources for development of Indian banking in the new century.
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INDEX

Chapter Number Chapter Name Page no.

1 INTRODUCTION 8-9

2 HISTORY 10 - 13

3 POST INDEPENDENCE 14 – 16

4 NATIONALISATION 17 - 21

5 LIBERALISATION 22 - 24

6 EVOLUTION 25 - 27

7 BANKING TECHNOLOGIES

I. ONLINE BANKING
II. ATM
III. DEBIT CARDS
IV. CREDIT CARDS
V. ELECTRONIC FUND TRANSFER
28 - 66
VI. ELECTRONIC CLEARING SERVICE
VII. MOBILE BANKING
VIII. CORE BANKING
IX. REAL TIME GROSS SETTLEMENT
X. LASER(DEBIT CARD)
XI. ELECTRONIC COMMERCE
XII. VERY SMALL APERTURE TERMINAL
 7
XIII. VIRTUAL BANKING
XIV. TELEPHONE BANKING

8 CHALLENGED AHEAD 67 - 71

9 INNOVATIONS IN BANKING 72 - 75

10 CASE STUDY 76 - 77

❖ CONCLUSION 78 – 79

❖ WEBLIOGRAPHY 80
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CHAPTER :- 1

INTRODUCTION

The word ‘bank’ is derived from the Greek word ‘banque’ or the Italian word ‘banco both meaning –
a bench at which money-lenders and money- changers used to display their coins and transact business in the
market place. The origin of modern banking in India can be traced back to the English Agency Houses in
Kolkata and Mumbai which used to serve as bankers to the East India Company The Hindustan Bank
established in 1779 was the first banking institutions of its kind in India

“A bank is defined as one which transacts the business of banking which means accepting, for the
purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise
and withdrawals by cheque draft. Order, or otherwise.”- The Banking Companies Act, 1949.

All the modern economies are money economies .The process of growth and expansion of banking
sector has been evolutionary in nature. There is no solitary answer to the query of what banking is? This is
because a bank performs a multitude of functions and services, which cannot be comprehended into a single
definition. For a common man, a bank means a storehouse or lumber room of money for a businessman it is
an institution of finance and for a worker it may be a depositary for his savings.

Banks in India, whether large or small, have traditionally been required to adopt similar strategies to
expanding their banking businesses. These strategies have been characterised by an almost exclusive
Originate-To-Hold-till-Maturity (HTM) approach to building their asset books, with origination strategies that
have often been high cost and high risk in nature and resulting in several anomalies that are currently plaguing
the Indian banking system. This paper seeks to lay out a set of ideas that look at root causes of bank
performance, which will then pave way for the modernisation of the sector. At the heart of these
recommendations is an attempt to go back to first principles of banking and to reflect on what banks’
managements and boards (not with standing their ownership patterns), and the banking supervisor need to
focus on in order to set the course for a globally competitive banking sector for India. Some of the important
recommendations pertain to a more focused adoption of approaches and tools that help reveal the true costs of
 9
origination which will then lead to better risk-based pricing, and various steps to be taken to reimagine the
role of full-service banks from being ‘risk originators’ to ‘risk aggregators’ that are well equipped to actively
rebalance their portfolios and use diversification as a strategy for effective risk aggregation.

India’s banking sector is characterised by a few large national banks and many smaller banks of a
regional nature, all of which have traditionally been forced to adopt similar strategies in expanding their
banking business. Such strategies have been characterised by an almost exclusive Originate-To-Hold-till-
Maturity (HTM) approach to managing asset books in an environment where a significant portion of credit
continues to be targeted to specific ‘priority’ sectors at artificially low prices based on policy mandates. These
high cost and high risk approaches have resulted in several anomalies that currently plague the Indian banking
system.

The high accumulation of non-performing assets on banks’ books and the continued multi-year
government-led capital infusion are only symptomatic of these anomalies. This paper seeks to lay out a set of
ideas that look at root causes of bank performance, which will then pave way for the modernisation of the
sector. At the heart of these recommendations is an attempt to go back to first principles of banking and to
reflect on what banks’ managements and boards (not with standing their ownership patterns), and the banking
supervisor need to focus on in order to set the course for a globally competitive banking sector for India.
 10

CHAPTER :- 2

HISTORY

The first banks were probably the religious temples of the ancient world, and were probably established
in the third millennium B.C. Banks probably predated the invention of money. Deposits initially consisted of
grain and later other goods including cattle, agricultural implements, and eventually precious metals such as
gold, in the form of easy-to-carry compressed plates. Temples and palaces were the safest places to store gold
as they were constantly attended and well built. As sacred places, temples presented an extra deterrent to
would-be thieves. There are extant records of loans from the 18thcentury BC in Babylon that were made by
temple priests/monks to merchants.

Banking in India originated in the last decades of the 18th century. The first banks were The General
Bank of India which started in 1786, and the Bank of Hindustan, both of which are now defunct. The oldest
bank in existence in India is the State Bank of India, which originated in the Bank of Calcutta in June 1806,
which almost immediately became the Bank of Bengal. This was one of the three presidency banks, the other
two being the Bank of Bombay and the Bank of Madras, all three of which were established under charters
from the British East India Company. For many years the Presidency banks acted as quasi-central banks, as
did their successors. The three banks merged in 1921 to form the Imperial Bank of India, which, upon India's
independence, became the State Bank of India.
 11

RESERVE BANK OF INDIA

Central bank and supreme monetary authority

SCHEDULED BANKS

COMMERCIAL BANK CO OPERATIVE

1. Foreign banks 1. Urban cooperatives,

2. Regional Rural banks

2.State cooperatives

3. Private sector banks

1. State bank of
India and
4. Public sector banks associate banks

2. Other nationalised
banks
 12

Indian merchants in Calcutta established the Union Bank in 1839, but it failed in 1848 as a consequence
of the economic crisis of 1848-49. The Allahabad Bank, established in 1865 and still functioning today, is the
oldest Joint Stock bank in India. (Joint Stock Bank: A company that issues stock and requires shareholders to
be held liable for the company's debt) It was not the first though. That honour belongs to the Bank of Upper
India, which was established in 1863, and which survived until 1913, when it failed, with some of its assets
and liabilities being transferred to the Alliance Bank of Shimla.

When the American Civil War stopped the supply of cotton to Lancashire from the Confederate States,
promoters opened banks to finance trading in Indian cotton. With large exposure to speculative ventures, most
of the banks opened in India during that period failed. The depositors lost money and lost interest in keeping
deposits with banks. Subsequently, banking in India remained the exclusive domain of Europeans for next
several decades until the beginning of the 20th century.

Foreign banks too started to arrive, particularly in Calcutta, in the 1860s. The Comptoire
d’Escompte de Paris opened a branch in Calcutta in 1860, and another in Bombay in 1862: branches in Madras
and Puducherry.. then a French colony, followed. HSBC established itself in Bengal in 1869. Calcutta was the
most active trading port in India, mainly due to the trade of the British Empire, and so became a banking
center.

The Bank of Bengal, which later merged with the Bank of Bombay and the Bank of Madras to form
the Imperial Bank of India in 1921.

The first entirely Indian joint stock bank was the Oudh Commercial Bank, established in 1881 in
Faizabad. It failed in 1958. The next was the Punjab National Bank, established in Lahore in 1895. Which has
survived to the present and is now one of the largest banks in India.

Around the turn of the 20th Century, the Indian economy was passing through a relative period of
stability. Around five decades had elapsed since the Indian Mutiny, and the social, industrial and other
infrastructure had improved. Indians had established small banks, most of which served particular ethnic and
religious communities.
 13

The presidency banks dominated banking in India but there were also some exchange banks and a
number of Indian joint stock banks. All these banks operated in different segments of the economy. The
exchange banks, mostly owned by Europeans. Concentrated on financing foreign trade. Indian joint stock
banks were generally under capitalized and lacked the experience and maturity to compete with the presidency
and exchange banks. This segmentation let Lord Curzon to observe. “In respect of banking it seems we are
behind the times. We are like some old fashioned sailing ship, divided by solid wooden bulkheads into separate
and cumbersome compartments.”

The period between 1906 and 1911, saw the establishment of banks inspired by the Swadeshi
movement. The Swadeshi movement inspired local businessmen and political figures to found banks of and
for the Indian community. A number of banks established then have survived to the present such as Bank of
India, Corporation Bank, Indian Bank, Bank of Baroda, Canara Bank and Central Bank of India.

The fervour of Swadeshi movement lead to establishing of many private banks in Daksha Kannada and
Udupi district which were unified earlier and known by the name South Canara (South kannada) district. Four
nationalised banks started in this district and also a leading private sector bank. Hence undivided Daksha
Kannada district is known as “Cradle of Indian Banking”.

During the First World War (1914-1918) through the end of the Second World War (1939-1945), and
two years thereafter until the independence of India were challenging for Indian banking. The years of the
First World War were turbulent, and it took its toll with banks simply collapsing despite the Indian economy
gaining indirect boost due to war-related economic activities. At least 94 banks in India failed between 1913
and 1918
 14
CHAPTER:- 3

POST INDEPENDENCE

At the time when India got independence, all the major banks of the country were led privately which
was a cause of concern as the people belonging to rural areas were still dependent on money lenders for
financial assistance. With an aim to solve this problem, the then Government decided to nationalise the Banks.
These banks were nationalised under the Banking Regulation Act, 1949. Whereas, the Reserve Bank of India
was nationalised in 1949.

The partition of India in 1947 adversely impacted the economies of Punjab and West Bengal,
paralyzing banking activities for months. India’s independence marked the end of a regime of the Laissez-
faire for the Indian banking. The Government of India initiated measures to play an active role in the economic
life of the nation, and the Industrial Policy Resolution adopted by the government in 1948 envisaged a mixed
economy. This resulted into greater involvement of the state in different segments of the economy including
banking and finance. The major steps to regulate banking included:

➢ In 1948, the Reserve Bank of India. India’s central banking authority, was nationalized, and it
became an institution owned by the Government of India.

➢ In 1949, the Banking Regulation Act was enacted which empowered the Reserve Bank of India
(RBI) “to regulate, control, and inspect the banks in India.”

➢ The Banking Regulation Act also provided that no new bank or branch of an existing bank
could be opened without a license from the RBI, and no two banks could have common
directors.

However, despite these provisions, control and regulations, banks in India except the State Bank of
India, continued to be owned and operated by private persons. This changed with the nationalisation of major
banks in India on 19 July 1969.
 15
Following it was the formation of State Bank of India in 1955 and the other 14 banks
were nationalised between the time duration of 1969 to 1991. These were the banks whose
national deposits were more than 50 crores.

Given below is the list of these 14 Banks nationalised in 1969:

1. Allahabad Bank
2. Bank of India
3. Bank of Baroda
4. Bank of Maharashtra
5. Central Bank of India
6. Canara Bank
7. Dena Bank
8. Indian Overseas Bank
9. Indian Bank

10.Punjab National Bank

11. Syndicate Bank

12. Union Bank

13. United Bank

14. UCO Bank

In the year 1980, another 6 banks were nationalised, taking the number to 20 banks. These banks
included:

1. Andhra Bank
2. Corporation Bank
3. New Bank of India
4. Oriental Bank of Comm.
5. Punjab & Sind Bank
6. Vijay Bank
 16

Apart from the above mentioned 20 banks, there were seven subsidiaries of SBI which were
nationalised in 1959:

1. State Bank of Patiala

2. State Bank of Hyderabad
3. State Bank of Bikaner & Jaipur
4. State Bank of Mysore
5. State Bank of Travancore
6. State Bank of Saurashtra
7. State Bank of Indore

All these banks were later merged with the State Bank of India in 2017, except for the State Bank of
Saurashtra, which merged in 2008 and State Bank of Indore, which merged in 2010.

❖ Note: The Regional Rural Banks in India were established in the year 1975 for the development
of rural areas in India.
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CHAPTER :- 4

NATIONALIZATION

The RBI was nationalized on January 1, 1949 in terms of the Reserve Bank of India (Transfer to Public
Ownership) Act, 1948

By the 1960s, the Indian banking industry had become an important tool to facilitate the development
of the Indian economy. At the same time, it had emerged as a large employer, and a debate had ensued about
the possibility to nationalise the banking industry. Indira Gandhi, the-then Prime Minister of India expressed
the intention of the GOI in the annual conference of the All India Congress Meeting in a paper entitled "Stray
thoughts on Bank Nationalisation." The paper was received with positive enthusiasm. Thereafter, her move
was swift and sudden, and the GOI issued an ordinance and nationalised the 14 largest commercial banks with
effect from the midnight of July 19, 1969. Jayaprakash Narayan, a national leader of India, described the step
as a "masterstroke of political sagacity. "Within two weeks of the issue of the ordinance, the Parliament passed
the Banking Companies (Acquisition and Transfer of Undertaking) Bill, and it received the presidential
approval on 9 August 1969.

From 1947 to 1991 which was majorly known as the Nationalizing period for the banks in India. Indira
Gandhi, the Prime Minister that time put up a proposal for the same on behalf of the Central government and
thereafter the Government of India started issuing ordinance of Banking Companies (Acquisition and Transfer
of Undertakings) 1969. And after 14 days or so of the issue of ordinance Parliament enacted Banking
Companies (Acquisition and Transfer of Undertakings) act.

In the year 1980 the second round of Nationalization started where 6 more commercial banks like
Punjab and Sind bank, Oriental Bank of Commerce, Corporation Bank, Andhra Bank, New Bank of India and
Vijay Bank got nationalized. The credit delivery to government was the major reason for the same. With the
second round of nationalization, government controlled approx. 91% of the banking business of the country.
 18
Banking system has passed 51 years of Bank Nationalization successfully and if it has contributed
anything to the economy, then it has to be gaining self-sufficiency in food grains products and a massive raise
in financial inclusion. It has helped India to emerge as one of the greatest economies and its potential being
recognized around the globe. On that note, let’s get deep into the concept of Nationalization.

It could be expressed as a process whereby the National government or the state becomes empowered
to take over the private industry, organization or even the assets into their ownership i.e. public ownership
through any legislation or an ordinance or any kind of order. A lot of socialist governments have undertaken
this process just to convert from capitalism to socialism.

In India, the RBI (Transfer of public ownership) Act was passed in order to nationalize the Reserve
Bank of India and as a result on Jan 1st, 1949, RBI was nationalized.

Similarly, in the year 1955 the Imperial Bank of India underwent nationalization and later it was named
as the State Bank of India which, in the present time, is the largest bank of the Public sector.

It was established by the State Bank of India Act 1955 and also serves as the principal agent of RBI
and is responsible for handling bank transactions across the country.

Due to this sudden nationalization, banks all over the country had to face extreme changes which led
to economic growth ultimately.

It was in the year 1969, 19th July when 14 of most major commercial banks functioning in India
underwent nationalization and then in the year 1980 another 6 banks were nationalized which enhanced the
total number to 20.
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History of Nationalization

The history of Nationalization can be traced back in the 1947 which is also known as the pre-
independence period. It was during this time when the banking system in India was established. It began with
the foundation of Bank of Hindustan in the year 1770. There are many banks that started operating during
those days and are still operating like Allahabad bank, Punjab National Bank, etc. this period was marked as
the merging period where most of the banks were merged with one another. The Imperial bank is one of the
biggest example in that regard which is a merger of Bank of Madras, Bank of Bombay and Bank of Bengal
which later turned into what we know as the ‘Reserve Bank of India’.

After that the second phase started from 1947 to 1991 which was majorly known as the Nationalizing
period for the banks in India. Indira Gandhi, the Prime Minister that time put up a proposal for the same on
behalf of the Central government and thereafter the Government of India started issuing ordinance of Banking
Companies (Acquisition and Transfer of Undertakings) 1969. And after 14 days or so of the issue of ordinance
Parliament enacted Banking Companies (Acquisition and Transfer of Undertakings) act. As a result of that,
few banks were nationalized like- Allahabad bank, Bank of Baroda, Bank of India, Bank of Maharashtra,
Canara bank, Punjab National Bank, UCO Bank, Union Bank of India, etc.

In the year 1980 the second round of Nationalization started where 6 more commercial banks like
Punjab and Sind bank, Oriental Bank of Commerce, Corporation Bank, Andhra Bank, New Bank of India and
Vijay Bank got nationalized. The credit delivery to government was the major reason for the same. With the
second round of nationalization, government controlled approx. 91% of the banking business of the country.

The third phase started from the year 1991 till date. The policy of Liberalization was duly followed in
this period and as a result of that a small number of these banks got licensed. They were known as the New
generation tech-savvy banks which later merged with the Oriental bank of commerce, Induced Bank, UTI
bank, ICICI bank and HDFC bank. The three sectors of banks i.e. Government, Private, Foreign contributed
their best to the overall growth of the economy. As a result of liberalization of banking policies, a lot of private
banks also came into effect
 20
It was on July 19, 1969, when then prime minister Indira Gandhi announced the nationalisation of 14
banks. Nationalisation of banks in India: Banks play a crucial role in the growth of economy as they deal with
the money. Banks provide guarantee to keep our money safe and in return, give interest.

In the year 1983, the GOI controlled around 91% of the banking business of India. Later on, in the
year 1993, the government merged New Bank of India with Punjab National Bank. It was the only merger
between nationalized banks and resulted in the reduction of the number of nationalised banks from 20 to 19.
After this, until the 1990s, the nationalised banks grew at a pace of around 4%, closer to the average growth
rate of the Indian economy.

Impact of Nationalisation

There were various reasons why the Government chose to nationalise the banks. Given below is the
impact of Nationalising Banks in India:

➢ This lead to an increase in funds and thereby increasing the economic condition of the country

➢ Increased efficiency

➢ Helped in boosting the rural and agricultural sector of the country

➢ It opened up a major employment opportunity for the people

➢ The Government used profit gained by

➢ Banks for the betterment of the people

➢ The competition decreased, which resulted in increased work efficiency

 21

This post Independence phase was the one that led to major developments in the banking sector of
India and also in the evolution of the banking sector.
 22
CHAPTER:- 5

LIBERALISATION

In the early 1990s, the then Narsimha Rao government embarked on a policy of liberalization, licensing
a small number of private banks. These came to be known as New Generation tech-savvy hanks, and included
Global Trust Bank (the first of such new generation banks to be set up), which later amalgamated with Oriental
Bank of Commerce, Axis Bank(earlier as UTI Bank), ICICI Bank and HDFC Bank. This move, along with
the rapid growth in the economy of India, revitalized the banking sector in India, which has seen rapid growth
with strong contribution from all the three sectors of banks, namely, government banks, private banks and
foreign banks.

Currently (2007), banking in India is generally fairly mature in terms of supply, product range and
reach-even though reach in rural India still remains a challenge for the private sector and foreign banks. In
terms of quality of assets and capital adequacy, Indian banks are considered to have clean, strong and
transparent balance sheets relative to other banks in comparable economics in its region. The Reserve Bank of
India is an autonomous body, with minimal pressure from the government. The stated policy of the Bank on
the Indian Rupee is to manage volatility but without any fixed exchange rate-and this has mostly been true.

The new policy shook the Banking sector in India completely. Bankers, till this time, were used to the
4-6-4 method (Borrow at 4%;Lend at 6%; Go home at 4) of functioning. The new wave ushered in a modern
outlook and tech-savvy methods of working for traditional banks. All this led to the retail boom in India.
People not just demanded more from their banks but also received more.

The next stage for the Indian banking has been set up with the proposed relaxation in the norms for
Foreign Direct Investment. Where all Foreign Investors in banks may be give voting rights which could exceed
the present cap of 10%,at present it has gone up to 74% with some restrictions.

In March 2006, the Reserve Bank of India allowed Warburg Pincus to increase its stake in Kotak
Mahindra Bank (a private sector bank) to 10%. This is the first time an investor has been allowed to hold more
than 5% in a private sector bank since the RBI announced norms in 2005 that any stake exceeding 5% in the
 23
private sector banks would need to be vetted by them. With the growth in the Indian economy expected to be
strong for quite some time-especially in its services sector-the demand for banking services, especially retail
banking, mortgages and investment services are expected to be strong.

In recent years critics have charged that the non-government owned banks are too aggressive in their
loan recovery efforts in connection with housing, vehicle and personal loans. There are press reports that the
banks' loan recovery efforts have driven defaulting borrowers to suicide.

Liberalization (or liberalization) refers to a relaxation of previous government restrictions, usually in

areas of social or economic policy. In some contexts this process or concept is often, but not always, referred
to as deregulation. In the arena of social policy it may refer to a relaxation of laws restricting. Most often, the
term is used to refer to economic liberalization, especially trade liberalization or capital market liberalization.

In the following years, reforms covered the areas of interest rate deregulation, directed credit rules,
statutory pre-emptions and entry deregulation for both domestic and foreign banks. The objective of banking
sector reforms was in line with the overall goals of the 1991 economic reforms of opening the economy, giving
a greater role to markets in setting prices and allocating resources, and increasing the role of the private sector.
The Narsimhan Committee was first set up in 1991 under the chairmanship of Mr. M. Narsimha who was 13th
governor of RBI. Only a few of its recommendations became banking reforms of India and others were not at
all considered. Because of this a second committee was again set up in 1998. As far as recommendations
regarding bank restructuring, management freedom, strengthening the regulation are concerned, the RBI has
to play a major role. If the major recommendations of this committee are accepted, it will prove to be fruitful
in making Indian banks more profitable and efficient.

Once the banks were established in the country, regular monitoring and regulations need to be followed
to continue the profits provided by the banking sector. The last phase or the ongoing phase of the banking
sector development plays a hugely significant role.

The biggest development was the introduction of Private sector banks in India. RBI gave license to 10
Private sector banks to establish themselves in the country. These banks included:

1. Global Trust Bank

 24
2. ICICI Bank
3. HDFC Bank
4. Axis Bank
5. Bank of Punjab
6. IndusInd Bank
7. Centurion Bank
8. IDBI Bank
9. Times Bank
10. Development Credit Bank

The other measures taken include:

➢ Setting up of branches of the various Foreign Banks in India

➢ No more nationalisation of Banks could be done

➢ The committee announced that RBI and Government would treat both public and private sector
banks equally

➢ Any Foreign Bank could start joint ventures with Indian Banks

➢ Payments banks were introduced with the Development in the field of banking and Technology

➢ Small Finance Banks were allowed to set their branches across India

➢ A major part of Indian banking moved online with internet banking and apps available for fund
transfer
 25

CHAPTER :- 6

EVOLUTION

The Rangarajan Committee report in early 1980s was the first step towards computerization of banks.
Banks started exploring the idea of Total Bank Automation (TBA)’. Although titled ‘Total Bank Automation,’
TBA was in most cases confined to branch automation. It was only in the early 1990s that banks started
thinking about tying- up disparate branches together to facilitate information sharing. At the same time, private
banks entered the banking arena with radically different strategies. Given the huge IT budgets at their disposal
and with almost no legacy IT equipment to worry about: private banks hastened the adoption of technology.
The philosophy for private banks was very clear: to provide a whole new range of financial products and
services at minimal costs. And technology made this possible. Says K.N.C. Nair, Head (IT), Federal Bank.
“The new generation banks showed the way and others had no option but to follow the tech infusion to retain
and attract profitable customers.”

The Improved connectivity and falling costs offered by leased lines and VSATs provided a booster to
inter-branch automation. Confirms Naresh Wadhwa, Vice President-West, Cisco Systems (India), “With the
improved services and lowered costs of service providers such as Dot and VSNL, it became more feasible for
banks to network their branches. This gave banks an impetus to network all the branches and set up centralized
databases. With these developments it became possible for operations such as MIS to be truly automated and
centralized.” With centralized infrastructure and numerous connectivity options, banks started exploring
multiple delivery channels like ATM, Net-banking, mobile banking, and Tele- banking thus driving down cost
per transaction.

Since 1991, the Indian banking system has been evolving. The Indian Government encouraged foreign
investment, which opened the economy to foreign and private investors, which has led to the introduction of
mobile banking, internet banking, ATMs, and more.

The banking system in India has glorious past, bright future, and pleasant present Indian banking
system has been developing day by day. Banks are one of the most important organizations for proper growth
 26
of Economy and GDP of the country. It is also important for society which requires faith of customer to keep
safe their asset in terms of gold and money in the banks. There is liability of banks to maintain strict policies
in terms of asset management Banks also provide various facilities to the customer so that there must be a very
healthy relationship between banker and customer.

The banking sector in India plays a vital role in this country’s economic development. Over the
centuries, numerous changes have taken place within this industry, starting from technological advancement
to the diversification of financial services and products.

Currently, the Indian banking system includes commercial banks, small finance banks, and co-
operative banks. Banks operating within the boundaries of India abide by the Banking Regulation Act, 1949.

Evolution of Banking

Pre-independence

1. Owdh Commercial Bank(1881)

2. Punjab National Bank (1895)

3. The Bank of India (1906). Bank of Baroda Ltd (1908), Central Bank of India Ltd
(1911)

4. Reserve Bank of India (1935)

Post-independence

1. Nationalization of Banks
 27
2. Imperial Bank of India brought under public ownership (1955)

3. Formation of State Bank Group (1955-59)

4. Emergence of New Private Sector Banks (1993)

 28
CHAPTER :- 7

BANKING TECHNOLOGIES

In ‘Banking Technology’, the word ‘banking’ refers to the economic, financial, commercial and
management aspects of banking while ‘technology’ refers to the information and communication technologies,
computer science and risk quantification and measurement aspects.

The term “Banking Technology” refers to the use of sophisticated information and communication
technologies together with computer science to enable banks to offer better services to its customers in a
secure, reliable and affordable manner and sustain competitive advantage over other banks. Banking
Technology also subsumes the activity of using advanced computer algorithms in unravelling the patterns of
customer behaviour by sifting through customer details such as demographic, psychographic and transactional
data. This activity also known data mining, helps banks achieve their business objectives by solving various
marketing problems such as customer segmentation, customer scoring, target marketing, market- basket
analysis, cross-sell, up-sell, customer retention by modelling churn etc. Successful use of data mining helps
banks achieve significant increase in profits and thereby retain sustainable advantage over their competitors.
From theoretical perspective, Banking Technology is not a single, stand-alone discipline, but a confluence of
several disparate fields such as finance (subsuming risk management), information technology,
communication technology, computer science and marketing science. From the functional perspective,
Banking Technology has three important dimensions. They are as follows:

I. The use of appropriate hardware for conducting business and servicing the customers through
various delivery channels and payments systems and the associated software constitutes one
dimension of Banking Technology. The use of computer networks, security algorithms in its
transactions, use of ATM and credit cards, Internet banking, telebanking and mobile banking are
all covered by this dimension.

II. On the other hand, the use of advanced computer science algorithms to solve several interesting
marketing related problems such as customer segmentation, customer scoring, target marketing,
 29
market- basket analysis, cross-sell, up-sell and customer retention etc. faced by the banks to reap
profits and outperform their competitors constitutes the second dimension of Banking Technology.

III. Moreover, banks cannot ignore the risks that arise in conducting business with other banks and
servicing their customers, for otherwise, their very existence would be at stake. Thus, the
quantification, measurement, mitigation and management of all the kinds of risks that banks face
constitutes the third important dimension of Banking Technology.
 30
I. ONLINE BANKING

Online banking (or Internet banking) allows customers to conduct financial transactions on a secure
website operated by their retail or virtual bank, credit union or building society.

Features

Online banking solutions have many features and capabilities in common, but traditionally also have
some that are application specific.

The common features fall broadly into several categories

1) Transactional (e.g.. performing a financial transaction such as an account to account transfer,

paying a bill, wire transfer… and applications… apply for a loan, new account, etc.)

a) Electronic bill presentment and payment – EBPP

b) Funds transfer between a customer’s own checking and savings accounts, or to

another customer’s account

c) Investment purchase or sale

d) Loan applications and transactions, such as repayments

2) Non-transactional (e.g., online statements. Check links, cobrowsing, chat)

 31
3) ASP Hosting Administration – features allowing the hosting company to administer the
solution across financial institutions

4) Financial Institution Administration features allowing the financial institution to manage the
online experience of their end users.

Features commonly unique to Internet banking include

Personal financial management support, such as importing data into personal accounting software.
Some online banking platforms support account aggregation to allow the customers to monitor all of their
accounts in one place whether they are with their main bank or with other institutions.

Features commonly unique to business banking include

a) Support of multiple users having varying levels of authority

b) Transaction approval process

Security token devices

Protection through single password authentication, as is the case in most secure Internet shopping sites,
is not considered secure enough for personal online banking applications in some countries. Basically there
exist two different security methods for online banking.

a) The PIN/TAN system where the PIN represents a password, used for the login and TANS representing
one-time passwords to authenticate transactions. TANS can be distributed in different ways, the most
popular one is to send a list of TANs to the online banking user by postal letter. The most secure way
of using TANS is to generate them by need using a security token. These token generated TANS
depend on the time and a unique secret, stored in the security token (this is called two-factor
 32
authentication or 2FA). Usually online banking with PIN/TAN is done via a web browser using SSL
secured connections, so that there is no additional encryption needed.

b) Signature based online banking where all transactions are signed and encrypted digitally. The Keys for
the signature generation and encryption can be stored on smartcards or any memory medium,
depending on the concrete implementation.
 33
II) AUTOMATED TELLER MACHINE (ATM)

An automated teller machine (ATM) is a computerized telecommunications device that provides the
customers of a financial institution with access to financial transactions in a public space without the need for
a human clerk or bank teller. On most modern ATMs, the customer is identified by inserting a plastic ATM
card with a magnetic stripe or a plastic smartcard with a chip, that contains a unique card number and some
security information, such as an expiration date or CVC (CVV). Security is provided by the customer entering
a personal identification number (PIN).

Using an ATM, customers can access their bank accounts in order to make cash withdrawals (or credit
card cash advances) and check their account balances as well as purchasing mobile cell phone prepaid credit.
ATMs are known by various other names including automated transaction machine, automated banking
machine, money machine, bank machine, cash machine, cashpoint. Bancomat (in various countries in Europe
and Russia), Multibank (after a registered trade mark, in Portugal), and Any Time Money (in India).

Most ATMs are connected to interbank networks, enabling people to withdraw and deposit money
from machines not belonging to the bank where they have their account or in the country where their accounts
are held (enabling cash withdrawals in local currency). Some examples of interbank networks include PULSE.
PLUS, Cirrus. Interact and LINK.

ATMs rely on authorization of a financial transaction by the card issuer or other authorizing institution
via the communications network. This is often performed through an ISO 8583 messaging system.

An ATM in the Netherlands. The logos of a number of interbank networks this ATM is connected to
are shown. ATMs typically connect directly to their ATM Controller via either a dial-up modem over a
telephone line or directly via a leased line. Leased lines are preferable to POTS lines because they require less
time to establish a connection. Leased lines may be comparatively expensive to operate versus a POTS line,
meaning less-trafficked machines will usually rely on a dial-up modem. That dilemma may be solved as high-
speed Internet VPN connections become more ubiquitous.
 34

Many banks charge ATM usage fees. In some cases, these fees are charged solely to users who are not
customers of the bank where the ATM is installed; in other cases, they apply to all users. Where machines
make a charge some people will not use them, but go to a system without fees.

In order to allow a more diverse range of devices to attach to their networks, some interbank networks
have passed rules expanding the definition of an ATM to be a terminal that either has the vault within its
footprint or utilizes the vault or cash drawer within the merchant establishment, which allows for the use of a
scrip cash dispenser.

The user who uses this product will be able to see all the information and services provided by the
ATM, when he enters the necessary option and arguments. The product also provides services like request for
cheques, deposit cash and other advanced requirement of the user. The data is stored in the database and is
retrieved whenever necessary. The implementation needs ATM machine hardware to operate or similar
simulated conditions can also be used to successfully use the developed product.

To develop this ATM system the entire operation has been divided into the following step:

1) Verification process
2) Language, service and account selection
3) Banking services
4) Transactions
5) Special services

The program is designed in such a way that the user has to card and pin number. Once verified, he is
provided a menu and he/she had to enter the option provided in the menu. For example, when the user wants
to view the list of payment history than he/she had to enter the option for payment history provided in the main
menu. When the option is entered alone with the respective argument, then the payment history is displayed
on the screen.
 35
The user also must be given option to browse through the pages like previous page, next
page, etc. The user may experience a delay in retrieving or viewing the data, when there are
many users logged on to the same bank branch system.

Now-a-days every one very busy in their work. So they feel that the job must be easy so the system is
used to reduce their work which is done in the ATM system. Instead o keeping lots of paper into a record or
file and it may be missed somewhere so, this system help to keep the record of the customer it also keeps the
details of the customer It is also easy to access. The system customer transactions, satisfies the requirements
of the existing system in full-fledged manner. Through this system, customer can make fast transactions and
view the last transactions easily.

ATM main objective is to speed up the transactions done by customers. No manual transactions needed
generally. The second objective is to save the time which is very important now-a-days.
 36
III) DEBIT CARDS

A debit card, also known as a check card or bank card is a payment card that can be used in place of
cash to make purchases. The term plastic card includes the above and as an identity document. These are
similar to a credit card, but unlike a credit card, the money for the purchase must be in the cardholder's bank
account at the time of a purchase and is immediately transferred directly from that account to the merchant's
account to pay for the purchase.

Debit cards are essentially "pay-now" instruments linked to a checking account whereby transactions
can happen either instantaneously using online (PIN based) methods or in the near future with offline
(signature based) methods. Consumers typically have the choice of using online or offline methods, and their
selection often hinges on the respective benefits. Online debit allows the cardholder also to withdraw cash at
the point-of-sale, and offline provides float. According to ATM & Debit News (2007), there were
approximately 26.5 billion debit transactions in the U.S. during 2006. This is up from 6.5 billion transactions
in 1999- a four-fold increase.

After the demonetization by current government in the December 2016, there has been a surge in
cashless transactions, so nowadays you could find card acceptance in most places. The debit card was mostly
used for ATM transactions. RBI has announced that fees are not justified so transactions have no processing
fees. Almost half of Indian debit and credit card users use Rupay card. Some Indian banks issue Visa debit
cards, though some banks (like SBI and Citibank India) also issue Maestro cards. The debit card transactions
are routed through Rupay (mostly), Visa or MasterCard networks in India and overseas rather than directly
via the issuing bank.

The National Payments Corporation of India (NPCI) has launched a new card called RuPay. It is similar
to Singapore’s NETS and Mainland China’s Union Pay.

As the COVID cases in India are surging up, the banking institution has shifted its focus to contactless
payment options such as contactless debit card, contactless credit card and contactless prepaid card. The
payment methods are changing drastically in India because of social distancing norms and lockdown; people
are using more of the digital transactions rather than cash.
 37

Some debit cards carry a stored value with which a payment is made (prepaid card), but most relay a
message to the cardholder’s bank to withdraw funds from the cardholder’s designated bank account. In some
cases, the payment card number is assigned exclusively for use on the Internet and there is no physical card.
This is referred to as a virtual card.

In many countries, the use of debit cards has become so widespread they have overtaken checks in
volume, or have entirely replaced them; in some instances, debit cards have also largely replaced cash
transactions. The development of debit cards, unlike credit cards and charge cards, has generally been country-
specific, resulting in a number of different systems around the world, which were often incompatible. Since
the mid-2000s, a number of initiatives have allowed debit cards issued in one country to be used in other
countries and allowed their use for internet and phone purchases.

Debit cards usually also allow an instant withdrawal of cash, known as a cash advance, acting as an
ATM card for this purpose. Merchants may also offer cashback facilities to customers, so that a customer
can withdraw cash along with their purchase. There are usually daily limits on the amount of cash that can
be withdrawn. Most debit cards are plastic, but there are cards made of metal, and rarely wood.

In some countries, banks tend to levy a small fee for each debit card transaction. In other countries
(for example, the UK) the merchants bear all the costs and customers are not charged. There are many
people who routinely use debit cards for all transactions, no matter how small. Some (small) retailers refuse
to accept debit cards for small transactions, where paying the transaction fee would absorb the profit margin
on the sale, making the transaction uneconomic for the retailer.
 38
IV) CREDITS CARDS

A credit card is part of a system of payments named after the small plastic card issued to users of the
system. It is a card entitling its holder to buy goods and services based on the holder’s promise to pay for these
goods and services. The issuer of the card grants a line of credit to the consumer (or the user) from which the
user can borrow money for payment to a merchant or as a cash advance to the user. A credit card is different
from a charge card, where a charge card requires the balance to be paid in full each month. In contrast, credit
cards allow the consumers to ‘revolve’ their balance, at the cost of having interest charged. Most credit cards
are issued by local banks or credit unions.

Credit cards are issued after an account has been approved by the credit provider, after which
cardholders can use it to make purchases at merchants accepting that card. When a purchase is made, the credit
card user agrees to pay the card issuer. The cardholder indicates consent to pay by signing a receipt with a
record of the card details and indicating the amount to be paid or by entering a personal identification number
(PIN). Also, many merchants now accept verbal authorizations via telephone and electronic authorization
using the Internet, known as a ‘Card/Cardholder Not Present’ (CNP) transaction. Electronic verification
systems allow merchants to verify that the card is valid and the credit card customer has sufficient credit to
cover the purchase in a few seconds, allowing the verification to happen at time of purchase. The verification
is performed using a credit card payment terminal or Point of Sale (POS) system with a communications link
to the merchant’s acquiring bank. Data from the card is obtained from a magnetic stripe or chip on the card;
the latter system is in the United Kingdom and Ireland commonly known as Chip and PIN, but is more
technically an EMV card. These will typically involve the cardholder providing additional information, such
as the security code printed on the back of the card, or the address of the cardholder each month, the credit
card user is sent a statement indicating the purchases undertaken with the card, any outstanding fees, and the
total amount owed. After receiving the statement, the cardholder may dispute any charges that he or she thinks
are incorrect (see Fair Credit Billing Act for details of the US regulations). Otherwise, the cardholder must
pay a defined minimum proportion of the bill by a due date, or may choose to pay a higher amount up to the
entire amount owed. The credit issuer charges interest on the amount owed if the balance is not paid in full
(typically at a much higher rate than most other forms of debt). Some financial institutions can arrange for
automatic payments to be deducted from the user’s bank accounts, thus avoiding late payment altogether as
long as the cardholder has sufficient funds.
 39
A regular credit card Is different from a charge card, which requires the balance to be repaid in full
each month or at the end of each statement cycle. In contrast, credit cards allow the consumers to build a
continuing balance of debt, subject to interest being charged. A credit card differs from a charge card also in
that a credit card typically involves a third-party entity that pays the seller and is reimbursed by the buyer,
whereas a charge card simply defers payment by the buyer until a later date.

A credit card also differs from a debit card, which can be used like currency by the owner of the card.
Alternatives to credit cards include debit cards, mobile payments, digital wallets, cryptocurrencies, pay-by-
hand, bank transfers, and buy now, pay later. As of June 2018, there were 7.753 billion credit cards in the
world. In 2020, there were 1.09 billion credit cards in circulation in the U.S and 72.5% of adults (187.3 million)
in the country had at least one credit card.

Features

➢ Credit cards are accepted worldwide, and are available with a large variety of credit limits,
repayment arrangement, and other perks (such as rewards schemes in which points earned by
purchasing goods with the card can be redeemed for further goods and services or credit card
cashback).

➢ As well as convenient, accessible credit, credit cards offer consumers an easy way to track
expenses, which is necessary for both monitoring personal expenditures and the tracking of
work-related expenses for taxation and reimbursement purposes.

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

➢ A smart card combining credit card and debit card properties. The 3 by 5 mm security chip
embedded in the card is shown enlarged in the inset.

➢ The contact pads on the card enable electronic access to the chip.
 40
An example of the front in a typical credit card:

1. Issuing bank logo

2. EMV chip (only on “smart cards”)
3. Hologram
4. Card number
5. Card network logo
6. Expiration date
7. Card holder name
8. Contactless chip

An example of the reverse side of a typical credit card:

1. Magnetic stripe
2. Signature strip
3. Card security code
 41
V) ELECTRONIC FUND TRANSFER (EFT)

Electronic funds transfer or EFT refers to the computer-based systems used to perform financial
transactions electronically.

Electronic funds transfer (EFT) is the electronic transfer of money from one bank account to another,
either within a single financial institution or across multiple institutions, without the direct intervention of
bank staff.

The term is used for a number of different concepts:

➢ Cardholder-initiated transactions, where a cardholder makes use of a payment card

➢ Direct deposit payroll payments for a business to its employees, possibly via a payroll services
company

➢ Electronic bill payment in online banking, which may be delivered by EFT or paper check

➢ Electronic Benefit Transfer

➢ Direct debit payments from customer to business, where the transaction is initiated by the
business with customer permission

➢ Wire transfer via an international banking network (generally carries a higher fee)

➢ Transactions involving stored value of electronic money possibly in a private currency

 42
Transaction types

A number of transaction types may be performed, including the following:

➢ Sale: where the cardholder pays for goods or service.

➢ Deposit: where a cardholder deposits funds to their own account (typically at an ATM).

➢ Withdrawal: the cardholder withdraws funds from their account, e.g. from an ATM. The term
Cash Advance may also be used. Typically when the funds are advanced by a merchant rather
than at an ATM.

➢ Payment: transferring funds to a third party account.

➢ Refund where a merchant refunds an earlier payment made by a cardholder.

➢ Cashback: where a cardholder withdraws funds from their own account at the same time as
making a purchase.

➢ Inter-account transfer: transferring funds between linked accounts belonging to the same
cardholder.

➢ Mini-statement: where a cardholder uses a device (typically an ATM) to obtain details of recent
transactions on their account.

➢ Enquiry: a transaction without financial impact, for instance balance enquiry, available funds
enquiry, linked accounts enquiry, or request for a statement of recent transactions on the
account.
 43

➢ E top-up: where a cardholder can use a device (typically POS or ATM) to add funds (top-up)
their pre-pay mobile phone.

➢ Administrative: this covers a variety of non-financial transactions including PIN change .

Send an EFT payment, all that is needed is the recipient’s bank account information. Typical account
information includes name, account number and institution/routing number. There are two parties: the sender
of funds and the receiver of funds.

With direct deposit or electronic funds transfer (EFT), the general public, government agencies, and
business and institutions can pay and collect money electronically, without having to use paper checks. Direct
deposit (EFT) is safe, secure, efficient, and less expensive than paper check payments and collections.
 44
VI) ELECTRONIC CLEARING SERVICE (ECS)

A clearing house is a financial services company that provides clearing and settlement services for
financial transactions, usually on a futures exchange, and often acts as central counterparty (the pay or actually
pays the clearing house, which then pays the payee). A clearing house may also offer novation, the substitution
of a new contract or debt for an old, or other credit enhancement services to its members. The term is also used
for banks like Suffolk Bank that acted as a restraint on the over-issuance of private bank notes.

a) Clearing of payments

In the United States, NACHA-The Electronic Payments Association. Formerly the National
Automated Clearing House Association, organizes the mechanism for the financial service institutions that
participate in the Automated Clearing House (ACH) network. These organizations use the ACH to transfer
funds either as debits or credits between participating institutions. Most, but not all, U.S. banks are members
of the NACHA. Typical uses of ACH transactions are for automatic payroll programs, monthly mortgage or
membership payments, or among non-profit organizations, as a monthly donor/contribution program.

b) Clearing on options exchanges

The Options Clearing Corporation is an example of a clearing house that functions for the purpose of
clearing equity options and bond derivatives, in order to ensure the proper implementation of these
instruments.

c) Clearing on futures exchanges

LCH Clemet (Formerly known as The London Clearing House), for example, provides clearing and
settlement services for the International Petroleum Exchange. London, which is affiliated with the
Intercontinental Exchange, Atlanta, Georgia. The London Clearing House also acts as the clearing house for
Euronext life and the London Metal Exchange.
 45

In 2001, the Commodity Futures Trading Commission registered the London Clearing House as a
Derivatives Clearing Organization (DCO) in the United States, making it the first offshore DCO to be
recognized under the statutory mandate of the Commodity Futures Modernization Act of 2000 CME Group,
now a combination of the Chicago Mercantile Exchange, the Chicago Board of Trade, and the New York
Mercantile Exchange, owns and operates its own clearing operation while also offering clearing services (for
a fee) to other exchanges. Its “Clear Port” operation also provides clearing for certain “over-the-counter”
trades.

ECS Credit is used for affording credit to a large number of beneficiaries having Accounts with bank
branches at various locations within the jurisdiction of a ECS Centre by raising a single debit to an account of
a bank (that maintains the Account of the user institution). ECS Credit enables payment of amounts towards
Distribution of dividend, interest, salary, pension, etc., of the user institution. ECS Debit is used for raising
debits to a large number of accounts maintained With bank branches at various locations within the
jurisdiction of a ECS Centre for Single credit to an account of a bank (that maintains the account of the user
Institution). ECS Debit is useful for payment of telephone / electricity / water bills, Cess / tax collections, loan
instalment repayments, periodic investments in mutual Funds, etc., that are periodic or repetitive in nature and
payable to the user Institution.

In October 2008, a centralised version of ECS Credit known as National-ECS (NECS) has been
launched. NECS has no restriction of centres or of any geographical area inside the country. The system takes
advantage of the Centralised accounting system in banks. Accordingly, the account of a bank that Is submitting
or receiving payment instructions is debited or credited centrally at Mumbai. The branches participating in
NECS should be core-banking-enabled through they can be located anywhere across the length and breadth of
the country.

The ECS system has been introduced at a few Regional offices of Reserve Bank of India, viz. Regional-
ECS (RECS). RECS also has two variants viz. Debit and Credit. RECS will cover all core-banking-enabled
Branches in a State or group of States and can be used by institutions desirous Of reaching beneficiaries within
the State / group of states. The system takes advantage of the centralised accounting system in banks.
Accordingly, the account of a bank that is submitting or receiving payment instructions is debited or credited
centrally. The branches participating in RECS can, however, be Located across the length and breadth of the
State / group of States.
 46
VII) MOBILE-BANKING

Mobile Banking refers to provision of banking- and financial services with the help of mobile
telecommunication devices. The scope of offered services may include facilities to conduct bank and stock
market transactions, to administer accounts and to access customised information."

According to this model Mobile Banking can be said to consist of three inter-related concepts:

➢ Mobile Accounting

➢ Mobile Brokerage

➢ Mobile Financial Information Services

Most services in the categories designated Accounting and Broker are transaction-based. The non-
transaction-based services of an informational nature are however essential for conducting transactions for
instance, balance inquiries might be needed before committing a money remittance. The accounting and
brokerage services are therefore offered invariably in combination with information services. Information
services, on the other hand, may be offered as an independent module.

Mobile Banking Services

Mobile banking can offer services such as the following:

A) Account Information

1. Mini-statements and checking of account history

2. Alerts on account activity or passing of set thresholds
 47
3. Monitoring of term deposits
4. Access to loan statements
5. Access to card statements
6. Mutual funds/equity statements
7. Insurance policy management
8. Pension plan management
9. Status on cheque, stop payment on cheque
10. Ordering check books
11. Balance checking in the account transaction
12. Recent transactions
13. Due date of payment (functionality for stop. Change and deleting of payments).
14. PIN provision, Change of PIN and reminder over the Internet
15. Blocking of (lost, stolen) cards

B) Payments, Deposits, Withdrawals, and Transfers

1. Domestic and international fund transfers

2. Micro-payment handling
3. Mobile recharging
4. Commercial payment processing
5. Bill payment processing
6. Peer to peer payments
7. Withdrawal at banking agent
8. Deposit at banking agent

Especially for clients in remote locations, it will be important to help them deposit and withdraw funds
at banking agent.

A specific sequence of SMS messages will enable the system to verify if the client has sufficient funds
in his or her wallet and authorize a deposit or withdrawal transaction at the agent. When depositing money,
the merchant receives cash and the system credits the client’s bank account or mobile wallet. In the same way
the client can also withdraw money at the merchant: through exchanging sms to provide authorization, the
merchant hands the client cash and debits the client’s account.
 48

Challenges for a Mobile Banking

Key challenges in developing a sophisticated mobile banking application are:

Handset operability

There are a large number of different mobile phone devices and it is a big challenge for banks to offer
mobile banking solution on any type of device. Some of these devices support J2ME and others support WAP
browser or only SMS. Initial interoperability issues however have been localized, with countries like India
using portals like R-World to enable the limitations of low end java based phones, while focus on areas such
as South Africa have defaulted to the USSD as a basis of communication achievable with any phone.

The desire for interoperability is largely dependent on the banks themselves, where installed
applications(Java based or native) provide better security, are easier to use and allow development of more
complex capabilities similar to those of internet banking while SMS can provide the basics but becomes
difficult to operate with more complex transactions. There is a myth that there is a challenge of interoperability
between mobile banking applications due to perceived lack of common technology standards for mobile
banking. In practice it is too early in the service lifecycle for interoperability to be addressed within an
individual country, as very few countries have more than one mobile banking service provider. In practice,
banking interfaces are well defined and money movements between banks follow the ISO-8583 standard. As
mobile banking matures, money movements between service providers will naturally adopt the same standards
as in the banking world.

Scalability & Reliability

Another challenge for the CIOS and CTOs of the banks is to scale-up the mobile banking infrastructure
to handle exponential growth of the customer base. With mobile banking, the customer may be sitting in any
part of the world (true anytime, anywhere banking) and hence banks need to ensure that the systems are up
and running in a true 24 x 7 fashion. As customers will find mobile banking more and more useful, their
expectations from the solution will increase. Banks unable to meet the performance and reliability expectations
 49
may lose customer confidence. There are systems such as Mobile Transaction Platform which allow quick and
secure mobile enabling of various banking services. Recently in India there has been a phenomenal growth in
the use of Mobile Banking applications, with leading banks adopting Mobile Transaction Platform and the
Central Bank publishing guidelines for mobile banking operations.

Security

Security of financial transactions, being e executed from some remote location and transmission of
financial information over the air, are the most complicated challenges that need to be addressed jointly by
mobile application developers, wireless network service providers and the banks’ IT departments.

Personalization

It would be expected from the mobile application to support personalization such as:

1. Preferred Language

2. Date/Time format

3. Amount format

4. Default transactions

5. Standard Beneficiary list

6. Alerts

Mobile Banking through SMS

 50
Mobile Banking through SMS Mobile Banking with SMS is conducted through SMS codes sent to a
particular number as directed by your bank. You will receive the response in the form of a text message on
your mobile phone screen within a few seconds. For example to get details of your HDFC bank account you
will use codes like HDFCBAL, HDFCTXN, HDFCSTM, HDFCSTP-6 digit cheque no, etc. for balance
enquiry, last transaction details, account statement, stop cheque payment etc. respectively.

How it works?

The message sent by you travels from your mobile phone to the SMS Centre of the Cellular Service
Provider, and from there it travels to the Bank’s systems. The information is retrieved and sent back to your
mobile phone via the SMS Centre, all in a matter of a few seconds.

Mobile Banking through WAP

Once you log onto your Bank’s WAP site through your WAP/GPRS enabled mobile phone, all you
need to do is enter your customer ID and Net Banking IPIN. Then go to the Transactions Menu after selecting
your account. Select any one of the Transactions like Balance Inquiry, Mini Statement, Statement Request( A
Statement of Accounts for the selected account for the current period will be mailed to your address on record
with the bank), Cheque Book Request (It will be mailed to your address on record with the bank), Stop
Payment, Cheque Status Inquiry(will tell you if the cheque has been paid/unpaid/stopped/invalid), Fixed
Deposit Inquiry can get information on account number, principal amount, rate of interest, maturity date and
maturity amount) etc.

Mobile Banking Alerts

Some banks also provide the facility of Mobile Banking Alerts where you can get regular
updates of transactions in your account as they happen. These include:

➢ Debits to your account (you choose a threshold debit amount, above which you’d like to be alerted)
 51
➢ Credits to your account (you choose a threshold credit amount, above which you’d like to be
alerted)

➢ Cheque returned (Get to know every time a cheque deposited in your account is returned)

In the time to come we will see more and more banks offering such services in India which will definitely
make our life easier.
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VIII) CORE BANKING

Core banking is a general term used to describe the services provided by a group of networked bank
branches. Bank customers may access their funds and other simple transactions from any of the member branch
offices.

Core Banking is normally defined as the business conducted by a banking institution with its retail and
small business customers. Many banks treat the retail customers as their core banking customers, and have a
separate line of business to manage small businesses. Larger businesses are managed via the Corporate
Banking division of the institution. Core banking basically is depositing and lending of money. Normal core
banking functions will include deposit accounts, loans, mortgages and payments. Banks make these services
available across multiple channels like ATMs. Internet banking, and branches.

Core banking functions will include transaction accounts, loans, mortgages and payments. Banks make
these services available across multiple channels like automated teller machines, Internet banking, mobile
banking and branches.

A core banking system is defines as a back-end system that processes daily banking transactions, and
posts updates to accounts and other financial records. Core banking systems typically include deposit, loan,
and credit-processing capabilities, with interfaces to general ledger systems and reporting tools. Core banking
applications are often one of the largest single expenses for banks and legacy software is a major issue in terms
of allocating resources. Spending on these systems is based on a combination of service-oriented architecture
and supporting technologies.

Advancements in Internet and information technology reduced manual work in banks and increased
efficiency. Computer software is developed to perform core operations of banking like recording of
transactions, passbook maintenance, interest calculations on loans and deposits, customer records, the balance
of payments, and withdrawal. This software is installed at different branches of the bank and then
interconnected by means of computer networks based on telephones, satellite and the Internet.
 53
Core banking is all about knowing customers’ needs. Provide them with the right products at the right
time through the right channels 24 hours a day, 7 days a week using technology aspects like Internet. Mobile
ATM. While many Banks run core banning in-house, there are some which use outsourced service providers
as well. There are several Systems integrators like IBM which implement these Core banking packages at
Banks.

There are few providers that help leverage the existing legacy systems itself, by hollowing out customer
engagement functions from the core system and managing it as a horizontal cross-enterprise layer. This layer
provides banks with enhanced product innovation capabilities, sophisticated customer data management,
partner ecosystem, and revenue management and pricing. With this approach, banks can quickly adopt new
technologies, add more functionality and capabilities, offer customized products and enhance the customer
experience. The goal is to transition from a product-based to an agile, customer-first organization.

Many banks implement custom applications for core banking. Others implement or customize
commercial independent software vendor packages. Systems integrators implement these core banking
packages at banks. Open-source Technology in core banking solutions or software can help banks to maintain
their productivity and profitability at the same time.

Core Banking Solutions is new jargon frequently used in banking circles. The advancement in
technology, especially internet and information technology has led to new ways of doing business in banking.
These technologies have cut down time, working simultaneously on different issues and increasing 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.
 54

IX) REAL TIME GROSS SETTLEMENT (RTGS)

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.

As of 1985, three central banks implemented RTGS systems, while by the end of 2005, RTGS systems
had been implemented by 90 central banks.

The first system that had the attributes of an RTGS system was the US Federal system which was
launched in 1970. This was based on a previous method of transferring funds electronically between US federal
reserve banks . The United Kingdom and France both independently developed RTGS type systems in 1984.
The UK system was developed by the Bankers’ Clearing House in February 1984 and was called CHAPS. The
French system was called SAGITTAIRE. A number of other developed countries launched systems over the
next few years. These systems were diverse in operation and technology, being country-specific as they were
usually based upon previous processes and procedures used in each country.

In the 1990s international finance organizations emphasized the importance of large-value funds
transfer systems which banks use to settle interbank transfers for their own account as well as for their
customers as a key part of a country’s financial infrastructure. By 1997 a number of countries, inside as well
as outside the Group of Ten, had introduced real-time gross settlement systems for large-value funds transfers.
Nearly all G-10 countries had plans to have RTGS systems in operation in the course of 1997 and many other
countries were also considering introducing such systems.

The RTGS system Is suited for low-volume, high-value transactions. It lowers settlement risk, besides
giving an accurate picture of an institution’s account at any point of time. Such systems are an alternative to
systems of settling transactions at the end of the day, also known as the net settlement system such as BACS.
 55
In the net settlement system, all the inter-institution transactions during the day are accumulated. At the end
of the day, the accounts of the institutions are adjusted. Extending the example above, say another person
deposits a check drawn on Bank B in Bank A for $500. At the end of the day. Bank A will have to
“electronically” pay Bank B only $500 ($1000-$500). The implementation of RTGS systems by Central Banks
throughout the world is driven by the goal to minimize risk in high-value electronic payment settlement
systems.

This “electronic” payment system is normally maintained or controlled by the Central Bank of a
country. There is no physical exchange of money; the Central Bank makes adjustments in the electronic
accounts of Bank A and Bank B, reducing the amount in Bank A’s account by $1000 and increasing the amount
of Bank B’s account by the same.

In an RTGS system, transactions are settled across accounts held at a Central Bank on a continuous
gross basis. Settlement is immediate, final and irrevocable. Credit risks due to settlement lags are eliminated.
RTGS does not require Core Banking to be implemented across participating banks. Any RTGS would employ
two sets of queues: one for testing funds availability, and the other for processing debit/credit requests received
from the Integrated Accounting System. All transactions would be queued and submitted for funds availability
testing on a FIFO + Priority basis.
 56
X) LASER (DEBIT CARD)

Laser means an electronic payment using Laser (which can include payment for Cashback) by a
Cardholder to a Retailer made in connection with and at the time of purchase of goods and/or services.

Laser is primarily an electronic point of sale debit card, but can also be used by telephone and internet.
There is no maximum limit on a Chip and Pin transaction, and a EUR 1,500 maximum limit on all other
transactions. Laser also offers a cashback option similar to many other cards. Laser is the only non-cash
payment method that is accepted by some discount stores in Ireland, namely Aldi and Lidl. Post bank and
Halifax debit cards are not currently accepted in these stores.

Laser was launched in 1996 and currently has around 2.5 million customers. Seven Irish financial
institutions are partners in the Laser card system: Allied Irish Banks, Bank of Ireland, EBS Building Society,
First Active, National Irish Bank. Permanent TSB and Ulster Bank. Halifax, on the other hand, issues the Visa
Debit card, and is the only bank to do so in the Republic of Ireland. Postbank do not offer Laser cards, but
solely Maestro branded debit cards.

Laser cards are not widely acceptable for online purchases made on sites operated outside of Ireland.
Some major Irish companies such as Ryanair do not accept Laser payments.
 57
XI) ELECTRONIC COMMERCE

The term was coined and first employed by Dr. Robert Jacobson, Principal Consultant to the California
State Assembly’s Utilities & Commerce Committee, in the title and text of California’s Electronic Commerce
Act, carried by the late Committee Chairwoman Gwen Moore (D-L.A.) and enacted in 1984.

E-commerce typically uses the web for at least a part of a transaction’s life cycle although it may also
use other technologies such as e-mail. Typical e-commerce transactions include the purchase of products (such
as books from Amazon) or services (such as music downloads in the form of digital distribution such as iTunes
Store). There are three areas of e-commerce: online retailing, electronic markets, and online auctions. E-
commerce is supported by electronic business. The existence value of e-commerce is to allow consumers to
shop online and pay online through the Internet, saving the time and space of customers and enterprises, greatly
improving transaction efficiency, especially for busy office workers, but also saving a lot of valuable time.

Electronic Commerce, commonly known as (electronic marketing) e-commerce, consists of the buying
and selling of products or services over electronic systems such as the Internet and other computer networks.
The amount of trade conducted electronically has grown extraordinarily with widespread Internet usage. The
use of commerce is conducted in this way, spurring and drawing on innovations in electronic funds transfer,
supply chain management. Internet marketing, online transaction processing. Electronic data interchange
(EDI), inventory management systems. And automated data collection systems. Modern electronic commerce
typically uses the World Wide Web at least at some point in the transaction’s lifecycle, although it can
encompass a wider range of technologies such as e-mail as well.

Electronic commerce that is conducted between businesses is referred to as business-to-business or

B2B. B2B can be open to all interested parties (e.g. commodity exchange) or limited to specific, pre-qualified
participants (private electronic market). Electronic commerce that is conducted between businesses and
consumers, on the other hand, is referred to as business-to-consumer or B2C. This is the type of electronic
commerce conducted by companies such as Amazon.com.
 58
A large percentage of electronic commerce is conducted entirely electronically for virtual items such
as access to premium content on a website, but most electronic commerce involves the transportation of
physical items in some way. Online retailers are sometimes known as e-retail and online retail is sometimes
known as e-tail. Almost all big retailers have electronic commerce presence on the World Wide Web.

Electronic commerce is generally considered to be the sales aspect of e-business. It also consists of the
exchange of data to facilitate the financing and payment aspects of the business transactions.

Recent research indicates that electronic commerce, commonly referred to as e-commerce, presently
shapes the manner in which people shop for products. The GCC countries have a rapidly growing market and
are characterized by a population that becomes wealthy. As such, retailers have launched Arabic-language
websites as a means to target this population. Secondly, there are predictions of increased mobile purchases
and an expanding internet audience . The growth and development of the two aspects make the GCC countries
become larger players in the electronic commerce market with time progress. Specifically, research shows that
the e-commerce market is expected to grow to over $20 billion by 2020 among these GCC countries . The e-
commerce market has also gained much popularity among western countries, and in particular Europe and the
U.S. These countries have been highly characterized by consumer-packaged goods (CPG) (Geisler, 34).
However, trends show that there are future signs of a reverse. Similar to the GCC countries, there has been
increased purchase of goods and services in online channels rather than offline channels. Activist investors are
trying hard to consolidate and slash their overall cost and the governments in western countries continue to
impose more regulation on CPG manufacturers (Geisler, 36). In these senses, CPG investors are being forced
to adapt to e-commerce as it is effective as well as a means for them to thrive.

For traditional businesses, one research stated that information technology and cross-border e-
commerce is a good opportunity for the rapid development and growth of enterprises. Many companies have
invested an enormous volume of investment in mobile applications. The DeLone and McLean Model stated
that three perspectives contribute to a successful e-business: information system quality, service quality and
users’ satisfaction. There is no limit of time and space, there are more opportunities to reach out to customers
around the world, and to cut down unnecessary intermediate links, thereby reducing the cost price, and can
benefit from one on one large customer data analysis, to achieve a high degree of personal customization
strategic plan, in order to fully enhance the core competitiveness of the products in the company
 59
Modern 3D graphics technologies, such as Facebook 3D Posts, are considered by some social media
marketers and advertisers as a preferable way to promote consumer goods than static photos, and some brands
like Sony are already paving the way for augmented reality commerce. Wayfair now lets you inspect a 3D
version of its furniture in a home setting before buying.
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XII) VERY SMALL APERTURE TERMINAL (VSAT)

The concept of the geostationary orbit was originated by Russian theorist Konstantin Tsiolkovsky, who
wrote articles on space travel around the beginning of the 20 th century. In the 1920s, Hermann Obvert and
Herman Protonic, also known as Herman Noordung, described an orbit at an altitude of 35,900 kilometres
(22,300 mi) whose period exactly matched the Earth’s rotational period, making it appear to hover over a fixed
point on the Earth’s equator.

Live satellite communication was developed in the 1960s by NASA, which launched Syncom 1–3
satellites.[3] Syncom 3 transmitted live coverage of the 1964 Olympics in Japan to viewers in the United States
and Europe. On April 6, 1965, the first commercial satellite was launched into space, Intelsat I, nicknamed
Early Bird.

A Very Small Aperture Terminal (VSAT), is a two-way satellite ground station with a dish antenna
that is smaller than 3 meters. Most VSAT antennas range from 75 cm to 1.2 m. Data rates typically range from
56 Kbit/s up to 4 Mbit/s. VSATS access satellites in geosynchronous orbit to relay data from small remote
earth stations (terminals) to other terminals (in mesh configurations) or master earth station “hubs” (in star
configurations). G VSATs are most commonly used to transmit narrowband data (point of sale transactions
such as credit card, polling or RFID data; or SCADA), or broadband data (for the provision of Satellite Internet
access to remote locations, VoIP or video). VSATs are also used for transportable, on-the-move (utilising
phased array antennas) or mobile maritime communications.

The first commercial VSATS were C band receive-only systems by Equatorial Communications using
spread spectrum technology. More than 30,000 60 cm antenna systems were sold in the early 1980s. Equatorial
later developed a C band (4/6 GHz) 2 way system using 1 mx 0.5 m antennas and sold about 10,000 units in
1984-85.

Live satellite communication was developed in the 1960s by NASA, which launched Syncom 1–3
satellites.[3] Syncom 3 transmitted live coverage of the 1964 Olympics in Japan to viewers in the United States
and Europe. On April 6, 1965, the first commercial satellite was launched into space, Intelsat I, nicknamed
Early Bird.
 61

Advances in technology have dramatically improved the price–performance ratio of fixed satellite
service (FSS) over the past five years. New VSAT systems are coming online using k-band technology that
promise higher data rates for lower costs.

FSS systems currently in orbit have a huge capacity with a relatively low price structure. FSS systems
provide various applications for subscribers, including: telephony, fax, television, high-speed data
communication services, Internet access, satellite news gathering (SNG), Digital Audio Broadcasting (DAB)
and others. These systems provide high-quality service because they create efficient communication systems
for both residential and business users.
 62
XIII) VIRTUAL BANKING

A virtual bank (sometimes called a branch-less bank or direct bank) is a bank that offers its services
only via the Internet, email, and other electronic means, often including telephone, online chat, and mobile
check deposit. A direct bank has no branch network. It may offer access to an independent banking agent
network and may also provide access via ATMs (often through interbank network alliances), and bank by
mail. Direct banks eliminate the costs of maintaining a branch network while offering convenience to
customers who prefer digital technology. Direct banks provide some but not all of the services offered by
physical banks.

In the 1990s, internet-only banks or “virtual banks” appeared. These banks did not have a traditional
banking infrastructure, such as a branch network, a cost-saving feature that allowed many of them to offer
savings accounts with higher interest rates and loans with lower interest rates than most traditional banks.
However, there was initial consumer hesitation in conducting monetary transactions over the Internet,
especially with an entity that they could not deal with face-to-face.

Various technological and payment systems developmental initiatives are undertaken in the Indian
banking and financial sector. The system has moved to a ‘virtual’ banking system gradually in view of IT
penetration in every sphere of banking.

The offering of electronic banking service channels like Internet Banking, Mobile Banking, real time
fund transfer, ATM Applications and other forms of upcoming electronic banking channels have become
important vehicles of offering banking services in a cost- efficient manner with wide geographical spread;
enhancing the banks’ reputation and brand building addressing the competitive forces as well.

The Core Banking concept to a great extent emerged from the IT infrastructure and this enabled the
centralization process and has since received a complete and focused attention from all the banks for its rapid
implementation. The banks have also undergone a massive change in terms of improvement in the IT
Communication network which has greatly facilitated not only the networking of the internal communication
processes but the integration with the external payment systems gateways as well.
 63
Operational comfort and convenience of operations in a highly challenging environment for banks.
The most important requirement relates to looking at the convenience of customers either online or offline.

Online banks and banking service providers offer desktop and mobile banking services without
physical branches. Because online institutions don’t have to pay for the cost of maintaining branches, they’re
often able to pass the savings on to their customers in the form of higher interest rates.

Examples of popular virtual banks include Mercury Bank, Starling Bank, and N26—all of which
provide their business and personal customers with virtual bank accounts.

Features of Internet Banking

Check Account Balances & Statements. You can log into the internet banking account to check your
account balance at any time. …

a) 24x7 Fund Transfer.

b) Bill Payments & Recharge.
c) Order Cheque Books & Cards.
d) Open deposit accounts.
e) Apply for Loans.
f) Make Investments.
g) Security.
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XIV) TELEPHONE BANKING

Telephone banking is a service provided by a financial institution which allows its customers to
perform transactions over the telephone.

Banks which operate mostly or exclusively by telephone are known as phone banks.

Most telephone banking uses an automated phone answering system with phone keypad response or
voice recognition capability. To guarantee security, the customer must first authenticate through a numeric or
verbal password or through security questions asked by a live representative. With the obvious exception of
cash withdrawals and deposits, it offers virtually all the features of an automated teller machine: account
balance information and list of latest transactions, funds transfers between a customer's accounts, etc.

Usually, customers can also speak to a live representative located in a call centre or a branch. although
this feature is not guaranteed to be offered 24/7. In addition to the self-service transactions listed carrier,
telephone banking representatives are usually trained to do what was traditionally available only at the branch:
loan applications, investment purchases and redemptions. chequebook orders, debit card replacements, change
of address, etc.

The customers get the following services under tele-banking.

a) Online balance enquiry.

b) Request for service.
c) Last five transactions.
d) Transactions of a recent date.
e) Details of transactions.
f) Request for cheque book.
g) Request for a statement of account.
 65

Major Reform Initiatives In banking sector:

Some of the major reform initiatives in the last decade that have changed the face of the Indian banking
and financial sector are:

➢ Interest rate deregulation. Interest rates on deposits and lending have been deregulated with banks
enjoying greater freedom to determine their rates.

➢ Banks now enjoy greater operational freedom in terms of opening and swapping of branches, and
banks with a good track record of profitability have greater flexibility in recruitment.

➢ Adoption of prudential norms in terms of capital adequacy, asset classification, income recognition,
provisioning, exposure limits, investment fluctuation reserve, etc.

➢ Government equity in banks has been reduced and strong banks have been allowed to access the capital
market for raising additional capital.

➢ New private sector banks have been set up and foreign banks permitted to expand their operations in
India including through subsidiaries. Banks have also been allowed to set up Offshore Banking Units
in Special Economic Zones.

➢ Several new institutions have been set up including the National Securities Depositories Ltd., Central
Depositories Services Ltd.. Clearing Corporation of India Ltd.. Credit Information Bureau India Ltd.

➢ New areas have been opened up for bank financing: insurance, credit cards, infrastructure financing,
leasing, gold banking, besides of course investment banking. Asset management, factoring, etc.
 66
➢ Technology infrastructure for the payments and settlement system in the country has been
strengthened with electronic funds transfer, Centralised Funds Management System, Structured
Financial Messaging Solution, Negotiated Dealing System and move towards Real Time Gross
Settlement.

➢ New instruments have been introduced for greater flexibility and better risk management: e.g. interest
rate swaps, forward rate agreements, cross currency forward contracts, forward cover to hedge inflows
under foreign direct investment, liquidity adjustment facility for meeting day-to-day liquidity
mismatch.

➢ Credit delivery mechanism has been reinforced to increase the flow of credit to priority sectors through
focus on micro credit and Self Help Groups. The definition of priority sector has been widened to
include food processing and cold storage, software up to Rs 1 crore, housing above Rs 10 lakh. Selected
lending through NBFCs, etc.

➢ Universal Banking has been introduced. With banks permitted to diversify into long-term finance and
DFIs into working capital, guidelines have been put in place for the evolution of universal banks in an
orderly fashion.

➢ Adoption of global standards. Prudential norms for capital adequacy, asset classification, income
recognition and provisioning are now close to global standards. RBI has introduced Risk Based
Supervision of banks (against the traditional transaction based approach). Best international practices
in accounting systems, corporate governance, payment and settlement systems, etc. are being adopted.

➢ RBI guidelines have been issued for putting in place risk management systems in banks. Risk
Management Committees in banks address credit risk, market risk and operational risk. Banks have
specialised committees to measure and monitor various risks and have been upgrading their risk
management skills and systems.
 67
CHAPTER :- 8

CHALLENGES AHEAD IN BANKING SECTOR

The future opportunity lies in the form of integration of the Indian banking and financial system with
the Government’s e- Governance initiatives. The electronic benefits in this regard would be passed on to the
beneficiaries directly thereby preventing the leakage of the funds provided under various Government’s
schemes like e- payments, etc. for the liftmen of the people. The collective efforts of the Government, banks,
financial institutions and the IT firms to provide innovative solutions for an inclusive growth of the Indian
economy will certainly go a long way not only for the sustained growth of the financial system but the Indian
economy as a whole.

Customers are continuing to opt for and engage in experiences that are designed to meet their needs.
It’s just that their needs and priorities are changing significantly. Banks that understand and quickly adapt to
these changes can not only preserve but enhance revenue in the short term. When a customer enters a bank
branch. Checks into a hotel, enrolls with a health insurance provider, etc…. they have a set of constructs
they’ve learned from past experiences and that operate within a perceptual framework that enables gist
processing. Experiences designed based on this perceptual framework.

Many organizations have placed an increasing amount of attention on the quality of the experience
their customers have. However, the first mistake most organizations make is focusing on what the company
does to deliver a customer experience rather than taking a step-back and thinking first about how customers
actually have experiences. The second biggest mistake is the way most banks listen to and react to customers’
suggestions about what to do to improve the experience.

Emotional touch on customers, change how they feel. This can be brought through delivery of
innovative solutions to people’s underlying, end-to-end problems. Finding these solutions requires getting
below-the-surface of existing touch points.
 68
Developing countries like India, still has a huge number of people who do not have access to
banking services due to scattered and fragmented locations. But if we talk about those people who are
availing banking services, their expectations are raising as the level of services are increasing due to
the emergence of Information Technology and competition. Since, foreign banks are playing in Indian
market, the number of services offered has increased and banks have laid emphasis on meeting the customer
expectations.

Now, the existing situation has created various challenges and opportunity for Indian Commercial
Banks. In order to encounter the general scenario of banking industry we need to understand the challenges
and opportunities lying with banking industry of India.

Some important challenges are as following :

I. Improving profitability:

The most direct result of the above changes is increasing competition and narrowing of spreads and its
impact on the profitability of banks. The challenge for banks is how to manage with thinning margins while
at the same time working to improve productivity which remains low in relation to global standards. This is
particularly important because with dilution in banks’ equity, analysts and shareholders now closely track their
performance. Thus, with falling spreads, rising provision for NPAS and falling interest rates, greater attention
will need to be paid to reducing transaction costs. This will require tremendous efforts in the area of technology
and for banks to build capabilities to handle much bigger volumes.

II. Sharpening skills:

The far-reaching changes in the banking and financial sector entail a fundamental shift in the set of
skills required in banking. To meet increased competition and manage risks, the demand for specialised
banking functions, using IT as a competitive tool is set to go up. Special skills in retail banking, treasury, risk
management, foreign exchange, development banking, etc., will need to be carefully nurtured and built. Thus,
the twin pillars of the banking sector i.e. human resources and IT will have to be strengthened.

III. International standards:

 69
Introducing internationally followed best practices and observing universally acceptable standards and
codes is necessary for strengthening the domestic financial architecture. This includes best practices in the
area of corporate governance along with full transparency in disclosures. In today’s globalised world, focusing
on the observance of standards will help smooth integration with world financial markets.

IV. Reinforcing technology:

Technology has thus become a strategic and integral part of banking, driving banks to acquire and
implement world class systems that enable them to provide products and services in large volumes at a
competitive cost with better risk management practices.

The pressure to undertake extensive computerisation is very real as banks that adopt the latest in
technology have an edge over others. Customers have become very demanding and banks have to deliver
customised products through multiple channels, allowing customers access to the bank round the clock.

V. Greater customer orientation:

In today’s competitive environment, banks will have to strive to attract and retain customers by
introducing innovative products, enhancing the quality of customer service and marketing a variety of products
through diverse channels targeted at specific customer groups.

VI. Risk management:

The deregulated environment brings in its wake risks along with profitable opportunities, and
technology plays a crucial role in managing these risks. In addition to being exposed to credit risk, market risk
and operational risk, the business of banks would be susceptible to country risk, which will be heightened as
controls on the movement of capital are eased. In this context, banks are upgrading their credit assessment and
risk management skills and retraining staff, developing a cadre of specialists and introducing technology
driven management information systems.

VII. Corporate governance:

Besides using their strengths and strategic initiatives for creating shareholder value, banks have to be
conscious of their responsibilities towards corporate governance. Following financial liberalisation, as the
ownership of banks gets broad based, the importance of institutional and individual shareholders will increase.
 70
In such a scenario, banks will need to put in place a code for corporate governance for benefiting all
stakeholders of a corporate entity.

VIII. Risk management

The growing competition increases the competitiveness among banks. But, existing global banking
scenario is seriously posing threats for Indian banking industry. We have already witnessed the
bankruptcy of some foreign banks.

There is a positive association between changes in risk and capital. Research studied the large sample
of banks and results reveal that regulation was partially effective during the period covered. Moreover, it
was concluded that changes in bank capital over the period studied was risk-based.

IX. Growth of banking

It was found in the study that small and local banks face difficulty in bearing the impact
of global economy therefore, they need support and it is one of the reasons for merger. Some
private banks used mergers as a strategic tool for expanding their horizons. There is huge
potential in rural markets of India, which is not yet explored by the major banks. Therefore
ICICI Bank Ltd. Has used mergers as their expansion strategy in rural market. They
are successful in making their presence in rural India. It strengthens their network across
geographical boundary, improves customer base and market share.

X. Global banking

If We look at the Indian Banking Industry, then we find that there are 36 foreign banks operating in
India, which becomes a major challenge for Nationalized and private sector banks. These foreign banks are
large in size, technically advanced and having presence in global market, which gives more and better options
and services to Indian traders.
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XI. Social and ethical aspects

There are some banks, which proactively undertake the responsibility to bear the social and
ethical aspects of banking. This is a challenge for commercial banks to consider the these aspects
in their working. Apart from profit maximization, commercial banks are supposed to support those
organizations, which have some social concerns.

Social banks try to invest their money only in endeavours that promote the greater good of society,
instead of those, which generate private profit just for a few. He has also explained the main difference
between mainstream banks and social banks that mainstream banks are in most cases focused solely
on the principle of profit maximization whereas, social banking implements the triple principle of
profit-people-planet

As per the above discussion, we can say that the biggest challenge for banking industry is to
serve the mass market of India. Companies have shifted their focus from product to customer. The better
we understand our customers, the more successful we will be in meeting their needs. In order to mitigate
above mentioned challenges Indian banks must cut their cost of their services. Another aspect to
encounter the challenges is product differentiation. Apart from traditional banking services, Indian banks
must adopt some product innovation so that they can compete in gamut of competition. Technology up
gradation is an inevitable aspect to face challenges. The level of consumer awareness is significantly
higher as compared to previous years. Now-a-days they need internet banking, mobile banking and ATM
services. Expansion of branch size in order to increase market share is another tool to combat competitors.
Therefore, Indian nationalized and private sector banks must spread their wings towards global markets as
some of them have already done it. Indian banks are trustworthy brands in Indian market; therefore,
these banks must utilize their brand equity as it is an valuable asset for them
 72
CHAPTER:- 9

INNOVATIONS IN BANKING

Innovation calls for vision and conviction. Innovation helps us make the product/provide services
highly suited for the targeted application. Successful innovation is not about the ideas or inventions; it's about
the people. Innovation can be defined as the key process by which products, processes and services are created,
and by which businesses generate jobs and wealth. Innovation isn't all about great ideas. Innovation is a chain
that requires strength at every link to succeed. The chain starts with idea generation, but then moves to
prioritizing and funding ideas, to converting those ideas to products/services and finally to diffusing those
products/services and business practices across the institution/bank.

Innovation calls for certain discernment on the part of the service delivery system of banks to design
the services in such a way that the customer is much delighted as to how the business process is effectively
carried out and how easily with least time and distress is delivered to them.

Financial innovation refers to the process of creating new financial or investment products, services,
or processes. These changes can include updated technology, risk management, risk transfer, credit and equity
generation, as well as many other innovations.

Looking for new frontiers in revenue growth, banks are discovering interesting opportunities in the
way they satisfy their customers. What are the key factors that appeal to bank customers and entice them to
do more business? As in most service industries, overall responsiveness and behavioural attributes account for
a 10- percent margin in customer satisfaction.

In a situation of global economic crisis, institutions will need to shake hands with a new generation of
price optimization system, customer relationship management platforms and Web-enabled tools that expand
relationships and grow wallet share. Customers who have adapted to the mass customization of the Internet’s
long tail – and who are used to getting personal recommendations from e-retailers can’t understand why an
institution that has so much information about them can’t offer tailored products and services. Banks that
change that perception by using automated tools to fine-tune products will be well-positioned. Today banks
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dive deeper than ever before to connect with consumers. To this the government at the Centre (Indian central
government) through the RBI fine tunes the banking system by reducing the CRR and lowering repo and
reverse repo rates.

Mobile banking has made major innovations for retail customers. Today, many banks like T.D. Bank
offer comprehensive apps with options to deposit checks, pay for merchandise, transfer money to a friend, or
find an ATM instantly. It is still important for customers to establish a secure connection before logging into
a mobile banking app in order to avoid their personal information being compromised.

When it comes to speed of service and the attitude of the people who deliver that service, banks should
improve their personal touch. Furthermore, advanced technologies provide bank managers and staff valuable
help because convoluted legacy systems hinder the prompt delivery of banking services and the integration of
customer information. Notwithstanding a positive service attitude, ailing technology systems could severely
constrain the ability of bank personnel to satisfy customer demands. Technology also plays a role with other
drivers of customer satisfaction, such as quality of service and product innovation. In order to be effective in
luring customers, banks should invest in fundamental improvements in their people, process, and technology
capabilities.

Service delivery

Most business houses believe that they do deliver superior things to their clients. But at most times
they do not satisfy at least half of their expectations. Which means that business fail to understand their
customers and there is no innovation in business. When customers appreciate the way a business is carried
then there should be necessarily innovation taking place. Following are some aspects which will make a bank
to be more innovative in its service delivery.

a) Easy Deposit: Scanning cheques from home and the same may be directly deposited into the account
of the customer, provided the cheque has the MICR code and other security features. Informing the
issuer of the cheque for counter- checking the amount details through email or sms alert can be another
innovation for safety of banking transactions.
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b) Account-to-account transfers: Make a transfer to or from an account at another bank or credit union
or consortium arrangement – already banks are doing under the core banking system. But the cost of
service has to be made very less.

c) Contactless payment systems: Many banks now offer contactless payment systems, such as near field
communication (NFC) and QR code scanners, that allow customers to make payments using their
mobile devices or smartwatches.

d) View every transaction: Customers have to given the choice to see a list of each deposit and
withdrawal, along with images of cheques/drafts that have been cashed and provide a running statement
online – including credit card and debit card accounts.

e) Alerts to keep customer on budget: Informing customer when they near their minimum balance
requirement and intimating every time drawls are made through sms alert or email service.

f) Live chat support: An interactive voice support system or a 24 hours online chatting system with the
banks representative have to arranged after ensuring with the system a fraud-free chatting.

g) Enhanced online security: Innovation means also ensuring more security features. Banks should
customize a security phrase and image at login for even greater protection. This will ensure accidental
visitor online from entering into one’s account details.

h) Creditor/debtor online clearing: Though some organizations have resorted to the practice of direct
credit of customer accounts instead of issue of cheque/DDs, but many organizations has not taken this
route as there are some practical problems like, accountability for tax and online checking of credits
and debits.

i) Free bill pay: Paying bills automatically through registration with the banker. Many banks are doing
such innovative services. When the system turns more competitive, easy and cheaper, many customers
will opt for electronic payment.
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j) Having human touch: Although today’s banking system has become mostly online and a customer
need not visit the branch at all for further transactions, yet most customer walk-back to their branches
to have a human touch and see their account operations done manually at least once in a month and
once in two months. This requires a sort of human touch by the bank employees with the customer-
innovations could be introduced in receiving and dealing with a customer and minimize his number of
visits to the branch.

k) New technologies for customers: The use of technology like Smart card, mobile ATMs, coverage of
post-offices under electronic payments network in far flung areas, etc. in providing financial services
to the people holds a tremendous potential for the business growth.
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CHAPTER :- 10

CASE STUDY

Banking sector play a very crucial role in the financial system of an economy. It facilitates the creation
and maintenance of a robust payment system to meet the requirements of businesses, the government and
general public. It also serves as a credit delivery mechanism, which can be accessed by those who are in need
of funds. Overall, the banking sector of the economic activities represents the centre of a nation Thus, a strong
and healthy banking system is essential for economic growth. The Indian banking sector, at present is
witnessing an IT revolution and is heading towards digitalization. The internet and IT has entirely changed the
way of functioning of banks and the financial institutions.

The Information technology was introduced in the Indian banking sector in the late eighties. However,
current phase of IT revolution is more intense and impactful, which probably has the potential to change not
only the banking landscape, but the overall structure and direction of the economy. The modernization of
banking sector, after the introduction of IT and internet has benefitted both the customers as well as banks.
The banking now is not just limited to transactions in the branches, but it has made its way into hand held
devices like smart phones and tablets. The current phase of banking may be aptly called as Digital Banking.

The world in which we are living is continuously on the move. It is changing every day and
consequently compelling us to change the way we live. Every now and then a new invention, innovation or
technology is finding its way Into our life and effecting a change in our lifestyle. Technology has become an
essential part of our life and it is definitely having its impact on every facet of our life. With each passing day,
we are becoming more and more dependent on technology for our daily needs.

If we have to single out and name one such technology which has changed the world in the last 50
years or so, then unquestionably it has to be internet. After the introduction of internet and its subsequent
widespread popularity and use, almost all the inventions and innovations have been focused around the usage
of internet.
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The role of financial sector plays is of very crucial one in the economic development of a nation. And
banking sector can be considered as the lifeline of an economy. It facilitates the creation and maintenance of
a robust payment system to meet the requirements of businesses, the government and general public, A strong
and healthy banking system is essential for economic growth. The Indian banking sector, at present is
witnessing an IT revolution and is heading towards digitalization. The internet has completely changed the
way of functioning of banks and the financial institutions.

The banking system in India has glorious past, bright future, and pleasant present Indian banking
system has been developing day by day. Banks are one of the most important organizations for proper growth
of Economy and GDP of the country. It is also important for society which requires faith of customer to keep
safe their asset in terms of gold and money in the banks. There is liability of banks to maintain strict policies
in terms of asset management Banks also provide various facilities to the customer so that there must be a very
healthy relationship between banker and customer.
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❖ CONCLUSIONS

The face of banking is changing rapidly. Competition is going to be tough and with financial
liberalisation under the WTO, banks in India will have to benchmark themselves against the best in the world.
For a strong and resilient banking and financial system, therefore, banks need to go beyond peripheral issues
and tackle significant issues like improvements in profitability, efficiency and technology. While achieving
economies of scale through consolidation and exploring available cost-effective solutions. These are some of
the issues that need to be addressed if banks are to succeed, not just survive, in the changing milieu.

Over the last three decades the role of banking in the process of financial intermediation has been
undergoing a profound transformation, owing to changes in the global financial system. It is now clear that a
thriving and vibrant banking system requires a well developed financial structure with multiple intermediaries
operating in markets with different risk profiles. Taking the banking industry to the heights of international
excellence will require a combination of new technologies, better processes of credit and risk appraisal,
treasury management, product diversification, internal control and external regulations and not the least,
human resources. Fortunately, we have a comparative advantage in almost all these areas. Our professionals
are at the forefront of technological change and financial developments all over the world. It is time to harness
these resources for development of Indian banking in the new century.

In the last decades and especially after the beginning of 1980s, there was a strong liberalisation and
deregulation of the financial sector, which occurred due to two fundamental reasons. Conventional economic
theory, supported by empirical studies, postulated that the financial development would be crucial to ensure a
higher economic growth given its positive effect on savings and investment.

The liberalisation and deregulation of the financial sector resulted in a huge growth of the financial
system, not only in terms of deposits, loans and stock market valuations, but also of other areas related with
derivatives, securitisation and shadow banking. This originated an excessive financial deepening, increasing
doubts on the “finance-growth nexus” and feeding fears around the unsustainable nature of this new
deregulated framework.
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In general terms, the concept of financialisation corresponds to the negative effects Arising from this
excessive financial deepening on the real economy, on economic agent and on Macroeconomic outcomes.
This is a broad concept that encompasses several dimensions, albeit all of them offer a negative view of the
growth of finance.

This suggests the need to take on in a fourth stage (de-financialisation), in order to reverse the current
disruptive relationship between the financial sector and the real economy. The literature presents several
recommendations that should be adopted by policy makers in the near future, which should promote a higher
sustainability of the financial system, making it more conductive to economic growth, employment, quality of
jobs, equality, and human development.
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❖ WEBLIOGRAPHY

• www.google.com

• www.wikipedia.com

• www.scribd.com

• www.researchgate.net

• www.byjus.com