An Analytical Study of Reforms and Their Impact on Indian

Banking Sector and The Influence of Artificial Intelligence On

The Banking Industry & How AI Is Changing The Face Of
Modern Day Banks

By Syed Wasil Ali

MBA(Finance), University of Lucknow

Abstract:

Before we look into the performance of banking sector of India, we must have a proper perspective of what is the
history of a banking system in India and also understand the rationale of why reform is necessary and which reforms are
essential. What is the impact of new technology on Indian banking system? Is performance better than the pre-reform
period with the adoption of new technology? The main focus of the study is on the performance of Indian banks. We
are living in the fast-changing world. With new emerging technologies and rapid expansion of internet
e - mail etc. excess to global information and knowledge and to commodity markets worldwide is how
much easier than before, in a bit to meet commitments to international institutional like world bank, IMF,
WTO country after country is pulling down barriers to foreign trade and investment. The government
of India has also followed suit with the result that quantitative restrictions on foreign trade are being
dismantled speedily. On the domestic front there are clear signals of privatization and liberalization as
licensing is being given up, controls are being dismantled, restrictive laws are being removed and the
privatization is being used in almost all sectors. India is a developing economy with the low growth of
GDP, low per capita income, rapid population growth existence of dualism, technological
backwardness etc. At the time of independence, it was a close economy with no FDI, no MNC ‘s,
restriction on currency movements, quota raj, permit raj, license raj and socialistic pattern of economy.
Indian banking sector was also working in the close economy scenario. Indian banking system was not
sound at the time of independence. In 1949, 2 major actions were taken with a view of structural
reforms in the banking sector. Banking regulation Act, which provided extensive power to RBI over the
commercial banks and another was the nationalization of RBI. Banking regulation act provided
excessive power the RBI. In a free enterprise economy, commercial banks operate like any other
business entity and gain private profit so at the time of independence it was viewed that the freedom of
commercial bank was not in the harmony of the socialistic pattern of society, so they were nationalized
in 1969 to establish the control over these banks. This study attempts to study the banking reforms in
India and their impact on Indian Banking System.
Artificial intelligence (AI), from time to time called machine intelligence is simulation of human intelligence in
machines. It is the intellect exhibited by machines, in contrast to the natural knowledge demonstrated by humans. From
Siri to self-driving cars, AI is progressing at a rapid pace. Artificial intelligence consists of generally two fundamental
ideas. First it involves studying human brains like how their thought process works and secondly it helps representing
those processes through machine learning. Artificial Intelligence in finance is more than about chat bots. Artificial
Intelligence has taken over numerous sectors including banking industry. The principal thought behind this
investigation was to comprehend the impact of AI on present day banking. This research mainly focuses on the concept
of AI in the field of banking, how it has brought revolutionary changes in banking and its impact on human manpower.
As we are aware that humans tend to commit errors, but the world is evolving so does the innovations, there is lack of
skilled talents required to handle the automation. Several routine and manual tasks which were earlier performed by the
humans are now being replaced by the automated machines with advance technology. Given that the business is
experiencing noteworthy change at a quick pace, this research is a preview of the current applications of AI in the
banking industry and how it is changing the face of banking in India.

Introduction:

Ritika Gauba in her study revealed that the concept of modern banking was first traced in medieval Florence
in 1397. A powerful merchant family named Medici established a network of shops that allowed patrons to
place money on account and withdraw the money in another city that had a Medici representative. Many
powerful families and even the Church kept their money in Medici banks.

This allowed rich people to travel without the need to carry large sums of money and risk of
robbery while travelling. Banking continued to gain popularity throughout Europe by 1700.
Nearly every country in Europe had some form of established banking. Modern banking has come
a very long way from those humble beginnings in Florence. Banking today covers the entire
spectrum of finance from simple savings to credit cards and home loans.

Banking Regulation Act, 1949, Section 5 (c), defines bank as " a banking company which transacts the
business of banking in India.' Further, Section 5(b) of the BR Act defines banking as, 'accepting, for the
purpose of lending or investment, of deposits of money from the public, repayable on demand or
otherwise, and withdraw able, by cheque, draft, and order or otherwise. 2

" A good bank is not only the financial heart of the community, but also one with an obligation of helping
in every possible manner to improve the economic conditions of the common people" - A. Subba Rao Pai
founder of Canara bank.
India has a long tradition of banking. Evidence regarding the existence of money-lending operations in India is found in
the literature of the Vedic times, i.e., 2000 to 1400 BC. The literature of the Buddhist period, for e.g., the Jatakas and
recent archaeological discoveries supply evidence of the existence of sresthis, or bankers. From the laws of Manu, it
appears that money-lending and allied problems had assumed considerable importance in ancient India. Basically, the
functions of banks are to accept the deposits from the people and advance the money to the people provide loans to the
people when they are in great need. The concept of bank is very old only difference is that today we are using modern
techniques in the banks and in traditional time only money lenders give loans to the poor people. The banking system is
central to a nation’s economy. A banking institution is essential for economic growth and development of nations.
Banks are special as they accept and deploy large amount of uncollateralized public funds in a fiduciary capacity, but
also leverage such funds through credit creation. Indian banking system divided into four phases i.e., these are early
phase era: 1770-1905, pre-independence era 1906-1946, post-independence regulated era: 1947-1993, post-
independence deregulated from 1993 onwards. The first bank in India, called The General Bank of India was
established in the year 1786.The east company established three main banks, Bank of Bengal in 1809, Bank of Mumbai
in 1840 and Bank of Madras in 1843 later on these three banks merged and known as presidency banks. At the time of
first phase (1913 to 1948) the growth of banking sector was very slow. The functioning and activities of commercial
banks were very slow due to the effect of British rule in India to increase the growth of Indian banks government of
India came up with the banking companies’ act, 1949 which was changed to banking regulation Act 1949 as per
amending Act of 1965.After independence, government has taken most important steps in regard of Indian banking
sector reforms. In 1955, the Imperial Bank of India was nationalized and was given the name "State Bank of India",
which act as the principal agent of RBI and to handle banking transactions all over the country. It was established under
State Bank of India Act, 1955. On 19th July, 1969, major process of nationalization was carried out. At the same time 14
major Indian commercial banks of the country were nationalized. In 1980, another six banks were nationalized, and thus
raising the number of nationalized banks to twenty. Seven more banks were nationalized with deposits over Rs 200
Crores. Till the year 1980 approximately 80% of the banking segment in India was under government’s ownership. In
India, prior to nationalization, banking was restricted mainly to the urban areas and neglected in the rural and semi-
urban areas. Large industries and big business houses enjoyed major portion of the credit facilities. Agriculture, small
scale industries and experts did not receive the deserved attention.

The need for the nationalization was felt mainly because private commercial banks were not fulfilling the social
developmental goals of banking, which are so essential for any industrializing country. The developmental goals of
financial intermediation were not achieved. Although the Indian banking system had made considerable progress in the
1950s and the 1960s, but the benefits of this did not flow down to the general public in terms of access to credit. In
fact, till 1968 commercial banks were not involved to any significant extent in providing direct finance to
agriculture. During 1969-96, the number of bank branches increased from 8262 to 62849, registering an annual rate of
growth of 7.80 percent. During the same period, the bank deposits and advances increased from Rs.4,26,073crore and
Rs.2,63,533 crore in 1996 from Rs 4646 crore and Rs.3599 crore respectively in 1969. Growth rate was 18.22
percent and
17.24 percentage. In 1991, under the chairmanship of M. Narasimham; a committee was set up by his name which
worked for the liberalization of banking practices. As a result of the reforms, the number of banks increased rapidly.
The committee submitted its report in November 1991 and made wide-ranging recommendations like reduction in
liquidity ratio, phasing out of direct credit programme, redefinition of priority sector, determination of rate of interest
without the intervention of RBI, abolition of branch licensing and ending the dual control of Finance ministry and
reserve bank over the banking system. On the suggestions of Narasimham Committee, the Banking Regulation Act was
amended in 1993 and thus the gates for the new private sector banks were opened. Increase in the branches of Indian
banks as we see in the table no 1, public sector banks have 45293 branches, private sector banks have 4665 branches
and foreign banks 182 branches which is high as compared to pre nationalized periods.

AI is the simulation of human intelligence which helps to build smarter machines capable of doing human work in a
smart way. AI work just like a human brain it can think and make decision with more accuracy rate, based on the data it
is being fed. Artificial intelligence is now becoming more widespread in the current market. It is used in various
sectors; banking industry is one among them. Banking industry is using AI in a very innovative way which save plenty
of time and money. The banks use algorithms to generate accurate results which in turn help in enhancing customer
service and generate better sales performance to deliver profits. AI includes machine learning and profound learning
which helps to reduce errors caused by emotional and psychological factors. One of the most important task AI
performs is to channelize key information from wide variety of data and draw conclusions. For instance, IP soft, the
world front-runner in Enterprise AI has built up a humanoid (robot) accomplice Amelia. It is the industry’s most human
digital AI partner. When one sees her for the first time it will leave an imprint that she implies business, wearing white
oxford shirt underneath a blazer, light hair with a decent attired look. The company acclaims that Amelia’s ability to
learn, intermingle and progress over time makes her the market’s only AI that can fully understand clients requirements
and intents. Amelia can be trained to understand words and phrases in more than 100 dialects. She delivers genuine
business assistance including lower operating costs, higher customer fulfillment and increased employee competence.
When a company hires Amelia (or numerous Amelia’s) they’ll be able to design her to address diversified company
needs, roles, and verticals—all according to their specific business strategies and procedures. The humanoid observes,
learns, and recalls anything one ask. She can read sentiments and situation during discussions with associates and
clients, on any communications network. She can accomplish the tedious work of thousands while assisting with
improving the innovativeness and efficiency of her human counter parts.
Objectives and Research Methodology:

Objectives of Study:

Examine the Evolution of Indian banking system.

Identify the changing structure of Indian banking sector since independence.

To find out the nature of banking sector reforms and its effect on functioning of banks in India.

To study the influence of artificial intelligence in the banking sector & how AI is changing the face of modern-day
banks.

Research Methodology:

The procedure adopted for conducting the research requires a lot of attention as it has direct bearing on accuracy,
reliability and adequacy of result obtained. It is due to reason that research methodology, which researcher used at the
time of conducting the research, needs to be elaborate upon. It may be understood as a science of studying how research
is done scientifically. So, the research methodology not only talks about the research methods but also consider the logic
behind the method used in the context of the research study. Research methodology is a way to systematically study and
solve the research problems. If a researcher wants to claim his study as a good study, he must clearly state the
methodology adapted in conducting the research the research so that it may be judged by the reader whether the methodology
of work done is sound or not.

Research methods can be classified in different ways, the most common distinction is between the
quantitative and the qualitative approaches (Myers, 2007). Quantitative approaches were originally
used while studying natural sciences like: laboratory experiments, survey methods and numerical
methods. A qualitative study is used when the researcher wants to get a deeper understanding on a
specific topic or situation. Myers (2007) 4
stated that the qualitative approach was developed in social
sciences in order to support the researcher in studies including cultural and social phenomena.
Sources included in the qualitative approach are interviews, questionnaires, observations, documents
and the researcher ‘s impression and reactions. The chosen approach is qualitative.
 Qualitative research typically takes the form of in- depth interviews with a small number of
respondents. These interviews may be done one individual at a time, or in groups. Individual
interviews have the advantages of providing very r ich information and avoiding the influence of
others on the opinion of any one individual. Individual interviews are very expensive and time
consuming, however, and as a result, it is not likely that any one research program will interview
large number of individuals.

1. To analyze the performance of Indian banking system during pre and post reform period.
2. To highlight the impact of technological development on Indian banking system.
3. Effective use of technology has a multiplier effect on growth and development.
4. Technology increases the efficiency of Indian banks.
5. To analyze the performance of non-performing assets on the profitability of banks.
This study used concise and informative analysis methods, as it is mainly a quantitative study and these methods help to
gather quantitative data in order to gain a deeper insight into the relationship between different research variables. The
research design is exploratory and descriptive. The type of research undertaken is exploratory as it comprises of in-
depth surveys in addition to qualitative and quantitative analysis. It is descriptive research and analytical research as the
present state of artificial intelligence is enlightened by using the facts and information already collected. The research
approach to this study was based on a sample used to collect key quantitative data from respondents. The survey
method was chosen here to collect data by surveying 112 clients from selected banks. The research instrument used
here to gather quantitative data was a formal and closed questionnaire. Quantitative data analysis was conducted using
SPSS 21.0 software.

RESEARCH DESIGN USED IN THE STUDY:

Descriptive research design is used in this study because it will ensure the minimization of bias and maximization of
reliability of data collected. Descriptive study is based on some previous understanding of the topic; research has got a
very specific objective and clear-cut data requirements. The researcher had to use fact and information already available
through financial statements of earlier years and analyze these to make critical evaluation of the available material.
Hence by making the type of the research conducted to be both descriptive and analytical in nature. From the study, the
type of data to be collected and the procedure to be used for this purpose were decided.

DATA COLLECTION METHOD:

The process of data collection begins after a research problem has been defined and research design has been chalked
out. There are two types of data

PRIMARY DATA:
It is first hand data, which is collected by researcher itself. Primary data is collected by various approaches so as to get a
precise, accurate, realistic and relevant data. The main tool is gathering primary data was investigation and observation.
It was achieved by a direct approach and observation from the officials of the company.

SECONDARY DATA:

It is the data which is already collected by someone else. Researcher has to analyze the data and interprets the results. It
has always been important for the completion of any report. It provides reliable, suitable, adequate and specific
knowledge. Researcher collected the secondary data by using banks annual reports and authorized websites of banks.

The data gathered is Primary data and Secondary data, which is both quantitative and qualitative data, which was
further analyzed in order to draw conclusions and suggestions. Primary data was gathered through a survey on
awareness of individuals about use of artificial intelligence in banking sector. A questionnaire was drafted for the
survey and random sampling was done. Secondary data collection was done through internet which includes web, e-
magazines, research papers, e-books, newspapers etc.

Rationale of the study:

The reforms were aimed at making the Indian banking sector more competitive, versatile, efficient, and
productive, to follow international accounting standard and to free from the government’s control. The
reforms in the banking industry started in the early 1990s have been continued till now. The study makes
an effort to examine the performance of banking sector in India during the last eighteen years. Secondly,
the attempt would also be made to study the major impacts of those techniques upon the banking sector.
From the above study we can say that performance of Indian banking system is far better as compared to
the pre nationalization period. The condition of banks is improving as all the banks provide ATM
facilities to their customer through debit card, credit cards etc. there is no doubt that with the coming of
foreign banks, we received the fruits of new technology which is boon for any developing country. With
the contact of foreign banks our Indian banks efficiency increases and profits also increased.

Evolution of AI:

While we have only recently experienced the implementation of AI, the history of AI dates back to the
1950s, when Alan Turing published a paper on the possibilities of machines with true intelligence. It was
just the establishment of Artificial Intelligence as a term, but no application of the case or Artificial
Intelligence method was carried out until the late 1990s. Artificial Intelligence speed only picked up after
2011, after major tech giants like Facebook, IBM, Microsoft and Google started engaging in Artificial
Intelligence and Machine Learning for business applications.
Adoption:

Today, AI implementations range from data mining to a variety of methods such as algorithm monitoring, facial
detection, optical character recognition. AI is now being applied in a variety of business industries, including
advertisement and targeting, accounting, insurance, internet, transportation, aerospace, agriculture and genetics. In
1990, new technologies focused on work in the AI field, expanding the potential for natural language analysis, image
recognition, deep learning, voice recognition and emotions. It was then taken up by a number of start-ups with a view to
generating market interest. 2.2. AI in Financial Services There are also a range of improvements in the way
communications, customer support, recruiting and asset management take place throughout financial sector. Today, for
example, stock investing and finance is all about technical skills and divine luck. Yet in the future, with the aid of
sentiment analysis, crowd-sourced data and algorithms, we will be able to handle money in a much different way. 2.3.
Future Aspects Not only is the AI revolution limited to the financial sector and banking industry, a variety of other
sectors have also experienced the effects of AI. Some of the industry highlights include robotic (automated) distribution
of anesthesia for routine treatments, while helping to minimize costs, improved patient support, digital guidance to the
introduction of self-driving vehicles. All these would allow the companies to replace boring and tedious work, such as
form filling and back-end testing.

WHY AI IN BANKING INDUSTRY?

 Enormous challenges in the banking sector.

 Thrust for a process-driven operation.
 Initiate self-service in the branches.
 Customer desire to deliver different personalized solutions.
 Build functional efficiencies.
 Escalating the productivity of employees.
 To support focus on productivity and efficiency.
 Visualization to extend human function with the use of robotics tools.
 To minimize the chances of fraud and scam.
 Manage an immense volume of data at record speed and gain valuable insights.
 To carry out effective decision-making.

Review of Literature:
Christian Catalini, Chris Foster and Ramana Nanda (2018) in their work ‗Machine Intelligence vs. Human Judgment in
New Venture Finance ‘study that machine learning models trained to mimic human evaluators performed relative to
models trained purely to maximize financial success. They found out that (1) model trained to mimic the picks of
humans performed well out-of-sample, implying that humans had a systematic pattern of early-stage investing that
could be identified and replicated; (2) Models trained to maximize success strongly outperformed mimic human
models‘ when picking from a common out of sample applicant pool, implying that heuristics used by these evaluators
were systematically overlooking certain high-potential applications that were identifiable ex-ante; (3) comparing the
focus of the two models suggests that the differences arose in part due to human heuristics systematically under-
emphasizing more ‗cognitively demanding‘ elements of the applications. Their findings have important implications for
the selection and financing of high potential ideas, and more broadly for how Artificial Intelligence can help humans
screen and evaluate information in an era of increasing information overload. Jawanda S (2018, July) in her research
paper ―How Artificial Intelligence is changing the banking sector - A case study of top four Commercial Indian Banks
studies the areas in which Machine Intelligence is being launched in the banks and applications of AI in principal
commercial banks in India. There is advancement in traditional banking and gradually banks are adopting innovative
technologies like AI, blockchain, cloud computing but banks are still to reach the stage of AI revolution, human touch is
still important. The banking sector in India is discovering the ways through which AI can be incorporated which
improve working of banks and improve customer service in the near future. Andrew Ng (2016) in his research paper
―What artificial intelligence can do and can’t do right now‖ discusses the implications of AI on business. He discusses
about the automation age, how business is evolving because of robotics and machine learning. AI work requires
cautiously picking A and B and providing the essential information to help the AI figure out the A→B relationship.
Selecting A and B creatively has already revolutionized numerous industries. It is ready to revolutionize many more.
Chan Kok Thim and Eric Seah (2011) in their research paper ‗Optimizing portfolio construction using artificial
intelligence intends to improve the viability of Artificial Intelligence utilizing Neural Network (NN) in the real market.
This paper summed up the standard Markowitz Theory's Efficient Frontier to emulate and improve the portfolio
development and build up a neural system heuristic to better comprehend how Artificial Intelligence can develop ideal
portfolio capacity and give yields to all degrees of financial specialists. Ryoji Kashiwagi (2005) ‗Utilization of artificial
intelligence in finance studies that manmade artificial intelligence is presently entering another boom stage, the third in
its history, in the wake of a technical advancement known as profound learning. Man-made AI is being used in different
structures even in the monetary segment. Money related foundations ought to use man-made consciousness all the more
effectively through such methods as open innovation.
Evolution of Banking in India:

Charan Singh et. al. (2014) Banking sector in India dates back to 18th century with the
establishment of Bank of Hindustan in 1770 followed by the General Bank of India in 1786.
There were a number of public sectors banks like Bank of Bengal, Bank of Bombay
which came into existence between 1800 and 1850(including State Bank of
India. These banks were founded as per the charters from British East India
Company. With the trade relations developing between India and various
other countries there was a keen interest from banks in other countries to invest
in India and grow their customer base here. The banks were following the
customers in some cases while in some other banks led new customers to enter
new geographies and make investments.

In India, banking has developed from the primitive stage to the modern system
of banking in a fashion that has no parallel in the world history. With the dawn
of independence, changes of vast magnitude have taken place in India. After
independence India launched a process of planned economic activity in order to
overcome the multitude of problems it faced as an underdeveloped nation. The
increasing tempo of economic activity led to tremendous increase in the volume
and complexity of banking activity.

Therefore, the role of banks has had to expand at a fast pace. As engines of
development and vehicle of silent Socio - economic revolution in the country,
Indian banks have assumed new responsibilities in the fields of geographical
expansion, functional diversification and personal portfolio. Indian banking
transformed itself from ‗Class banking to Mass banking

A banking sector performs three Primary functions in an economy: The

operation of the payment system, the mobilization of savings and the
allocation of savings to investment projects. By allocating capital to the
highest value use while limiting the risk and cost involved, the banking
sector can exert a positive influence on the overall economy, and thus of broad macro-
economic importance.
The origin of the Indian banking industry may be found with the
establishment of. Bank of Bengal ‘in Kolkata in 1786. The Bank of Calcutta
was the first part of the golden triangle - established in June 1806, it which
was renamed as Bank of Bengal in January 1809. This was followed by the
establishment of the Bank of Madras in July 1843, as a joint stock company,
through the reorganization and amalgamation of four banks viz., Madras
Bank, Carnatic Bank, Bank of Madras and the Asiatic Bank. This bank
brought about major innovations in banking such as use of jo int stock
system, conferring of limited liability on shareholders, and most
importantly acceptance of depo sits from the general public. The last
presidency bank - Bank of Bombay which was also last bank to be set up
under the British Raj was established in 1868.

The three Presidency Banks with their 70 branches were merged in 1921 to
form the Imperial Bank of India. The new monolith took on the triple role of
a commercial bank, a banker's bank and a banker to the government. Thus,
proving that the concept of mergers and consolidation as well as their
success in the banking system of India, is not as recent a phenomenon as is
often thought to be. Between the 1865 & 1913 a number of Indian private
bank emerged which are even reigning successfully today.

The first bank which was exclusively set up by Indians was Allahabad Bank,
followed by Punjab National Bank Ltd. set up in 1895 with headquarters at
Lahore. Other private banks established during this period was Bank of
India & Central Bank of India established in 1911, Bank of Baroda (1908);
Canara Bank (1906), Indian Bank (1907) and Bank of Mysore (1913). Until
1935 all the banks which were set up only belonged to the private sector In
the absence of any regulatory framework, these private owners of banks
were at liberty to use the funds as they wanted, they deemed appropriate and
resultantly the bank failure & exploitation of the poor were frequent
phenomenon.

Therefore, in order to control & regulate these banks the Reserve Bank of India was
established.

The Reserve Bank of India was established on April 1, 1935 in

accordance with the provisions of the Reserve Bank of India Act, 1934. The
establishment of this central bank of the country ended the quasi - central
banking role of the Imperial Bank. The latter ceased to be bankers to the
Government of India and instead became agent of the Reserve Bank for the t
transaction of government business at center at which the central bank was
not established.

Even after the formation as well as nationalization of RBI the growth of

economy & banks was very slow and banks still experienced periodic
failure. Therefore, in order to streamline the functioning and activities of
the 1100 commercial banks present then, the Government of India came up
with in March 1949, a special legislation, called the Banking Companies
Act, 1949.

The Banking Act 1949 was a special legislation, applicable exclusively to

the banking companies. This Act was later renamed as the Banking
Regulation Act from March 1966. The Act vested in the Reserve Bank of
India the responsibility relating to licensing of banks, branch expansion,
and liquidity of their assets, management and methods of working,
amalgamation, reconstruction and liquidation. Thus, giving RBI authority
along with responsibility & igniting the first part of banking transformation
in India. The second path braking & transformation effort took place in
1955 with the establishment of the Indian Banking Sector' State Bank of
India.

In 1951, when the First Five Year Plan was launched, the development of
rural India was given the highest priority. The commercial banks of the
country including the Imperial Bank of India had t ill t hen confined their
operations to the urban sector and were not equipped to respond to the
emergent needs of economic regeneration of the rural areas. In order,
therefore, to serve the economy in general and the rural sector in
particular, the All-India Rural Credit Survey Committee
recommended the creation of a state- partnered and state- sponsored bank
by taking over the Imperial Bank of India, and integrating with it, the
former state - owned or state- associate banks. An act was accordingly
passed in Parliament in May 1955 and the State Bank of India was
constituted on 1 July 1955.

The need for nationalization was felt because government believed that
private commercial banks were lacking in fulfilling the social &
developmental goals of banking. This was evident from the fact that the
industries' share in loans almost doubled between 1951 and 1968, from 34%
to 68%. On the other hand, agriculture which was a major occupation (and
still is) received less than 2% of total credit Thus with a view to serve the
mass Government of India Nationalized 14 banks {refer table 1) in 1969
bringing the total number of branches under government control to
84 percent.

Major Banking Reforms in India:

To understand the scenario before banking reforms, we have to revisit the
development of banking sector in India. Just after the independence in 1950
s, in those days, the need of the hour was to reorganize and to consolidate
the prevailing banking network keeping in view the requirements of the
economy. The first step taken to that end was the enactment of the Banking
Companies Act, 1949 followed by rapid industrial finance. Role played by
banks was instrumental behind industrialization with the impetus given to
both heavy and Small-Scale Industries. Subsequently after the adoption of
social control, banks started taking steps in extending credit to agriculture
and small borrowers. Finally, on July l969, 14 banks were nationalized with
a view to extending credit to all segments of the economy and also to
mitigate regional imbalances. Thus, the period of regulated growth from
1950 t il l bank nationalization witnessed a number of far - reaching changes
in the banking system.
Banking Reforms in India:

The main objective of the financial sector reforms in India initiated in the
early 1990s was to create an efficient, competitive and stable financial
sector that could then contribute in greater measure to stimulate growth.

Concomitantly, the monetary policy framework made a phased shift from

direct instruments of monetary management to an increasing reliance on
indirect instruments. However, as appropriate monetary transmission
cannot take place without efficient price disco very of interest rates and
exchange rates in the overall functioning of financial markets, the
corresponding development of the money market, Government securities
market and the foreign exchange market became necessary. Reforms in the
various segments, therefore, had to be coordinated.

The last two decades witnessed the maturity of India's financial markets.
Since 1991, every government of India took major steps in reforming the
financial sector of the country.

The government and the regulator have undertaken several measures to strengthen the
Indian banking sector.

 The Reserve Bank of India (RBI) has issued guidelines for

priority sector lending certificates (PSLCs), according to
which banks can issue four different kinds of PSLCs—those
for the shortfall in agriculture lending, lending to small and
marginal farmers, lending to micro enterprises and for
overall lending targets – to meet their priority sector
lending targets.

 The Reserve Bank of India (RBI) has allowed additional

reserves to be part of tier- 1 or core capital of banks, such as
revaluation reserves linked to property holdings, foreign
currency translation reserves and deferred tax assets, which
 is expected to shore up the capital of state- run banks and
privately owned banks by up to Rs 35, 000 crore (US$ 5.14
billion) and Rs 5, 000 crore (US$ 734 million) respectively.

 Scheduled commercial banks can grant non-fund based

facilities including partial credit enhancement (PEC), to
those customers, who do not avail any fund-based facility
from any bank in India.

 Ministry of Finance has planned to inject Rs 5, 000 crore

(US$ 734 million) in eight public sector banks in order to
boost their capital,

 To reduce the burden of loan repayment on farmers, a

provision of Rs 15, 000 crore (US$ 2. 2 billion) has been
made in the Unio n Budget 2016 - 17 towards interest
subvention.

 Under Pradhan Mantri Jan Dhan Yojna (PMJDY), 217

million accounts! have been opened and 174. 6 million
RuPay debit cards have been issued. These new accounts
have mustered deposits worth almost Rs 37, 000 crore
(US$ 5. 53 billion).

 The Government of India is looking to set up a special fund,

as a part of National Investment and Infrastructure Fund
(NIIF), to deal with stressed assets of banks. The special
fund will potentially take over assets which are viable but
don‘t have additional fresh equity from promoters coming in
to complete the project.
  The Reserve Bank of India (RBI) plans to soon come out with
guidelines, such as common risk- based know- your-
customer (KYC) norms, to reinforce protection for
consumers, especially since a large number of Indians have
now been financially included post the government ‘s
massive drive to open a bank account for each household.

 To provide relief to the state electricity distribution

companies, Government of India has proposed to their
lenders that 75 per cent of their loans be converted to state
government bond in two phases by March 2017. This will
help several banks, especially public sector banks, to offload
credit to state electricity distribution companies from their
loan book, thereby improving their asset quality.

 Government of India aims to extend insurance, pension and

credit facilities to those excluded from these benefits under
the Pradhan Mantri Jan Dhan Yojana (PMJDY).

To facilitate an easy access to finance by Micro and Small Enterprises (

MSEs), the Government/RBI has launched Credit Guarantee Fund Scheme
to provide guarantee cover for collateral free credit facilities.

extended to MSEs upto Rs 1 Crore ( US$ 0. 15 million). Moreover, Micro

Units Development & Refinance Agency ( MUDRA) Ltd. was also
established to refinance all Micro - finance Institutions ( MFIs), which are
in the business of lending to micro / small business entities engaged in
manufacturing, t rading and services activities upto Rs 10 lak h ( US$
0. 015 million).

The Finance Ministry continuously formulated major policies in the field

 of financial sector of the country. The Government accepted the
important role of regulators. The Reserve Bank of India ( RBI) has
become more independent. Securities and Exchange Board of India
( SEBI) and the Insurance Regulatory and Development Authority ( IRDA)
became important inst itut ions. Opinions are also there that there should
be a super- regulator for the financial services sector instead of
multiplicity of regulators.

FIRST GENERATION REFORMS (NARASIMHAM

COMMITTEE)
The Government of India appointed a committee called 'The Committee
on Financed System' under the chairmanship of Sri M. Narasimham, ex -
Governor of Reserve Bank of India which made recomme ndations in
November 1991. The Committee laid down a blue print of financial
sector reforms, recognized t hat a vibrant and competitive financial
system was central to the wide ranging structural reforms. In order to
ensure t hat the financial system operates on the basis of operational
flexibility and functional autonomy, with a view to enhance efficiency,
productivity and profitability, the Committee recommended a series of
measures aimed at changes according greater flexibility to bank
operations, especially in Pointing out statutory stipulations, directed credit
program, improving asset quality, institution of prudential norm, greater
disclosures, better housekeeping, in terms of accounting practices.

SECOND GENERATION REFORMS (NARASIMHAM COMMITTEE -

II 1998)

The recommendations of Narasimham Committee - I (1991) provided

blueprint for first generation reforms of the financial sector. The period
1992- 97 witnessed laying of the foundations for reforms of the banking
system. It also saw the implementation of prudential norms relating to
capital adequacy, asset classification, income recognition and provisioning,
exposure norms, etc.
M. Kartik and Ganesh (2013) 12
said The second Narasimham Committee
Report (1998) too focused on issues like strengthening of the ban king
system, upgrading of technology and human resource development (
Ramasastria. S. and Achamma Samuel, 2006). 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 the year 2007.

PRUDENCIAL ACCOUNTING NORMS FOR BANKS:

The Reserve Bank persevered with the on—going process of strengthening

prudential accounting norms with the objective of improving the financial
soundness of banks and to bring them at par wit h international standards.
The Reserve Bank advised PSBs to set up Settlement Advisory
Committees ( SACs) for t imely and speedier settlement of NPAs in t he
small scale sector, viz., small scale industries, small business including t
rading and personal segment and the agricultural sector.

RISK MANAGEMENT GUIDELINES:

The Reserve Bank issued detailed guidelines for risk management systems
in banks in October 1999, encompassing credit, market and operational r
isks. Banks would put in place loan policies, approved by their boards of
directors, covering the methodologies for measurement, monitoring and
control of credit r isk. The guidelines also require banks to evaluate their
portfolios on an on- going basis, rather than at a time close to the balance
sheet date.

DISCLOSURE NORMS:

As a move towards greater transparency, banks were directed to disclose the

following additional information in the ‗Notes to accounts‘ in t he balance
sheets from the accounting year ended March 31, 2000: (i) maturity pattern
of loans and advances, investment securities, deposits and borrowings, (
ii) foreign currency assets and liabilities, ( iii) movements in NPAs and (
iv) lending to sensitive sectors as defined by the Reserve Bank from time
to time.

TECHNOLOGICAL DEVELOPMENTS IN BANKING:

India, banks as well as other financial entities have entered domain of

information technology and computer networking. A satellite - based Wide
Area Network (WAN) would provide a reliable communication framework
for the financial sector. The I n d i a n Financial Network (INFINET)
was inaugurated in June 1999. It is based on satellite communication using
VSAT technology and would enable faster connectivity within the financial
sector. The INFINET would serve as the communication backbone of the
proposed Integrated Payment and Settlement System (IPSS). The Reserve
Bank constituted a National Payments Council (Nariman: Shri S. P. Talwar)
in 1999 - 2000 to focus on the policy parameters for developing an IPSS
with a real time gross settlement (RTGS) system as the core.

ARTIFICIAL INTELLIGENCE IN BANKING:

The banks cannot afford to wait, to get on their artificial intelligence journey as they
have to compete in a future which is packed with innovative and advanced technology.

Drive thru Banking- Drive thru banking allows you to do banking transaction without
getting out from car. There is lane where the customer can do transaction through a
window. Voice AI system is being developed to replace humans in drive thru banking.
Clinc, an Ann Arbor-based startup that developed voice-powered AI platforms for
banking in 2015, ventured into drive-through ordering in July 2018. Its conversational
AI innovation can recognize orders if people have language barriers or heavy accents
and can make corrections in the conversation.
Bank Stations- Banks can incorporate artificial intelligence at the front office, middle
office and back office. The bank stations are a system of self-service terminals that
delivers a wide range of value-based e-services to consumers example bill payments,
government e-services etc. Big data is the industry standard today and big data
applications in banks are transforming the industry. AI is helping in structuring and
sorting the data and banking sector is using the data to improve customer relations.
Artificial Intelligence is the future of banking to serve new age customers.

Passbook updating kiosks - The Indian banking industry has been evolving from
people driven to machines controlled in the past few years. Passbook printing kiosk is
an automatic kiosk which enable customers to print their passbooks. Indian banks such
as SBI and Bank of Baroda have installed this facility in a big way. They have installed
self-service passbook kiosks wherein customers can print passbooks on their own. For
instance, Indian Bank SBI has installed Swayam (passbook printing kiosk) that uses
barcode technology and allows customers to update their passbooks hassle-free
Although there has been hiring in banks, the nature of skill sets required is changing
with spotlight on the front-end talent.

Chatbot-The Intelligent Banking Assistant: Chatbots or virtual assistants are new

tools designed to simplify interaction between humans and computer. Chatbots are
examples of AI in banking that are replacing the front-desk scenes at the banks. These
AI-led machines provide next level digitized and customized interactive experiences to
the customers. Indian Bank SBI has launched chatbot SIA (SBI Intelligent Assistant)
which help customers in everyday banking tasks just like bank representatives. It also
resolves the questions of NRI customers by providing prompt solutions in the chat box
on SBI gateway.
Cash Deposit Machine- The Cash Deposit Machines are self-service terminals which
allow to deposit cash at any time. This facility ends the problem of standing in long
queues at banks to deposit cash. Banks offer the fastest and most reliable way to deposit
cash round the clock. Both state-owned and private banks offer this facility where
account balance is credited instantly. Customer will receive a transaction receipt for
each successful transaction. Payments can also be made in different accounts using this
machine.

ATM Machine Helpline- These help the customers to contact their respective banks in
case of emergency these helplines are provided in ATMs. AI has been introduced in
ATMs too. The following segments have been introduced in ATMs: Machine learning
for cybersecurity in ATMs, machine vision ATM cameras, facial recognition for
security and improving customer experience, predictive maintenance of ATM
machines, forecasting ATM cash demand.

Mobile Banking- Mobiles are becoming smarter globally. Millions of people depend
vigorously on mobile banking, which means that AI-powered banking mobile apps
strongly attract them. Consumers have moved to mobile banking effortlessly. Having
personal virtual assistant is very attractive no matter whether it is Siri from Apple or
Alexa from Amazon. It has been widely accepted and welcomed by users across the
globe. Mobile apps can readily meet the client‘s desires. There are intelligent apps that
can track the user’s behaviors and give them customized tips and insights on savings
and expenses. Nowadays every bank offers these services of mobile and text banking.
With the use of mobile banking, it has become more convenient to do daily transactions
such as money transfer, payments etc. Consumers can do better financial planning, can
get smart financial advisory, can do efficient and quicker transactions with the advent
of artificial intelligence in mobile banking.

Blockchain Technology and Banking- Blockchain is distributed, decentralized and

digital ledger. It is digital information (block) stored on public database (chain).
Blockchain is used to store encrypted data and Artificial Intelligence is the brain or
engine to enable decision making and assists in analysis of data collected. Most often it
is argued that blockchain technology is only beneficial for cryptocurrency industry but
that is not true. Blockchain technology visions to solve multiple issues related to digital
transactions such as data security, fraud prevention etc. Blockchain is the future of
inter-bank transactions, cross border remittances, crypto banking, record storing, KYC,
loan syndication, increased transparency to name a few.
AI-based Algorithms and Fraud Detection- AI revolves around algorithms. Machine
learning is made up of series of algorithms. Algorithm is a set of rules, instructions or
other problem-solving operations to be followed by computers. AI is very effective in
finding patterns in real time. It uses additional behavioral indicators to spot suspicious
activity and offer suggestions for mitigating risk. For instance, Feedzai, a data science
firm, uses algorithms to detect e-commerce fraud. Fraud detection is one of the fields
which has received massive boost in providing accurate and apt results with the
intervention of artificial intelligence. Fraud has been the major issue in the financial
sector and fraud detection is one of the crucial areas in banking sector where artificial
intelligence systems have excelled the most. AI helps to gain a better understanding of
customer’s behavior thus helps in better detection of new and emerging frauds. An
example of successful implementation of data analysis techniques in the banking
industry is the FICO Falcon fraud assessment system, which is based on a neural
network shell to deployment of sophisticated deep learning based artificial intelligence

systems today.
AI and Machine Learning applications use algorithms to analyze patterns and predictive
analytics to block fraudulent transactions thus helping banks to prevent financial frauds.
Fraud detection has made considerable progress and is expected to further develop in
coming years.
ANALYSIS AND FINDINGS:

This analysis is based on data collected from 112 respondents. Majority of the respondents in
mid 20s, 30s and 40s are most impacted by artificial intelligence in banking sector and they
also agree that artificial intelligence is valuable and friendly, and they look in for introduction
of new innovations in AI from time to time. 71.4% i.e., 80 people out of 112 think using
artificial intelligence in banking is beneficial. 24.1% i.e., 27 people out of 112 are not sure that
using artificial intelligence in banking is beneficial. 4.5% i.e., 5 people out of 112 don’t think
that it is beneficial at all. 58.9% i.e., 99 people out of 112 are taking benefit of automated
financial advisor for investing money in the market. 64.3% i.e., 72 people out of 112 agree
that after implementing artificial intelligence in banking system has improved speed of
services. 13.4% i.e., 15 people out of 112 are not sure that it has improved or not. 22.3% i.e.,
25 people don’t agree that it has any impact on fast services. Most of the respondents prefer
smart wallets over cash transaction which means people are taking benefits of artificial
intelligence. As online fraud is a major issue now days people can easily hack into your
account, 81.4% respondents believe that artificial intelligence can double the security system
in banks. 18.6% people do not fully trust the machines, they need a little bit of human touch
and prefer visiting the banks in traditional ways.
Conclusion:

Indian banking system performed better as compared to the pre-reform period. The IT
revolution had a great impact in the Indian banking system. The use of computers had
led to introduction of online banking in India. The use of the modern innovation and
computerization of the banking sector of India has increased many folds after the
economic liberalization of 1991 as the country's banking sector has been exposed to
the world's market. The Indian banks were finding it difficult to compete with the
international banks in terms of the customer service without the use of the information
technology and computers. Use of technology in expanding banking is one of the
significant focus areas of banks. The banks in India are using Information Technology
(IT) not only to improve their own internal processes but also to increase facilities and
services to their customers. Efficient use of technology has facilitated accurate and
timely management of the increased transaction volume of banks. By offering simple,
safe and secure technology, banks reach at doorstep of customer with delight customer
satisfaction.

The banking system, which was over - regulated and over administered, was
freed from all restrictions and entered into an era of competition since
1992. The entry of modern private banks and foreign banks enhanced
competition. Deregulation of interest rates had also intensified
competition.

In their paper Dr. Shurveer S. Bhanawat, Shilpi Kothari ( 2013), research

will evolve the performance of financial institutions only after 1998 and in
the wake of Narsimham Committee II. The study is micro economic in
nature and seeks to analyze the productivity of banking systems. Here an
attempt has been made to examine the impact of reforms. The impact of
reforms on the profitability of Indian banks has been examined on the basis
of following parameters: Interest income to Total assets, Operating Profit
to Total Asset, Return on Asset and Return on Advances.

Rajiv et. al ( 2016) , In their study on Banking Reforms mentioned that

Public Sector Banks ( PSBs) in India are struggling with high NPAs (
Non– Performing Assets) which have been rising steadily since 2009 - 10.
These banks continue to face the dual problem of significant asset
quality stress and inadequate capitalization, which has impacted their
growth. Around 27 PSBs wrote off a staggering Rs 1.14 lakh crores of bad
loans during FY12 - 15. The Punjab National Bank (PNB), the fourth
largest state- owned bank by assets, announced that its gross NPAs touched
8.5% of the loan book in December 2015, highest in eleven years. Without
government recapitalization, some of these banks may find its lending
activity squeezed.

The world of banking is shifting faster than ever, with Artificial Intelligence (AI)
leading the way in bringing in sea change in the banking industry. Various AI
technologies have been applied in banking in fields such as core banking, operational
performance, customer support and analytics. For AI, banking is no longer just
physical branches, but a brand-new world of modern banks. The introduction of new
banking services by modern day banks is helping them to grow and expand.
Technology is enabling increased penetration of the banking system, increased cost
effectiveness and is making small value transactions possible. Effective use of
technology has a multiplier effect on growth and development of banks. Hence with
the introduction of artificial intelligence, more customers are attracted, and it is helping
the banks to grow more. Banks can apply AI to improve the client experience by
empowering frictionless, round the clock client association - however AI in banking
applications isn't simply restricted to retail banking services. The back and middle
office of investment banking and all other money related supervisions are gaining by
AI.

Suggestions:

 There should be increase in the number of branches in rural areas.

 The facility of ATMs should also be available in far flung areas.
 Need for greater use of technology to propagate financial inclusion.
 Need for greater use of technology to propagate financial inclusion.
 Need to increase cyber security as with great facility comes great risk.
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Questionnaire:

A survey On Customer Satisfaction In Banking Services

1. Name

2. Address

3. Occupation

4. Annual Income

5. Name of your Bank

6. Do you think that your bank caters all your banking needs?
(a) Yes (b) No

7. For the past how many years you have account with this bank?

8. What kind of account do you maintain in this bank?

(a)Current (b)Savings (c)Loan a/c (d)Demat (e)Credit card

9. Which of the following facilities is given more importance in your bank

(a)Loan facilities (b)O/D facilities (c)ATM facilities

10. Does your bank conduct any recreation facilities for the customers
(a) Yes (b) No

11. Does your bank have listed its share in stock exchange
(a) Yes (b) No (c)Not Aware

12. Does your bank have core banking facility for the customers
(a) Yes (b) No

13. Do they charge unnecessarily for not maintain minimum balance in

your account
(a) Yes (b) No
14. Does your bank offer competitive service charges
(a) Yes (b) No

15. Do you think your bank offers competitive interest rate

(a) Yes (b) No

16. Do you use the service of alternative bank

(a) Yes (b) No

17. What do you feel about overall service quality of your

bank.
(a)Excellent (b)very good (c)good (d)average (e)poor

18. Would you recommend this bank to your friends, relatives,

associates
(a) Yes (b) No

19. When do you think of your bank what comes first in your mind
(a)Personalized service (b)Wide branch network (c)Customer
service (d)computerized banking (e)Core banking

20. Your overall opinion about this survey

(a)Satisfactory (b)Will yield result (c)looking forward for result