Role of iT IN INDIAN BANKING

WRITE-UP

UNDER THE GUIDANCE OF

g K pRABHU

SUBMITTED BY

GARIMA
GOPI NATH
D MANIKANTA
ANVESH
G ABHILASH
DIVI DURGA PRASAD
INTRODUCTION
Banking industry is the backbone of Indian financial system. Today, the banking industry in India is
facing manifold challenges and issues. The health of banking industry in general and the public sector
banks in particular is matter of grave concern for all the stakeholders. One of the challenges banking
industry faced during 1990s was the inability of the banks to cope up with the phenomenal increase in
volume of business handled and the ever expanding customer base which appears to have been fairly
addressed with the advent of core banking solution platform on which almost all the banks function
today. The information technology has come to stay and today banks are in a position to handle any
workload through the help of computers. Without IT and communication we cannot think about
banking at all. For creating an efficient banking system, which can respond adequately to the needs of
growing economy, technology has a key role to play. Technology is changing past and in the past 10
years, banks in India have invested heavily in the technology such as Tele banking, mobile banking,
net banking, ATMs, credit cards, debit cards, electronic payment systems and data warehousing and
data mining solutions, to bring improvements in quality of customer services and the fast processing
of banking operation. Heavy investments in IT have been made by the banks in the expectation of
improvement in their performance. The performance, however, depends upon effectiveness of the
system and its usage by the bank staff.
While the technology has been able to resolve the issues relating to workload to a great extent and
with the advent of telebanking, internet banking etc, the pressure on branch counters is reducing,
newer challenges in the form frauds being perpetrated by the customer and by the staff in growing in
alarming pace. The sheer magnitude of frauds , both technology related and external factors like bad
loans is the concern which needs to be addressed , perhaps through more effective technology.
Information technology in banking sector 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. It has not only increased the cost effectiveness but also has helped in making small value
transactions viable. Electronic delivery channels, ATMs, variety of cards, web based banking, and
mobile banking are the names of few outcomes of the process of automation and computerization in
Indian banking sector.

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 1. Evolution of Information Technology in Indian Banking
Indian banking has undergone a total transformation over the last decade. Moving seamlessly from a
manual, scale-constrained environment to a technological leading position, it has been a miracle. Such
a transformation takes place in such a short span of time with such a low cost. Rangarajan Committee
on Mechanisation in Banks (1984) could be considered as the harbinger of adoption of technology for
Indian banks. Thereafter, various committees / working groups have recommended gradual adoption
of technology and need for associated safeguards in the sector. Entry of technology in Indian banking
industry can be traced back from 1990s – the beginning of the era of liberalization, globalization and
privatization that had the telling effects on banking that needed total transformation in the banking
industry be it in the field of risk management, cross border trade and financing, treasury operations ,
corporate loan financing etc The introduction of technology, in a phased manner, that replaced manual
banking operation, experience of and advantage of ALPM that prompted the idea of Total Branch
Automation Local Area Networking (LAN) followed by Anywhere Banking (AWB) and the adopting
the technology to interconnect all the branches of a bank through Wide Area Networking (WAN)-
CBS and now the digital banking can best be termed as- Revolution in Indian Banking Sector.

2. Trends in technological developments

The advancements in software tools, computer hardware and telecommunications have shifted the
focus of the banks towards computerisation from data processing to information services.

 Data Warehousing- Database known as data warehouses are designed, wherein data from
heterogeneous sources is stored to generate critical information for decision support systems.
The main characteristics of data stored herein are:
 It is subject oriented. E.g. in banking, it is customer oriented.
 It is integrated and there are no inconsistencies.
 Data stored is non- volatile.

 Data Mining-is a technique to reveal the strategic information hidden in the data
warehouse(s), which provide knowledge of:
 Sound predictions of customer behaviour.
 Highly targeted market focus.
 Maximised operational effectiveness.
 Optimal return on investment.

3. Recent Advancements in IT

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  Core Banking Solutions (CBS) – Computerization of bank branches had started with
installation of simple computers to automate the functioning of branches, especially
at high traffic branches. Core Banking Solutions is the networking of the branches of
a bank, so as to enable the customers to operate their accounts from any of its
branches, regardless of which branch he opened the account with. The networking of
branches under CBS enabled centralized data management and aided in the
implementation of internet and mobile banking.

 Electronic Payment and Settlement System – The most common media of receipts
and payment through banks are negotiable instruments like cheques. These
instruments could be used in place of cash. The interbank cheques could be realized
through clearing house systems. Initially there was a manual system of clearing but
the growing volume of banking transaction emerged into the necessity of automating
the clearing process. Following are the modernisation in clearing process.
 MICR Technology – it uses nine-digit machine – readable code present in the
read band (at the bottom of every cheque leaf) which facilitates bank and
branch wise sorting of cheques for their smooth delivery to the respective
banks on whom they are drawn. This no doubt helped in speeding up the
clearing process, but physical movement of cheques continued under this
partial automation.
 CTS (Cheque Truncation System) – Truncation means stopping the flow of
the physical cheques. The physical instrument is truncated and an electronic
image of the cheque is sent to the drawee branch along with the relevant
information like the MICR fields, date of presentation etc.
 Electronic Clearing Services (ECS) – The ECS was the first version of
“Electronic Payments” in India. It is a mode of electronic funds transfer from
one bank account to another bank account using the mechanism of clearing
house. It is very useful in case of bulk transfers from one account to many
accounts or vice-versa. The beneficiary has to maintain an account with the
one of the bank at ECS Centre.

 Electronic Fund Transfer (EFT) – EFT is an interbank electronic mode of funds

transfer mechanism.
 National Electronic Fund Transfer(NEFT)- is a deferred payment system
which works on half hourly batches where Net settlement of funds take place.
The NEFT uses SFMS for EFT message creation and transmission thereby
considerably enhancing the security in the transfer of funds.
 Real Time Gross Settlement (RTGS) – RTGS system is a funds transfer
mechanism where transfer of money takes place from one bank to another on
a ‘real time’ and on ‘gross basis’. This is the fastest possible money transfer
system through the banking channel. Settlement in ‘real time’ means payment
transaction is not subjected to any waiting period.

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  Development of Distribution Channels – The major and upcoming channels of
distribution in the banking industry, besides branches are ATMs, internet banking,
mobile and telephone banking and card based delivery systems.
 Automated Teller Machine (ATM) – ATMs are perhaps most revolutionary
aspect of virtual banking. The facility to use ATM is provided through plastic
cards with magnetic strip containing information about the customer as well
as the bank. In today’s world ATM are the most useful tool to ensure the
concept of “Any Time Banking” and “Any Where Banking”.
 Internet Banking – Internet banking enables a customer to do banking
transactions through the bank’s website on the internet. It is system of
accessing accounts and general information on bank products and services
through a computer while sitting in its office or home. This is also called
virtual banking.
 Point of sale (POS)- authorized dealers have POS machines, whereby
payment can be made by swiping the debit cards.
 Mobile Banking – Mobile banking facility is an extension of internet
banking. Mobile banking is a service provided by a bank or other financial
institution that allows its customers to conduct financial transactions remotely
using a mobile device. Unlike the related internet banking it uses software,
usually called an App, provided by the financial institution for the purpose.
Mobile banking is usually available on a 24 hours’ basis.

4. Growth through Innovation

In this section we focus on what we believe will be key innovations and look at how they are
likely to impact the Banking sector:
1. Artificial Intelligence
2. Blockchain & Distributed Ledger Technology
3. Robotic Process Automation
4. Cyber Security

4.1 Artificial Intelligence

Artificial Intelligence (AI) is fast evolving as the go-to technology for companies across
the world to personalise experience for individuals. The technology itself is getting better and
smarter day by day, allowing more and newer industries to adopt the AI for various applications.
Banking sector is becoming one of the first adopters of AI. And just like other segments, banks
are exploring and implementing the technology in various ways.The rudimentary applications AI
include bring smarter chat-bots for customer service, personalising services for individuals, and
even placing an AI robot for self-service at banks. Beyond these basic applications, banks can
implement the technology for bringing in more efficiency to their back-office and even reduce
fraud and security risks.

State Bank of India, the largest bank in India, last year conducted “Code for Bank”
hackathon to encourage developers to build solutions leveraging futuristic technologies such as AI
and Blockchain into the banking sector. Private banks like HDFC Bank and ICICI Bank have
already introduced chat-bots for customers service. Some have even gone ahead with placing
robots for customers service. Last year, Canara Bank installed Mitra and Candirobots at some of
its offices.

Some common uses of AI in banks

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 Fraud Detection: Anomaly detection can be used to increase the accuracy of credit card fraud
detection and anti-money laundering.

Customer Support and Helpdesk: Humanoid Chatbot interfaces can be used to increase
efficiency and reduce cost for customer interactions.

Risk Management: Tailored products can be offered to clients by looking at historical data, doing
risk analysis, and eliminating human errors from hand-crafted models.

Security:Suspicious behaviour, logs analysis, and spurious emails can be tracked down to prevent
and possibly predict security breaches.

Digitization and automation in back-office processing: Capturing documents data using OCR
and then using machine learning/AI to generate insights from the text data can greatly cut down
back-office processing times.

Wealth management for masses: Personalized portfolios can be managed by Bot Advisors for
clients by taking into account lifestyle, appetite for risk, expected returns on investment, etc.

ATMs: Image/face recognition using real-time camera images and advanced AI techniques such
as deep learning can be used at ATMs to detect and prevent frauds/crimes.

Not without challenges

A wide implementation of a high-end technology like AI in India is not going to be without

challenges. From the lack of a credible and quality data to India’s diverse language set, experts
believe a number of challenges exist for the Indian banking sector using AI.A key challenge is the
availability of the right data. Data is the lifeblood of AI, and any vulnerability arising from
unverified information is a serious concern for businesses. Imagine for example, the risks that
could arise from KYC compliance AI systems if the data sources are incorrect. Or consider the
efficacy of a fraud detection AI system without the right kind of data. Structured mechanisms for
collecting, validating, standardizing, correlating, archiving and distributing AI relevant data is
crucial.

4.2 Blockchain and Distributed Ledger Technology (DLT)

The genesis of Blockchain technology and associated distributed ledgers is an anonymous

paper that emerged under the pseudonym of Satoshi Nakamoto in 2008. Satoshi had devised a
simple yet elegant solution to keep track of the cryptocurrency Bitcoins in circulation. The
solution leveraged a ‘distributed ledger’ architecture under which all users who participated
as ‘nodes’ in the network had a copy of the entire ledger. This implied that all participants had
complete visibility of all the transactions at all points in time. Any updates to the contents of
the ledger could happen by consensus of participants and any such addition would be in the
form of an encrypted new ‘block’ in an existing ‘chain’ of all such prior blocks. While
Bitcoin as a cryptocurrency has come under the scanner of various regulators, stakeholders
soon realized the power of the underlying Blockchain technology enabled by a system of
Distributed Ledgers.

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 4.3 Robotic Process Automation

RPA is a technology that mimics the actions of a human performing simple rule-based
processes. It interacts at the application/interface layer of any application and performs the
exact steps just like anyone working across multiple applications. “RPA is the natural
evolution of labour arbitrage, it takes the Robot Out of the Human” It is cost effective,
scalable, and easy to implement. This is the biggest difference and advantage RPA has over
traditional automation techniques that relied on backend automation requiring massive IT
transformation, huge investments and complex decision making/ approval cycles given its
susceptibility to security issues.

4.4 Cyber Security

Banking industry in India is rapidly evolving facilitated by mobile and internet
penetration in the country and technological innovations disrupting the established
processes. In the last couple of years, technologies such as Digital Wallets, EMV Chip-
based Cards, and two factor authentication via SMS-based One Time Password (OTP)
have become mainstream in India. These innovations were designed to make payment
transactions convenient and more secure; but are we really secure?
Digital Wallets
In India, digital wallets are increasingly replacing cash for purchases and payments,
especially for mobile phone recharge, DTH service plans recharge, utility bills,
transportation services, and even for online money transfers. Almost all major Banks in
India have launched their own version of a digital wallet with varying degree of
functionalities and are trying to tap into the growing smartphone user market. With
increase in usage of smart phones, there have been growing concerns on cyber frauds
associated with digital wallets.
Digital wallets in India are primarily mobile based and thus have inherent risk such as the
following:
• Phishing Fraud: Fraudsters dupe customers through phone calls/SMS/emails to share
sensitive information such as PINs/Passwords that may result in embezzlement of virtual
money from the wallet.
• Sniffing/ Intrusion/Cyber Attack: Fraudsters hack into the digital wallet platform and
manipulate the wallets to gain benefit. Fraudsters intercept traffic between the digital
wallet platform and consumers to harvest credentials or to manipulate the transactions.
• Fake KYC: Customers can furnish fake Know Your Customer (KYC) documents to
gain access to premium wallets that allow higher transaction value (transfer and cash out).
• Application manipulation by authorized user: Employees having admin/super-user
access can perform unauthorized transactions like pseudo virtual money generation on
select wallets, virtual money value embezzlement from wallets, and fraudulent reversals.
Chip-based Cards

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 As per guidelines issued by Reserve Bank of India, banks have started issuing EMV chip-
based cards, which secure the payment transactions with enhanced functionalities in the
following areas:
• Card authentication
• Cardholder verification
• Transaction authorization
The EMV chip-based cards issued by banks support both chip and magnetic-strip
functions and are thus exposed to the same risks as magnetic strip cards. Magnetic strips
on EMV chip-based cards are vulnerable to cloning or tampering:
The EMV chip-based cards have been successfully exploited and could be prone to
Pre-play attack: A card inserted into a rogue payment terminal can be charged for a
transaction that’s done with a fraudulent card at a terminal somewhere else.
Any-PIN attack: The attacker initiates a transaction using stolen cards, intercepts the PIN
query from POS (point-of-sale) terminals and authenticates it regardless of the PIN
entered, thus allowing the attacker to bypass PIN verification in order to authorize
fraudulent transactions.
SMS-based OTP
SMS-based one-time password (OTP) is an extremely popular and one of the most widely
used form of two factor authentication (2FA) in India. SMS-based OTP is used by banks
to deliver one time passwords quickly and securely using an out of band delivery channel
like simple messaging service (SMS) available on all mobile phones.
OTPs make it difficult for attackers to gain unauthorized access to restricted resources,
like bank accounts or databases with sensitive information. Some of the major cyber risks
associated with SMSbased OTP are as follows:
• SMS messages may be intercepted or re-directed. An attacker may be able to divert the
SMS containing a one-time password (OTP) to their own device, which lets the attacker
hijack any service, including adding a new beneficiary, transferring money, etc
• The pre-registered mobile number may not be associated with any mobile network and
could actually be a VoIP (or other software-based) service. SMS-based OTP is vulnerable
to hijacking, if the individual uses a voice-over-internet protocol (VoIP) service.

5. Challenges with Adoption

Business Challenges

 Meet customer expectations on service and facility offered by the bank.

 Customer retention.
 Managing the spread and sustain the operating profit.
 Retaining the current market share in the industry and the improving the same.
 Competition from other players in the banking industry.

Operational Challenges

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  Frequent challenges in technologies used focusing up grades in hardware and
software, attending to that implementation issues and timely roll out.
 Managing technology, security and business risks.
 System re-engineering to enable. Defined and implemented efficient processes to
be able to reap benefits off technology to its fullest potential.

6. Conclusion
IT has no doubt changes the overall pattern of banking system. The banking today is
redefined and re-engineered with the use of IT and it is sure that the future of banking
will offer more sophisticated services to customers with the continuous product and
process innovations. Thus there is a paradigm shift from seller’s market to buyer’s
market. So banks also change their approach from “Conventional Banking to
Convenience Banking” and “Mass banking to Class Banking”. So banks are now more
concentrate on providing value added services to customers. But IT can be fully useful
only if they enable to meet the challenges in the present environment. In India it can be
successful only if it is properly implemented in rural areas also. There is also need to
maintain privacy and confidentiality of data. Many nations deem privacy to be a subject
of human right and consider it to be the responsibility of those who concerned with
computer data processing for ensuring that the computer use does not revolve to the stage
where different data about people can be collected, integrated and retrieved quickly.
Another important responsibility is to ensure the data is used only for the purpose
intended. For this, there is a need to implement IT and other Cyber laws properly. This
will ensure the developmental role of IT in the banking industry.

If possible, try to bring out how AI would be useful for banks in collating the data
available within the CBS system, drawing information from various branches relating to
same customer, customer’s customers – suppliers / buyers, credit information on them,
one way interfacing { (?) if concept or understanding is correct} with information
available with CIBIL or other rating agency, data base created based on investigation
reports- both external and internal etc

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