1

“A STUDY ON INCREASING ONLINE FRAUDS

IN INDIAN BANKING: A STUDY ON YES BANK”

A PROJECT REPORT

Submitted by
PUSHPAK KUMAR CHAUDHARY
(22MBF10102)

In partial fulfillment of the award of the degree of

MASTER OF BUSINESS ADMINISTRATION

IN
BANKING & FINANCIAL ENGINEERING

Chandigarh University

APRIL 2024
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BONAFIDE CERTIFICATE

Certified that this project report titled “A STUDY OF ACCOUNTING PRINCIPLE

LAID DOWN BY THE INSTITUTE OF CHARTERED ACCOUNTANT OF INDIA(ICAI)”
is the bonafide work of “PUSHPAK KUMAR CHAUDHARY” who carried out the
project work under my/our supervision.

SIGNATURE SIGNATURE

Mr. Gagan Vibhu Prof. Harneet Kaur

HEAD OF THE DEPARTMENT SUPERVISOR

Submitted for the project viva voce examination held on

INTERNAL EXAMINER EXTERNAL EXAMINER

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DECLEARATION

This is to declare that the report “A STUDY ON INCREASING ONLINE FRAUDS IN

INDIAN BANKING: A STUDY ON YES BANK” has been made for partial fulfilment of
the capstone project in semester iv by me at Chandigarh University under the guidance of
Prof. Harneet Ma’am.

NAME: PUSHPAK KUMAR CHAUDHARY

UID: 22MBF10102
SIGNATURE:
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ACKNOWLEDGEMENT

Developing a project is not a single person's effort but it is a combination of a

group of people. So many contributions from different category of people are
required to develop a project successfully with all the functionalities fulfilled.

During the development of this project, right from the initiation stage to the
implementation stage, so many people have helped us in doing these right
things at the right time and in the right way.

We wish to offer our obligated thanks and uncommon gratitude to

PROFESSOR HARNEET MA’AM who disregarding being incredibly occupied
with his obligations, set aside some effort to hear and direct us. His
consolation, direction, and backing from the underlying to the last level
empowered us to finish and build up a comprehension of his undertaking.

We are very thankful to everyone who all supported us, for we have
completed our project report effectively and moreover on time.

We feel grateful to all the persons who helped us in studying the system,
researching, developing and at last preparing the document. Our completion
of the project could not have been accomplished without the support of our
teachers, classmates, and friends who helped us in one way or the other. We
might likewise want to express gratitude towards Chandigarh University for
giving us such a chance to study this field.

We would like to thank our team members who helped us a lot in gathering
different information, collecting data, and guiding us. we also thank my friends
who were there with their suggestions and comments for my project. we
learned a lot of new things by doing this project, so we are very grateful to
them.

THANKING YOU
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TABLE OF CONTENT
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ABSTRACTS
This research paper presents an in-depth examination of the escalating issue of
online fraud within the Indian banking sector, with a focused case study on Yes Bank.
The study outlines the evolution of digital banking in India and its concurrent
vulnerabilities to cyber threats, which have significantly impacted consumer trust and
financial security. By analyzing the Yes Bank crisis, this paper sheds light on how
lapses in cybersecurity measures and governance can lead to substantial financial
losses and erode public confidence in banking institutions. The research navigates
various dimensions of online fraud, including phishing, hacking, and malware
attacks, that have plagued Yes Bank and other financial institutions. It critically
evaluates the regulatory responses the Reserve Bank of India (RBI) spearheaded to
mitigate such risks and safeguard the banking ecosystem. Additionally, the paper
explores innovative technological solutions and best practices for enhancing digital
security and resilience against online fraud. Through this case study of Yes Bank, the
research aims to contribute to the broader discourse on cybersecurity in banking,
offering valuable insights for policymakers, banking professionals, and researchers
to fortify the Indian banking sector against the burgeoning threat of online fraud.

INTRODUCTION
In the rapidly evolving landscape of the Indian banking sector, the integration of
digital technologies has heralded a new era of convenience and efficiency. However,
this transformation has also exposed banks to heightened risks of online fraud,
posing significant challenges to financial stability and consumer trust. The case of
Yes Bank Ltd. (YBL), a prominent new-age private sector bank founded in November
2003 by Mr. Rana Kapoor and the late Mr. Ashok Kapoor, exemplifies the intricate
nexus between banking sector vulnerabilities and the incidence of online fraud.
Ascending to India's fifth-largest private lending bank position, Yes Bank's ambitious
journey was abruptly disrupted by a severe financial crisis, as evidenced by the
Reserve Bank of India's (RBI) intervention on March 5th, 2020. The RBI's drastic
measure to replace the bank's Board of Directors due to a "serious decline in the
financial position" of the bank, coupled with a withdrawal limit imposition and a
catastrophic plunge in share prices from Rs.404 to Rs.5.65, underscores the
profound impact of governance lapses and operational risks on banking stability.

This introduction sets the stage for an in-depth study into the increasing online fraud
within the Indian banking system, with a focused examination of the Yes Bank crisis
as a pivotal case study. It aims to unravel the multifaceted causes leading to Yes
Bank's predicament, including potential vulnerabilities to online frauds, and to
scrutinize the role of the Central Bank of India (RBI) in orchestrating a recovery. By
dissecting this critical episode, the paper seeks to contribute to a broader
understanding of the dynamics between digital banking advancements and the
escalation of cybersecurity threats, offering insights into effective strategies for
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preventing online fraud and ensuring the resilience of the banking sector in the face
of digital challenges.

OBJECTIVES OF STUDY
The study on increasing online fraud in Indian banking, with a focus on Yes Bank,
aims to achieve the following objectives:

1. To Identify and Analyse the Nature of Online Frauds: This objective

involves cataloging the types of online frauds prevalent in the Indian banking
sector, such as phishing, identity theft, unauthorized transactions, and
malware attacks. By understanding the nature of these frauds, the study
seeks to provide a comprehensive overview of the cybersecurity threats
facing banks and their customers.

2. To Examine the Impact of Online Frauds on Yes Bank: Focusing on Yes

Bank as a case study, this objective aims to assess the extent to which online
frauds have affected the bank’s operations, financial health, and reputation.
This includes evaluating the financial losses incurred due to fraud, the impact
on customer trust, and the resultant regulatory actions.

3. To Evaluate the Role of Regulatory Bodies in Mitigating Online Fraud:

This objective seeks to scrutinize the measures taken by regulatory bodies,
particularly the Reserve Bank of India (RBI), in addressing online fraud within
the banking sector. It will explore the effectiveness of regulatory frameworks,
guidelines, and interventions in preventing and responding to cyber threats.

4. To Assess the Cybersecurity Measures Implemented by Yes Bank: The

study aims to analyse the cybersecurity strategies employed by Yes Bank to
combat online fraud. This includes evaluating the bank’s investment in
technology, adoption of best practices in cyber risk management, and the
implementation of customer awareness programs.

5. To Identify Gaps and Challenges in Combating Online Frauds: By

analyzing the Yes Bank case and the broader context of the Indian banking
sector, this objective intends to highlight the challenges and limitations faced
by banks in preventing online fraud. This includes technological, regulatory,
and operational hurdles that may impede effective fraud management.
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6. To Recommend Strategies for Enhancing Cybersecurity and Fraud

Prevention: Building on the insights gained, the study aims to propose
actionable strategies for banks and regulatory authorities to strengthen
cybersecurity measures, enhance fraud detection capabilities, and improve
customer education on cyber threats. This will involve recommending
technological innovations, policy reforms, and collaboration initiatives to
safeguard against online fraud.

NEED FOR STUDY

The Yes Bank was established in 2003 as a mid-size private bank, is a “full-service
commercial bank” and has grown to become the fourth largest private bank in India as well
as the fifth largest private lending bank in India. It is the only greenfield bank license winner
in the last two decades from the Reserve Bank of India (Established with a new setup
i.e. acquired the commercial bank license without any prior exposure to financial business).
During the year 2019, the Bank declared a huge loss with high growth of NPAs and also got
high-risk credit ratings from different credit agencies. In this way, it was pulling into a greater
crisis by March 2020 and it also recovered from such crisis in April 2020. Studying these
aspects can give us better insights into the functioning of the bank and can potentially help
other banks to pick a quote from this thereby keeping their crisis under control.

RESEARCH METHODOLOGY

Our investigation into the crisis involved an exploratory research approach, where we
gathered secondary data spanning from 2015 to 2019, specifically focusing on quarterly and
annual reports from Yes Bank. Additionally, our data collection extended to the bank's
website, resources from the Reserve Bank of India (RBI), BSE India.com, and various print
and digital media sources. Our aim was to delve into the root causes of the crisis, examine
the steps taken by the central bank to mitigate the situation, and assess the overall impact of
the crisis on a private banking institution.

Asset Quality & Risk Management Practices - An Analysis on Yes Bank’ (DR.
ARUNA POLISETTY, 2019)
In this study, the author has been tried to understand the risk management attributes by
studying how it is practiced at the bank. Asset quality numbers are being collected over
years and analysis is done to determine how they are maintained. The Government of India
and the RBI have taken up the task of cleaning up the bank balance sheets on a priority
basis. Several approaches have been used in dealing with loans and the IBC and AMC
concepts are major steps towards this. This study perceives that regular monitoring of risk
management, asset quality (Gross NPA & Net NPA status, NPA Ratio, PCR, Concentration of
NPAs and Divergence) and knowledge banking, size of bank and other attributes are
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actually helping the bank to be with manageable NPA figures. Volatility in asset quality and
larger divergences are a cause of concern level of non-performing assets (NPAs) best and
negatively impacted the price.

Yes Bank Performance (Devansh S. Babaria,2019),

In this paper, with the help of various mathematical tools, The Author has been analysed the
performance of Yes Bank share price since December, 2019. The mathematical tools are
also helping in forecasting the future price of Yes Bank. The forecast is based on the
previous prices and did not consider any external factors. A Trend Line will also be provided
for better understanding of the research. They have concluded the following;

 To conclude, this research paper is based on how the yes bank shares will perform in
the near future (based on their performance since December).
 Shares of Yes Bank hit its 52-Week low on Friday 6th March, 2020 due to external
factor of government capping the withdrawal limit on the lender to Rs.50000.
 Around noon even the BSE SENSEX fell by 3%.
 A consortium of lenders, led by the State Bank of India, will acquire a controlling
stake in Yes Bank.

A critical review of non-performing asset in the Indian banking industry,”

(Varuna Agarwala, 2019)
The level of non-performing assets (NPA) best indicates the soundness of the banking
sector of the country. The objectives of this study are an attempt to look into the contribution
of the various banks individually to the NPA in the banking industry by looking into its growth
pattern during the period 2010-2017. Further, the study is made to look into the effect of
various groups of banks, mainly, State Bank of India (SBI) and its associates, nationalized
banks and private sector banks on the banking industry in this regard.

Capital Structure Analysis and Financials Analysis of Yes Bank in India (By
Hardik Brahmbhatt,2018)
This research aims to compare the capital structure and financial analysis of selected banks
through some measurements. The annual financial statements of the commercial banks
were used for this study which covers a period of two years from 2015 to 2017 for debt
equity and overall financial analysis. The study assesses the capital structure of the banking
measured by total debt to equity ratio (DER), f-test have been used to show the capital
structure of banks and its performance. However, this study concludes that there is no
significant difference in debt equity ratio amongst the years and future prospects are much
profitable and growth oriented as per financials. The investors are tending to get the profit if
invested during this phase of year. Coming years for the yes bank are the years of achieving
of the target and mission which is set for the year 2020.
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IMPORTANT CAUSES OF YES BANK CRISIS

There is no single cause that led to the failure of Yes Bank. In rare cases of RBI taking the
place of the board of a commercial bank in recent history, the Banking regulator (RBI) has
moved in to take charge of new age private sector bank, i.e. Yes Bank and interestingly, the
bank was established by top-graded professionals. Still, the RBI found such a style of
discrepancies within the banking operations of Yes Bank, through which the bank was
visiting declared insolvent, and with the assistance of RBI, the bank got a replacement of life.
So, we’ve to debate the causes, “How did Yes Bank constitute the crisis?”, are as follows:

1. High Credit-Deposit Ratio

Credit-Deposit Ratio: This ratio conveys what proportion of every rupee of deposit goes
towards credit markets. Better growth in the credit deposit ratio suggests credit growth is
rising quickly, which could lead to excessive risks and leveraging on the borrower’s side.
Just in the case of banks, it could imply that there’ll be an increase in NPAs when the
economic cycle reverses. This ratio is a useful measure to know the systemic risks in the
economy.

Credit -Deposit Ratio (CDR) =

(Total bank Credit)/Aggregate Deposits (Demand + Time Deposits)

Credit -Deposit Ratio of YES Bank (Rs. In Crore)

Year Ended on Mar’ 2019 Mar’2018 Mar’ 2017 Mar’2016 Mar’2015

Total Bank Credit 241,499.60 203,533.86 132,262.68 98,209.93 75,549.82

Aggregate Deposit 227,610.18 200,738.15 142,873.86 111,719.53 91,175.85

(Demand + Time Deposit)

Credit Deposit Ratio (%) 106.10 101.39 92.57 87.91 82.86

(The figures are extracted from the Annual Report of YES Bank)

Analysis:
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Typically, the perfect Credit- deposit ratio is 80% to 90%. A Credit- deposit ratio of one
hundred pc means a bank loaned one rupee to customers for each rupee received in
deposits it received and it results a high liquidity crunch. During this case, the said ratio has
been reported 92.57% within the year 2017 and it absolutely was exceeding 100% within the
year 2018 and 2019. That happens because of the loan mess, customers withdrew large
amounts, leading to the credit-deposit ratio of Yes Bank crossing 100% (it lent over what it
received) in FY18 and 19, which was creating an alarming situation, but the Bank
Management have ignored that situation and pulled the bank into the Crisis.

2. It went on a loaning spree with advances was increasing by 334%

between Financial Year 2014 and 2019,
Between 2004, when it had been launched, and 2015, Yes Bank was one in every of the
buzziest banks. In 2015, UBS, a global financial services company, raised the primary red
flag about its asset quality. The UBS report stated that Yes Bank had loaned over its net
worth to companies that were unlikely to pay back. However, Yes Bank continued to increase
loans to many big firms and have become the fifth-largest private sector lender. Within the
last five years, Yes Bank went on a loaning spree. Its total advances rose by 334% between
FY14 and FY19, the very best rise among comparable banks within the period.

44 Corporates from 10 big corporate groups account for Rs 34,000-crore Yes

Bank bad loans
At the time when Mr. Rana Kapoor, the former MD and CEO of Yes Bank Ltd and his family
members were under investigation on charges of professed money laundering and grant of
suspicious loans extended by the Bank various groups within the country, Such as:

 At least nine companies of the Reliance Anil Ambani Group considered for NPAs
worth Rs 12,800 crore.

 At the minimum 16 companies belonging to Subhash Chandra’s Essel Group made

up Rs 8,400 crore worth of bad loans of the Yes Bank.

 Further, Dewan Housing Finance Corporation and Belief Realtors Private Ltd of the
DHFL Group have taken loans amounting to Rs 4,735 crore

 while Yes Bank had exposure of over Rs 2,500 crore to IL&FS that turned bad.

 Yes Bank has additionally learned to have loaned Rs 1,100 crore to Jet Airways.

 Kerkar Group whose two companies Cox & Kings and Go Travels have taken loans
of around Rs 1,000 crore;

 McLeod Russel of B M Khaitan Group (Rs 373 crore);

 two projects of Omkar Realtors and Developers (Rs 2,710 crore);

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 Radius Developers (Rs 1,200 crore) and

 C G Power of Thapar Group (Rs 500 crore).

Analysis:
In step with the estimates, the maximum amount as 25% of all Yes Bank loans were
extended to Non-Banking Financial Companies, land firms, and also the construction sector.
These were the three sectors of the Indian economy that have struggled the foremost over
the past few years. The India’s fifth largest private lending Bank was overexposed to those
virulent assets. What made it more vulnerable to bankruptcy was its inability to honestly
recognize its Non-Performing Assets. On the three different occasions, the last being in
November 2019, the RBI pulled it up for divergence of NPAs by under reporting — and
adequately provide for such bad loans.

3. High Gross NPA Ratio& Divergence of Gross NPA in F.Y 2019

Gross NPA Ratio is a useful gizmo, which measures the standards of Bad Loans and also
the high Gross NPA ratio shows, performance of the bank in Assets management. This ratio
is that the relationship between Gross NPA and also the Gross Advance amount. Gross NPA
is that the aggregate of all loan assets that are classified as NPA as per RBI guidelines.
When the NPA occurs, it’s not just an interest income loss the bank, but a principal loss
furthermore. That means, if a bank has lent Rs.100 Crores to an organization with an
outstanding loan amount of 80 Crores, then the bank would lose these 80 Crores together
with the longer term interest payments further more when the corporate doesn’t repay back.

Gross NPA Ratio= (Gross NPA/Gross Advance) x100

Gross NPA Ratio of YES Bank (Rs. In Crore)

Year Ended on Mar’ 2019 Mar’2018 Mar’ 2017 Mar’2016 Mar’2015

Gross NPA (a) 7,882.56 2,626.80 2,018.56 748.98 313.4

Gross NPA (%) (b) 3 1 2 1 0

Gross Advances (c) 241,499.60 203,533.86 132,262.68 98,209.93 75,549.82

Gross NPA Ratio (%) (d) 3.3 1.3 1.5 0.8 0.4

(The figures are extracted from the Annual Report of YES Bank)
Analysis:
From the above table we have found that, the Gross NPA ratio was below 1% up to March
2016 and exceeds 1% in the financial year 2016-17 and 2017-18. Unfortunately, the bank
was reported a Gross NPA of Rs.7882.56 in the F.Y 2018- 19 with an increasing trend of 3%
and such trend was still continuing to the F.Y. 2019-20. The bank's gross NPAs stood at Rs
40,709.2 crore in Q3 FY20 up from Rs 5,158.6 crore at Q3 FY19 and as of the September
2019 ended quarter, Yes Bank had a gross NPA ratio of 7.39 percent.
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Divergence:
In FY19, per the private lender’s exchange notification, the RBI assessed the extent of gross
non-performing assets at Rs 11,159 crore. The bank had disclosed gross NPAs of Rs 7,882
crore, implying a divergence of Rs 3,277 crore or 41 percent. The divergence in reporting of
net NPAs for the year stood at Rs 2,299 crore or 51 percent of the net NPA amount reported
by the bank, the notification said. As per the RBI’s rules, banks are required to disclose any
divergence of quite 15 percent. The market regulator recently specified that this divergence
should be disclosed to investors within daily of the receipt of RBI’s report.

4. High Net NPA Ratio

The Net NPA to Advances (Loans given) ratio could be a useful metric that speaks about
overall quality of a bank’s loan book. The Net NPA is calculated by subtracting cumulative
balance of provisions outstanding at the end of a period from Gross NPAs. Generally, the
higher Net NPA Ratio shows increasing bad quality of loans.
NPA Ratio = Net Non-Performing Assets / Loans given (Advances) x 100

Year Ended on Mar’ 2019 Mar’2018 Mar’ 2017 Mar’2016 Mar’2015

Gross NPA (a) 7,882.56 2,626.80 2,018.56 748.98 313.4

Cumulative Provision (b) 3,397.71 1,314.05 946.29 464.51 313.40

Net NPA (c) [(a) –(b)] 4,484.85 1,312.75 1,072.27 284.47 0

Net NPA (%) (d) 2 1 1 0 0

Gross Advances (e) 241,499.60 203,533.86 132,262.68 98,209.93 75,549.82

Deposit Ratio of YES Bank (Rs. In Crore)

Net Advances (f)= [e –f) 238,101.89 202,219.81 131,316.39 97,745.42 75,236.42

Net NPA To Advances (%) 1.88 0.65 0.82 0.29 0.00

Analysis:
The above Table presents the Net NPA Ratio, It can be noticed that Net NPA ratio has
resulted within the first Four years of study i.e. from 2014-15 to 2017-18 is below 1%. But in
the year 2018-19, it has been reported 1.88%, which is double then the previous years. The
bank had didn’t make sufficient provisions against NPA in that year. Many borrowers started
defaulting. The bank’s gross non- performing asset percentage, that’s the proportion of loans
overdue for over 90 days, zoomed to 7.39% as of September 2019, the highest among
comparable banks. As per the info collected, the bank's gross NPAs stood at Rs 40,709.2
crore in Q3 FY20 up from Rs 5,158.6 crore at Q3 FY19, the YES Bank said in an
exceedingly regulatory filing to BSE. The net NPAs of the bank stood at Rs 11,114.72 in Q3
FY20, up from Rs 2,876.3 crore in Q3 FY19 and as of September 2019 ended quarter, Yes
Bank had a gross NPA ratio of 7.39 percent and a net NPA ratio of 4.35 percent.
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5. Loan spree and high NPA meant poor profitability, gauged by Yes Bank’s
sinking Return on Assets:
The loan spree & high NPA meant poor profitability, gauged by Yes Bank’s sinking
Return on Assets (ROA). Banks with higher NPAs effectively have fewer funds to
advance due to the upper provisioning that they have to provide i.e. lesser funds on
which they will potentially earn interest income. Other negative impacts of high NPAs
are that the upper NPAs will increase the quantity of provisioning thereby impacting
the profitability of the banks. Thus Banks may face difficulty in keeping up the capital
adequacy ratio. There’ll be increased pressure on Net Interest Margin (NIM) and
compulsiveness to cut back high NPAs.
(ROA = Net Profit / Total Assets)
Return on Asset (ROA) (%) (Rs. In Crore)
Year Ended on Mar’ 2019 Mar’2018 Mar’ 2017 Mar’2016 Mar’2015
Net Profit/ (Loss) 1,720.27 4,224.56 3,330.10 2,539.45 2,005.36
Gross NPA 7,882.56 2,626.80 2,018.56 748.98 313.4

Net NPA 4,484.85 1,312.75 1,072.27 284.47 0

Total Assets 380,826.17 312,445.60 215,059.92 165,263.41 136,170.41

Return on Assets (%) 0.45 1.35 1.54 1.53 1.47

(The figures are extracted from the Annual Report of YES Bank)
Analysis:
As an example, Yes Bank's ROA in FY19 was 0.45, in FY18 it absolutely was 1.35, Thus the
y-o-y change of -0.90 in FY19 is shown within the above table, that happens, because of the
increment in NPA within the year 2019 i.e. 100% Increase in Gross NPA and more 100%
increase in Net NPA. As a result, the Bank has been reported a Profit of Rs. 1720.27 Crore
within the year 2018-19, which was decreased by Rs.2504.29 Crore from the year 2017-18
and also the bank has suffered a loss of Rs 18,564 crore in December quarter in FY20
because of provisions and contingencies of Rs 24,567 crore. This is often its worst quarterly
loss in history. It absolutely was showing a nasty signal for the bank and pulled towards the
greater crisis.

6. Low provisions & Divergence in PCR (Provisioning Coverage Ratio)

Provisioning is an RBI prudential regulation norm in which banks have to ‘provision’ (set
aside) funds to a prescribed percentage of their bad assets. The percentage of bad asset
that are provided for is called Provisioning Coverage Ratio (PCR). This is a good tool to
determine the extent to which the bank has provided against the troubled part of its loan
portfolio. The PCR helps to determine relation between ‘Current provision balances’ to the
‘Gross NPA’. PCR differs according to the asset quality. When an asset cannot be recovered,
and is lost forever, it will be categorized as a ‘loss assets and hence banks have to set aside
100% of such loss assets out of its profit and if sufficient profits are not there, it eats up the
capital impacting capital structure and thereby leading further reparations.
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Provisioning Coverage Ratio (PCR) = Cumulative provisions / Gross NPA

Year Ended on Mar’ 2019 Mar’2018 Mar’ 2017 Mar’2016 Mar’2015

Cumulative Provision (b) 3,397.71 1,314.05 946.29 464.51 313.40
Gross NPA 7,882.56 2,626.80 2,018.56 748.98 313.4
PCR (%) 43.10 50.02 46.88 62.02 100.00
Provisioning Coverage Ratio (PCR) (%) (Rs. In Crore)
(The figures are extracted from the Annual Report of YES Bank)

Analysis:
While bad loans assembled, Yes Bank didn’t make enough provisions in its profits. Its
Provision Coverage Ratio within financial year 2019 was 43.1%, the bottom among
comparable banks. RBI says a PCR of >70% is desirable, we wish to imply the above
situation that, the YES Bank was maintaining the Low PCR %, is below the quality since
2016. The bank made provisions of Rs 1,336 crore for the 3rd quarter of the F.y.2019-20.
The total outstanding advance of the said bank stood at Rs 2.24 lakh crore within the quarter
under review, below the 6.3 percent year-on-year. For the F.Y 2018-19, Its provisions were at
the bottom among comparable banks, which is expressed as under;

A Comparison Chart of Provision Coverage Ratio

Name of the Bank PCR (%)

Yes Bank 43.10

ICICI 70.60

HDFC 71.36

Axis Bank 77.00

Kotak 71.90

SBI 78.73

Divergence:
On 12th November’2020 (Tuesday) the bank reported a lower net profit of Rs 1,084.03 crore
for 2018-19 compared to Rs 1,720.28 crore announced earlier due to higher NPA evaluated
by the Reserve Bank of India. The divergence in net non-performing assets (NPAs) of the
YES Bank --the difference in bad loans reported by the said bank and therefore the
assessment done by the RBI stood at Rs 2,299 crore for the financial year 2018-19, Yes
Bank said in an exceedingly regulatory filing. The private sector financer had reported a net
profit of Rs 1,720.28 gr., in 2018- 19.
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According to a report, the adjusted (notional) net profit after tax of the said bank for the
financial year ended on 31 ^ pi March 2019 after taking into consideration the divergence in
provisioning was at Rs 1,084.03 crore and also the variance in provisioning was
at Rs 978 crore.

7. Redemption Pressure
The YES Bank was facing a regular outflow of liquidity. It means that the Depositors
withdrew huge amounts, leading to the credit-deposit ratio crossing 100% in the FY 2018-19.
That means it lent more than it received from the depositors More than *20,000 crore of
deposits was withdrawn by the depositors from the bank during the six months due to fear of
bankruptcy. So, the bank was facing a liquidity problem and pulled it into a crisis within the
third quarter of 2019, the most popular Tirupati temple trust withdrew its deposits from

Yes Bank worth Rs 1,300 crore. The main points are shown in the following figure,

8. Deteriorating Financial Position

The financial position of Yes Bank has undergone a gradual decline over a previous couple
of years due to its inability to boost the capital to manage prospective loan losses,
downgrade in bank revenues, triggering citation of bond pledges by investors, and
withdrawal of deposits by the depositors. The bank was making losses and inadequate
profits within the last four quarters of the financial year 2019-20, which result in an unhealthy
condition for the bank.

9. Governance Issues
In recent years the YES Bank has also experienced serious governance issues and
practices, which have led to a gradual decline in financial position. Take, as an example, the
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bank under- reported Non-Performing Assets to the tune of Rs 3,277 crore in the year 2018-
19. That was prompted Reserve Bank of India to dispatch Mr. R Gandhi, a former Deputy
Governor, to the Board of Directors of the bank.

10. The bank's stock price fell steadily in a couple of years

During the month of August 2018, the YES Bank stock was trading in the exchange at
around Rs. 300 per share and therefore the then MD & CEO Mr. Rana Kapoor had vowed
never to sell his shares and was willing to transfer them to his daughter. A year and a half I

later, the case was completely different, and therefore the Stock price of Yes Bank fell
gradually, because of the forced sale of 1 (crore equity shares on the rear of the invocation
of pledged shares by a large stakeholder during the Ex 2018-18. Kapoor and his group
entities had sold 2.16 percent of their stake within the bank amounting to Rs 510 crore
through the open market transaction on September 26-27 2019.

After this, Kapoor and his group entities' stake in the Yes Bank had been reduced to 4.72
percent and gradually it became worse because the investors were losing their confidence in
the management of Yes Ban and went for the redemption of their capital. This can be the
foremost important cause for the bank's crisis.

11. Less engagement of Investors to invest their capital into the bank
In the past couple of years, the engagement of the investors was very low in infusing the
capital into the Yes Bank. The investors kept on discussing with some senior officials of the
Reserve Bank of India, but because of various reasons, they didn’t put any capital into the
said bank. The reason behind not putting the capital was that the investors were not serious
enough to place their capital into the bank.
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12. Unsound and erroneous Assurance

Yes Bank has given false assurance by announcing that the management of the bank was in
regular contact with the investors who will invest and put the type of funds that the banks
require to survive. But actually, there have been no such proposals. Adding thereto, the
Reserve Bank of India also said that, they were in frequent contact with the management of
the Yes Bank to seek out ways to create liquidity and a sound financial position,
unfortunately, there was an unsound and erroneous assurance by both Yes Bank and the
regulator.

IMPACT OF YES BANK CRISIS

The renowned private banking player Yes Bank, which once had a commanding position
within the country saw its NPAs growing rapidly with the bank’s primary lenders was
undergoing steep valuation declines or started undergoing an investigation itself. The
resultant cash crisis was accountable for the trickle-down effect that not only affected the
direct account holders but had an effect on various other fronts still. These are discussed as
under;

1. Impact of Crisis on Customers:

The crisis in Yes Bank and its impact on the customer’s interest. During the great crisis of
the Yes Bank, Amount deducted towards loan and premium payments higher than Rs.
50,000 was impacted. There was a greater impact on customers whose salary account is
linked to Yes Bank. So many customers have visited multiple ATMs but none of them
dispensed money Some also tried using digital banking but were unable to transfer funds to
their other bank accounts. The possibility of renewing or granting loans and making
investments by the bank was reduced at that time.

2. Impact of Crisis on Investors:

Almost thirty-two open-ended mutual fund schemes are exposed to Yes Bank debt with a
whole exposure of ₹2,848 crores. Several of those bonds are AT 1 (Additional Tier
1) bonds that are designed to soak up losses when the capital of the bank falls below a
specific level. Throughout a note to distributors, Nippon India Mutual Fund, which has the
biggest exposure to Yes Bank, same that it’s written off its entire exposure to the bank.
Inflows into Nippon schemes with Yes Bank exposure have additionally been restricted to ₹2
lakh per capitalist.
 19

3. Impact of Crisis on Insurance Companies:

The first and foremost result of the Yes Bank crisis was on Life Insurance Corporation of
India & other Insurance firms. The insurers have sometimes seen a high quantity of revenue
assortment coming back within March every year. The premiums sometimes flow in currently
as online payments. Because of the automation of processes, the bank for ECS (through
NACH) debit and cheque clearances for LICI was Yes Bank Ltd, which was affecting the
collections for the corporation for March for the 4th Quarter of the F.Y.19-20. Just like LICI,
other insurance companies have also suffered a huge loss during that time.

4. Impact of Crisis on the economy:

The crisis at Yes Bank was a crippling impact on the Indian economy, too. Some situations
that have been to play out are:

a) Digital payment mistrust:

Yes Bank had one of the foremost widespread digital payment networks in India, powering
transactions on sites like PhonePe, 5Paisa, and Flipkart. The sudden curbs on its
operations, and limited functionality of its cards, resulted in merchants’ money getting frozen.

b) A greater impact on the mutual fund industry:

The debt funds of different asset management companies (AMCs) took a severe beating as
many of them had exposure to the bonds and non-convertible debentures (NCDs) issued by
Yes Bank Ltd. Yes Bank is also a constituent of the Nifty 50 index, and hence it was present
in many index funds, whose values have deteriorated.

c) Increased supervisory role for RBI:

The Reserve Bank of India has been at the tiller of the Yes Bank rescue act by taking the
place of its board of directors and convincing the State Bank of India to fund the bailout.
However, a vital question remains in our mind, if the RBI was alert to the precarious financial
situation, why did it wait till it reached some extent of no return? Regardless of the outcome
of this discussion is, the accord around increased regulatory powers for the regulator (RBI) is
making firm ground.

d) Loss of reputation for India:

The Yes Bank crisis comes within the backdrop of a prevailing atmosphere of economic
stress inside the telecom and also airline sectors, prompting reconsideration by global
capitalists on the efficacy of sector-related policies. With the intercalary strain of economic
turmoil caused by Yes Bank Ltd, global fund houses are guaranteed to seek safer havens or
approach any more investments into the Indian economy with caution.

POINTS ON REVIVAL OF YES BANK FROM CRISIS

The crisis in Yes Bank Ltd and its impact on customers all over the country has yet again
raised the questions on accountability of banks. The need of the hour is taking effective
 20

remedial steps to ensure good health and credibility of the Indian banking system and
restore the trust of depositors and investors in the Country. The rapidly deteriorating financial
position of the Yes Bank Ltd. relating to liquidity, capital and other critical parameters, and
the absence of any credible plan for infusion of capital has necessitated Reserve Bank of
India to take immediate action in public interest and particularly in the interest of the
depositors. The following action has been taken by the RBI for the restoration of Yes Bank.

A. Control Over the Management:

In terms of section 45 of the Banking Regulation Act, 1949 (10 of 1949), during the period of
moratorium the Regulator of the Banking Sector in India ( i.e. RBI) may, if so desired in
public interest or in the interest of the depositors or to secure the management of the India’s
5th largest private lending bank, frame a scheme of reconstruction or amalgamation of the
concerned banking Institution. Reserve Bank of India has condemned the affairs of the Yes
Bank Ltd. and put restrictions on its operations. On the separate hand, Enforcement
Directorate registered a Money Laundering Case against Rana Kapoor, the founding Father
of the 5thYes Bank LTD.

B. The Flow of Liquidity:

The bank was facing a regular outflow of liquidity. It means that the Customers withdrew
large amounts, resulting in the credit-deposit ratio crossing 100% in 2018-19. That is, it lent
more than it received. Deposits worth over ₹20,000 crores were withdrawn from the bank
during the six months. On the 5th day of March 2020, the Central Bank had imposed a
moratorium on the 5th largest private lender India and restricted the withdrawals to Rs
50,000 per depositor till 3rd April’2020, in view of its poor financial health due to bad loans.

C. Reconstruction Scheme:
In the month of March’2020, The Reserve Bank of India or RBI published a draft scheme of
revival Yes Bank, the public lender that has been put under the control of the Reserve Bank
of India. India's biggest nationalized bank, SBI has expressed its interest to infuse capital
into Yes Bank Ltd. and participate in its reconstruction scheme. Such Draft Reconstruction
Scheme was implemented within April 2020 and also the Scheme may be called ‘Yes Bank
Ltd. Reconstruction Scheme, 2020’. The Scheme covers the subsequent Points.

Here are important things to know about RBI's ‘Yes Bank reconstruction scheme’:
i. For Deposits:
According to the Yes Bank Reconstruction Scheme, all deposits with Yes Bank Ltd will be
continued within the same manner and with identical terms and conditions, completely
unaffected by the new scheme.

ii. The Share capital of the Reconstructed Bank:

The Authorized Share capital of the Reconstructed Yes Bank shall stand altered to Rs. 5,000
crore and several equity shares will stand altered to Rs. 2400 crore of Rs. 2 each. The
investor bank (i.e. State Bank of India) shall agree to invest within the equity shares of
reconstructed Yes Bank to the extent that post-infusion holds 49% shareholding within the
 21

reconstructed Yes Bank Ltd. at a price not less than Rs. 10 (face value of Rs. 2) and
premium of Rs.8.
During this reconstruction, seven investors infused Rs. 12000 crores in Yes Bank. These
investors are the State Bank of India, ICICI Bank Ltd, HDFC Bank Ltd, Axis Bank Ltd, Kotak
Mahindra Bank, Rakesh Jhunjhunwala, Radhakishan Damani, and Azim Premji Trust. Out of
which the SBI has invested Rs 7,250 crore in the sufferer bank to overcome the financial
crisis and remains a 49% stake capital owner of Yes Bank. Further, ICICI Bank Ltd and
mortgage lender HDFC have been invested in Rs. 1,000 crores each. Axis Bank has also
invested Rs.600 crores, while Kotak Mahindra Bank was putting into Rs. 500 crores.
Bandhan Bank and Federal Bank have been infused Rs. 300 crore each, while IDFC First
Bank was putting into Rs.250 crore.

iii. Three-Year Lock-In-Period for Investors: The investor bank shall not reduce
its holding below 26% before the completion of three years from the date of infusion
of the capital into Yes Bank.
iv. Constitution of the Board of Directors:
From the appointed date, the office of the administrator of Yes Bank, appointed by the
Reserve Bank, shall stand vacated, and a new board will be constituted:
(1) CEO &Managing Director
(2) Non-Executive Chairman
(3) Non-Executive Director
(4) Non-Executive Director
Accordingly, the Bank has constituted its Board of Directors and Mr. Prasant Kumar is
working as CEO & Managing Director.

v. Nominee Directors:
As per the Conditions of ‘Yes Bank’s Reconstruction Scheme, the investor bank shall have to
appoint two nominee directors on the board of directors of the reconstructed Yes Bank Ltd.

vi. Additional Directors:

The Central Bank (RBI) may appoint additional directors on the board of directors of the Yes
Bank Ltd. It will be open to the board of directors of Yes Bank Ltd to appoint more directors
into the board.

vii. Continuation of services of the existing Staff members:

All the prevailing employees of reconstructed Yes Bank Ltd. shall continue in its service with
identical remuneration and on the identical terms and conditions of service (T&C), which
includes the terms of determination of service and retirement, as applied to such employees
immediately before the appointed date, a minimum for one year. The reconstruction scheme
of Yes Bank has given the freedom to the Board of Directors of reconstructed Yes Bank Ltd,
 22

to discontinue the services of the key managerial personnel (KMPs) at any point in time after
following the due proceeding.

viii. Freedom to BOD for free exit:

The board of directors of reconstructed Yes Bank Ltd will, however, have the liberty to
discontinue the services of the 'Key Managerial Personnel' (KMPs) at any point in time after
complying with certain legal proceedings. But the members of the Board so appointed shall
continue in office for one year, or until an alternate Board is constituted by Yes Bank Ltd.
through the normal procedure laid down in its Memorandum and Articles of Association,
whichever is later.

ix. No change within the offices or branch network of the Reconstructed

Yes bank:
The offices and branches of reconstructed Yes Bank Ltd shall continue to function in the
same manner and at the same places they were functioning before the effective date of
reconstruction, without in any way being affected by the reconstruction scheme framed by
RBI.

x. Freedom to open new offices/branches:

The RBI's new reconstruction scheme has given the power to reconstruct Yes Bank to open
new offices and branches or close down existing offices or branches, by the extant policy of
the central bank.

TEN LESSONS FROM YES BANK TO FORESTALL BANK FAILURES

The failure of India's 5th Largest Private lender, Yes Bank Ltd. comes on the heels of crises
at different non-banking finance companies, IL&FS, and DHFL, and frauds in banks like
PMC Bank and PNB. It involved serious lapses in any respect levels, including at the Board
of Directors, auditors, and regulators. Now the question comes, what should be done to
forestall or reduce such type of instances in the future?
The subsequent ten points suggest a way to prevent the failure/ crisis of commercial banks
in the future:
a. Strict Supervision:
The banks are the backbone of an economy. Once the banks become bankrupt, it impacts
both the economy and the general public. So, Supervision is required to be strict for the
banks. RBI gave an enormous rope to Yes Bank management despite finding loopholes
within the management.
 23

b. Short tenure for CEO:

Bank chief executive officers shouldn’t be allowed long tenures as seen within the case of
several CEOs who have faced issues with the central bank (RBI). The long tenure of CEO
affects performance through its impact on two groups of stakeholders— employees and
customers—and has different effects on each, which ends up a serious governance issue.
The Central bank (RBI) caps the age limit for banks CEO at 70. But under the provisions of
Companies Act 2013, banks that are also registered companies can have chief executives
who are over 70 years old by passing a special resolution. Their tenure should be short &
fixed for a specific period of time and thereafter they ought to be retired from their position,
So, that RBI might have to rethink the age limit and therefore the tenure for bank CEO.
c. The Separation between ownership and control of a Bank:
The separation of ownership and control permits a hierarchical higher cognitive process
which, for a few types of decisions, is superior to the market. The separation of ownership
and control creates costs because of adverse selection and financial losses. These costs are
potentially mitigated bya variety of mechanisms including business failure, the market for
corporate control, the enforcement of fiduciary duties, corporate governance oversight,
managerial financial incentives, and institutional shareholder activism. For instance, Indian
public sector banks are maintaining ownership and Control separately, but in the case of
private sector banks, the control is depending on the shareholdings instead of the
managerial ability. That’s way, the Indian private sector banks are facing the governance
issue. So, there must be a clear separation of ownership and control of a bank. The Reserve
Bank of India has moved in this direction, by asking banks to cap promoter shareholdings.
d. High stakes for safety and stability:
Nowadays It is widely assumed that banks and the banking system have a special status,
mainly because they are regarded as more vulnerable to instability than other firms or
sectors. That happens due to the growth of NPA and mismanagement in the private sector
and it creates a question of Safety & Stability. To overcome this issue, all the stakeholders,
including the bank’s Board of directors, auditors, and the regulator have to maintain constant
vigil, given the high stakes for safety and stability.
e. Continuously monitoring by the Regulator:
As, the banks are the main operators in the financial system, through which the general
public money is mobilized to the industries. If any bank is going to be bankrupt, the general
public will lose their money and as a result, the economy of the country is destroyed.
Regular monitoring is necessary for the banks to protect the interest of the general public
from unhealthy situations. So, the central bank has to continuously monitor the lending
institutions on various parameters, including fit and proper.
f. The selection of the board of directors has to be prudent:
board of directors is the driver of a corporation. Every business operation & decision-making
of the bank are within the hands of BOD. The choice of the board of directors should be
made carefully and prudently. Despite big names as directors, Yes Bank's board could not
prevent aggressive lending by the management. As per my suggestion, the selection of the
Board of Directors is required to be based on the idea of Managerial ability, rather than the
name & fame.
 24

g. Auditors' selection has to be done with care:

The auditors are the watchdog and their duty and responsibility to find out the errors in the
financial statements and frauds done by the management, it depends on the experience and
ability of the specific auditor. So, the auditors' selection has to be done with care. Yes Bank’s
auditors could not find the window-dressing the bank management was indulging in. In my
opinion, ‘The criteria for empanelment and selection of statutory auditors have been made
after due consultation with the Institute of Chartered Accountants of India’.
h. The requirement of timely action:
As a banking sector regulator, the central bank should have acted in time. By the time the
central bank came into the picture, the bank’s net worth was eroded. So, the question arises
that why the banking regulator was in deep somnolence and did not take any action against
the bank and allowed such a big scam to continue to take place. In my opinion, strict action
is required to be taken at the right time, otherwise, it will result in an uncontrollable situation.
i. Investor’s attention towards Corporate Governance:
As per the opinions of different experts, YES Bank scam a case of corporate governance
failure, not due to the lapses the banking system. Investors should pay attention to lapses in
corporate governance. The exit of upper management, a dispute between promoters, under-
reporting, poor results, any drastic fall in share price should ring alarm bells.
j. The guilty should not go Scot- free:
The former chief executive officer of YES Bank Ltd, Mr. Rana Kapoor has been arrested for
investigation into the widespread lapses, but the guilty should not go scot-free so that a
message is sent to prevent such instances.

CYBER CRIME IN BANKING SECTOR

Cyber Crime can be simply stated as crimes that involve the use of computer and a network
as a medium, source, instrument, target, or place of a crime. With the growing aspect of e-
commerce and e-transactions, the economic crime has drifted towards the digital world.
Cybercrimes are increasing globally and India too has been witnessing a sharp increase in
cybercrimes related cases in the recent years.
In 2016, a study by Juniper Research estimated that the global costs of cybercrime could be
as high as 2.1 trillion by 2019. However, such estimates are only indicative and the actual
cost of cybercrime including unreported damages is beyond estimation.
Cyber Crimes can be broadly classified into categories such as cyber terrorism, Cyber-
bullying, Computer Vandalism, Software Piracy, Identity Theft, Online Thefts and Frauds,
Email Spam and Phishing and many more.
However, from the aspect of financial cyber-crimes committed electronically, the following
categories are predominant:
 25

 Hacking: It is a technique to gain illegal access to a computer or network in order

to steal, corrupt, or illegitimately view data.
 Phishing: It is a technique to obtain confidential information such as usernames,
passwords, and debit/credit card details, by impersonating as a trustworthy entity in
an electronic communication and replay the same details for malicious reasons.
 Vishing: Itis the criminal practice of using social engineering over the telephone
system to gain access to private personal and financial information from the public
for the purpose of financial reward.
 E-mail Spoofing: It is a technique of hiding an e-mail’s actual origin by forged the
e-mail header to appear to originate from one legitimate source instead of the
actual originating source.
 Spamming: Unwanted and unsolicited e-mails usually sent in bulk in an attempt to
force the message on people who would not otherwise choose to receive it are
referred to as Spam E-mails.
 Denial of Service: This attack is characterized by an explicit attempt by attackers
to prevent legitimate users of a service from using that service by "flooding" a
network to disallow legitimate network traffic, disrupt connections between two
machines to prohibit access to a service or prevent a particular individual from
accessing a service.
 Advanced Persistent Threat: It is characterized as a set of complex, hidden and
ongoing computer hacking processes, often targeting a specific entity to break into
a network by avoiding detection together sensitive information over a significant
period of time. The attacker usually uses some type of social engineering, to gain
access to the targeted network through legitimate means.
 Advanced Persistent Threat: It is characterized as a set of complex, hidden and
ongoing computer hacking processes, often targeting a specific entity to break into
a network by avoiding detection to gather sensitive information over a significant
period of time. The attacker usually uses some type of social engineering, to gain
access to the targeted network through legitimate means. Successful advanced
persistent threat campaigns can result in costly data breaches.
 ATM Skimming and Point of Sale Crimes: It is a technique of compromising the
ATM machine or POS systems by installing a skimming device atop the machine
keypad to appear as a genuine keypad or a device made to be affixed to the card
reader to look like a part of the machine. Additionally, malware that steals credit
card data directly can also be installed on these devices. Successful
implementation of skimmers causes in ATM machine to collect card numbers and
personal identification number (PIN) codes that are later replicated to carry out
fraudulent transactions.

II. OVERVIEW OF INTERNET BANKING IN INDIA

 26

The Indian baking industry is enjoying joyous growth. With the credit card and debit card
users increasing every day and new technologies like internet wallets slowly gaining
popularity, financial transactions are touching all-time highs.
This firm progression in the mounting paperless transactions numbers where a total of
9545797438 transactions were commenced using credit and debit cards in the year 2015
alone (Fig 1) can be partially accredited to the recent developments in the e-banking and e-
commerce verticals.
Fig 1: Credit/Debit Card Transactions in

In order to provide improved support for cashless transactions, a steady increase in the
number ATM and POS machines is inevitable. Fig 2 highlights the growth in the number of
ATM machines and POS machines installed across India in 2015.

Fig 2: ATM & POS Transactions in

III. IMPACTS OF CYBER CRIME ON THE BANKING SECTOR

The cases related to cybercrimes have grown ruthlessly due to the upsurge in mobile
devices with internet connectivity. Smartphones are nowadays used for numerous online
 27

activities like internet banking, online shopping, paying utility bills and are constantly in the
eyes of criminals to obtain access to confidential information.
Amongst the various motivations for committing a cybercrime, Financial Gain remains the
constant winner for the past many years overtaking other motives including revenge,
extortion and political causes. (Fig 3)
Alarmingly, simple phishing attacks enjoy a success rate of 45% due to lack of awareness
regarding the common safeguards to protect against the shrewd cyber criminals.
The span of cybercrime can be estimated from the figures of 3855 cybercrimes committed
for financial gain (NTRO) and 534 phishing incidents (CERT-In) in year 2015. These
incidents only correspond to the reported incidents and do not comprise the incidents that
went unreported and/or unnoticed.
Banks across the globe are increasing becoming prime targets of distributed denial-of-
service (DDoS) attacks launched sometimes as a part of the plan to distract the security
professional’s attention to the depleting resources, while carrying out some additional
dangerous activity in parallel like insertion of malware, or tampering with the IT assets. Such
an embedded hacking campaign with a hidden agenda is usually referred to as Advanced
Persistent Threat and is the latest kid on the board with enhanced complexity and
shrewdness.
In the cases, where the attackers are not able to yield some valuable information, they
deface the banks website as a measure to take revenge against their failed attempts.
 28

Fig 3: Cyber Crime by Motives

Besides the resulting financial gains from successful cyber-attacks, the presence of online
black markets commonly referred to as the „Dark web‟ adds to the motivation of committing
cybercrimes as a commonplace for exchanging personal information, latest exploits and
sophisticated hacking kits. Sensitive information including stolen/leaked credit card numbers,
online banking accounts, medical records and administrative access to servers are traded
for money in these online fraud communities.

IV. SAFEGUARDING THE INTERNET BANKING SECTOR

Financial organizations in today’s date require well laid cyber security teams with
distinguished digital leaders. According to PWC‟s year’s global economic crime survey,
2016, too many organizations are leaving first response to their IT teams without adequate
intervention or support from senior management and other key players.
Specialized security teams with an upbeat mix of competent professionals should be
employed to take a proactive stance when it comes to cybersecurity and privacy
 29

Organizations in the BFSI sector need to undergo rigorous and continuous cybercrime risk
assessments to precisely assess, identify and improve their present security posture by
viewing the organization’s policies from an attacker’s perspective and thus facilitate
enhanced security, operations, organizational management.
Additionally, as long-term planning, cyber awareness needs to introduced at a fundamental
level in educational institutions with specialized security courses at graduate level to provide
hands-on training on the latest attack methodologies and mitigation techniques using
concepts like virtual cyber labs.
A comprehensive threat intelligence technology is essential to foster organized and analyzed
threat information about potential or current attacks from the organization’s perspective.
Alongside, threat intelligence helps organizations in understanding the common threat actors
including the latest vulnerabilities, exploits and advanced persistent threats (APTs)
campaigns.
On a national level, there is an urgent necessity to build capability of inspecting critical
infrastructure in critical industry sectors before these are deployed in production to avoid any
malicious intruders by leveraging the trusted hardware/software.
Finally, cooperation between Indian government sector and industrial groups is bound to
strengthen the legal framework for cybersecurity with each blending in a different array of
cyber risks and preventive mechanisms.

IMPACT OF ARTIFICIAL INTELLIGENCE (AI) ON ONLINE

BANKING FRAUDS IN INDIA.

The most dramatic revolution in payment methods in the past few decades has undoubtedly
been the introduction and usage of plastic money. Payment through credit card is a mode of
payment that provides its holders with multifarious benefits. They include the relatively safe
and secure way of carrying monetary value, a means of making payments abroad, and
obtaining foreign exchange by consolidating payment of numerous transactions, of obtaining
credit card and usually a limited period of interest-free credit, include methods of spreading
payments and in the case of credit card, of securing the creditor’s indemnity for any
misrepresentation or breach of contract by the supplier.

The payment revolution spread internationally with the establishment of cash dispensers and
electronic terminals. The international interbank cash dispenser network now has two
hundred card holders in our country. This is in addition to the credit cards issued by VISA,
Master Card, American Express, and the like. Credit cards are a subset of the general
category of “Payment Cards” that card whose production (whether or not any other action is
required) enables the person to whom it is issued (the holder) to discharge his obligation to a
supplier in respect of payments for the acquisition of goods, services, accommodation or
facilities, with the supplier being reimbursed by a third party, whether or not the issuer of the
card, and whether or not a fee is imposed for such reimbursement.
 30

A credit card has been defined as a payment card, the holder of which is permitted under his
contract with the issuer of the card to discharge less than the whole of any outstanding
balance on his payment card account on or before the expiry of a specified period, subject to
any contractual requirements concerning minimum or fixed amount of payments. The card
permits the holder to obtain credit to a stated maximum amount from the issuer upon the
car's presentation to a merchant. The card issuer sends the cardholder’s statements
describing the purchases made. The cardholder may settle the debt without interest by
paying the entire amount on receipt of the statements or paying interest on the outstanding
amount.
Retail and service-based businesses that cannot accept credit card payments are at a
disadvantage against their competitors. In the United States alone, 250 billion dollars a year
are spent with credit cards. It is no wonder that businesses want to accept credit cards even
though it means paying a percentage of each credit card sale to the acquiring bank or
processor. The impact of technology on credit card operations is formidable. An example is
Citibank’s “New Millennium” banking a project that has been implemented only in New York
and Bangalore. This involves the reduction of bank visits by customers to an absolute
minimum- to the extent that the customers are charged for a visit to the bank. The reason is
that the technology used is such that the bank is confident that its customer's demands can
be met on the phone.
Similarly, further refinement in the use of ATMs- for example, allowing a person with the card
of one bank to withdraw cash from an ATM of any other bank also would add considerably to
the use of credit cards. Electronic Data Capture (EDC) machines help to enable online
settlements for merchants, which considerably adds to the lure of credit cards to the retailer.
Internet banking fraud and credit card fraud are growing in India. The Internet is global, with
no single territory and jurisdiction. This is both beneficial as well as harmful. It is beneficial as
it connects people and organizations and helps them in interacting efficiently. It is dangerous
as well as it provides the means to commit cyber crimes by its misuse.
The contemporary era has replaced these traditional monetary instruments from paper and
metal-based currency with “plastic money” in the form of credit cards, debit cards, etc. This
has resulted in the increasing use of ATMs all over the world. The use of ATMs is not only
safe but also convenient. This safety and convenience, unfortunately, has an evil side as
well that does not originate from the use of plastic money but rather from the misuse of the
same. This evil side is reflected in the form of ATM fraud which is a global problem. The
world at large is struggling to increase convenience and safety on the one hand and to
reduce its misuse on the other.

DIFFERENT TYPES OF FRAUDS IN ONLINE TRANSACTIONS

Mostly applied for credit or debit card frauds range from simple theft, which would be
punishable under Section 378 and Section 379 of the IPC, to the following which also is not
an exhaustive list:

1. Theft of Credit/Debit Card Data: Data of credit/debit cards are stolen from data
processing centers or at points of payment, that is when payments are made at
the store physically or on websites. These may be committed either by persons
lawfully receiving such data or by hackers, who either gain access to the point
where data is entered, i.e. to the victim’s computer or the point of receipt of such
data, that is to the entity is receiving and /or processing such data. The Mphasis
 31

case of data theft of credit/debit card details of American customers at the data
processing center in Pune is a classic example of this mode of credit/debit card
fraud. In this instance, several million US dollars were stolen by misusing the data
stolen.

2. Skimming: Skimmer devices are part of our everyday existence. It is just that we
may not even be aware of their existence or may fail to register the import of the
machines we see every day. The swipe machine is attached to computers at every
supermarket or store, whereby credit or debit card details are captured and stored
in the computers of such stores are skimmers.

These or similar devices are used to skim credit/debit card details (i.e. from the
magnetic strip on the reverse of all plastic cards) and use this information with the
CVV of PINs, which fraudsters may obtain either through physical video grabs or
key loggers, money is siphoned out. Skimmers may be attached at any place
including doors given access to ATMs or even inside the ATM providing the slot
for inserting the credit or debit cards.

3. Phishing of Data: Phishing including through voice calls or Vishing, as set out
above in other methods of acquiring card defiles, which is then used online for
making illicit purchases. Banks have repeatedly warned customers not to part with
credit/debit card details CVV numbers or PINs, for this reason.

4. Data leak from the online transaction: Credit card/debit card even net banking
details may be acquired through an online transaction on unsecured platforms.
Data, which may even be acquired for legal purposes on such an e-commerce
platform may then be used illegally for making other online purchases. Regulators
globally have, therefore, advised two levels of verification for online transactions,
that is, where Credit/ Debit cards related crimes were subject to prosecution by
invoking IPC provision about cheating under sections 418to 420 of the Indian
Penal Code, and forgery section 464 -471 of IPC, even before the enactment of
the IT Act. The IT Act provisions have strengthened the possibility of prosecution
with the addition of provisions for identity theft (section 66C of the IT Act) and
cheating by personation (Section 66D of the IT Act).

5. CREDIT & DEBIT CARDS FRAUDS: The use of credit cards Debit cards or
plastic money is quite a popular means of effecting payments both in the
conventional and online worlds.5 On the internet usually, the credit card number is
required and the three-digit number (CVV) at the back of the credit card is also
needed to make an online payment. The websites that use credit cards as a
means to accept payment use SSL (Secure Socket Layer Technology) which
automatically encrypts the data that is being transmitted for security reasons.6
Certain websites request credit card details over the telephone. Credit Cards are
being used to purchase software, make payments to utility service providers, to do
shopping online, or even play games as entertainment. In the United Kingdom,
consumers pay using a credit card as they are protected under the Consumer
Credit Act, 1947.7 The e-merchant is required to sign up an account with the
issuer of the card to accept payment through a credit card. This entails heavy
costs and opens the risk of chargebacks. At the same time, however, there are
many advantages to using credit cards or e-transaction.
 32

One of the prime advantages is the stipulated time window of credit without charging
interest. Encryption platform for use of credit cards offers varied combinations to use
a credit card to make payments at the point of sales or an ATM, net-banking or
through CC Avenue. Several acceptable credit insurers operate this business
including Visa Card, Master Card, American Express, among other service providers.
In a nutshell, a credit card is a payment card wherein the holder enters into a contract
that provides that the issuer can “discharge less than whole of any outstanding
balance on his payment card account on or before the expiry of specified periods
subject to any contractual requirement with respect to minimum of fixed amount of
payments.” The cardholder may avail credit to the highest amount stated on the card
and pay against statements with or without interest. Interest is payable on the
outstanding amount as per the bank's policy. Although credit cards can be used with
much ease, there are growing concerns about security threats, Cybercriminals may
adopt skimming, install a hidden camera near the ATM machine, clone the
stolen credit card or introduce a virus to steal secret pin and passwords to create an
unauthorized and fraudulent transaction. Due to these technical vulnerabilities, credit
card frauds are a risk. New solutions are being devised to counter cybercrimes
attacks. One of the common methods is to segregate the purchase transaction from
the payment process.
For example, when a user shops a product online through a telephonic call, the credit card
number may be disclosed. However, this system may have flaws and additional burdens
such as more manpower requirements and a chance of misuse of the information. Another
method suggested is the use of Secure Socket Layer Server which uses cryptography to
transmit any sensitive use.

6. PIN COMPROMISE
The report, Payments Fraud and Control Survey Report (Feb 10, 2021),
The survey showed that 82 percent of companies were targets of payment fraud
last year (2018), demonstrating the crucial need for cybersecurity protocols and
strict control governance.
 33

PIN compromise methods range from the very technically sophisticated to the
relatively easy technique known as shoulder surfing. Shoulder surfing involves the
perpetrator standing close enough to the consumer to observe the numbers
entered on the keypad. A more sophisticated method of observation or surveillance
involves the use of a miniature camera that can either transmit the image of the
PIN being entered or store the recording within the device. With the increase in the
number of mobile phones with video capture capabilities, such phones are adapted
to compromise PINs.

7. CARD SKIMMING
Card skimming involves making a copy of the information encoded on the
magnetic stripe of the card. There are different types of skimming devices
designed to be used in different environments, from handheld devices through
door access skimmers to miniature card entry slot skimmers. Handheld skimming
devices are more commonly associated with card skimming in restaurants and
other retail establishments.

8. CASH TRAPPING
Cash trapping is the term used to describe attacks where the consumer's cash is
trapped and prevented from being presented or delivered to the consumer. The
variety of trapping devices is significant, ranging from those that require insertion
within the ATM's cash dispenser through false fronts to well-engineered electro-
mechanical devices that simulate the removal of the cash by the consumer.

9. TRANSACTION REVERSAL
Transaction reversal techniques involve highly skilled manipulation of the ATM
during a transaction with the result that the host computer believes that the
consumer did not receive his cash and thus re-credits or reverses the transaction.

10. DEPOSIT FRAUD

Deposit fraud covers a variety of criminal techniques from making false deposits to
trapping deposits through the skillful manipulation of the deposit-accepting device.
False deposit fraud includes exploiting processing rules to draw on funds before
they have been verified and officially cleared for credit to an account. In a recent
case investigated in the Nagpur region, ATM cards belonging to new applicants
were dispatched through official couriers to the residences of the victims after their
applications were sanctioned by the bank authorities.

CREDIT CARD AND THE INTERNET

The other area where credit cards will play a huge role is on the internet. It seems natural
that online commerce would be done with credit cards. No physical paper needs to be
passed, unlike cash or cheque. We simply type our credit card number into the merchant’s
World Wide Web (WWW) page payment form and wait for our purchase to be shipped to us.
The only thing that needs to be passed between the merchant and the buyer is the credit
 34

card number of the manifold problem that credit card transactions over the net have become
involved with, the possibility the most formidable is that of security. The Internet is perceived
as a medium in which security and privacy are practically non-existent. Therefore, with the
possibility of credit card fraud looming large over them, customers are reluctant to even
enter into a transaction that could involve the transmission of “Sensitive” information over the
internet. The consequence of this has been that several corporations are engaged in the
process of creating a system with some measure of security. These form the subject matter
of examination –

One of the simplest methods in use is simply de-linking the purchase process from the
Internet. Thus, once the item is selected over the Net, the credit card number has to be
independently delivered through a phone call to the retailer. This system while being
relatively secure has many disadvantages. Firstly, it requires the presence of additional staff
to receive a call and cater to customers. Further, the process is not fully automated;
something the internet and any merchant would inevitably aim at.

Another method that is currently used by many sites is hosting the www sites on a secure
server. A secure server uses a protocol such as SSL or S-HTTP to transmit data between the
browser and the server. These protocols encrypt the data being transmitted, so when one
submits their credit card number through their WWW it travels to the server encrypted.
These methods help to ease people’s fear, but they still do not go enough for many people to
feel comfortable using their credit cards online. To ensure customers, trust, and still maintain
the security of credit card transactions on the net, some companies have evolved systems to
cater to the unique nature of the Internet.

One of these is First Virtual. This came into operation in 1994 and is regarded as one of the
simplest systems currently available.11 The first virtual system ensures credit card numbers
through the use of substitute numbers namely “First virtual personal identification number”
(PINs). These numbers are of no use, even if intercepted because purchases cannot be
charged to them. The first virtual system works by ensuring that a person’s account is never
charged without e-mail verification from them, whereby the cardholder accepts the charge.
First Virtual uses email to communicate with a buyer to confirm charges against their
account. Sellers use either email or automated programs that make use of First Virtual’s
Simple MIME Exchange Protocol (SMXP) to verify accounts and initiate the payment
transaction.

CYBER CASH:
Cyber Cash operates on a different footing from First Virtual. It simply ensures encrypted
passage over the internet for the credit card data. The authorization procedure is almost
identical to the normal procedure used at the point-of-sale terminal in the case of ordinary
credit card transactions. Moreover, cyber cash requires a special program (Cyber Cash
wallet software program). The user must then register with Cyber Cash. Registration would
include certain of a “wallet ID” and a password. The Cyber Cash system works like an
electronic contractual transaction. The customer first indicates his requirement to purchase
from the merchant’s site by clicking on Cyber Cash. The merchant’s software responds with
 35

an invoice to the buyer’s Cash Cash Wallet Software this is followed by the buyer selecting
the credit card on which he wishes to charge the transaction. The software then sends both
the invoice and the credit card information as a package to the Cyber Cash server,
requesting authorization for the transaction. Cyber Cash then moves the package to an
office line machine, decrypts it to ensure the absence of any tampering, and sends it to the
acquiring bank, using dedicated lines and encrypted data. This is then processed by the
banks like any other credit card transaction. The bank then sends its approval or denial to
Cyber Cash. This is in turn encrypted and sent to the merchant. This entire process is
supposed to take 15-20 seconds. This system has an advantage over First Virtual in that the
merchant’s account is credited without any time lag. The corresponding disadvantage
however accounts for an acquiring bank that accepts the Cyber Cash system.

LEGAL REGIME SURROUNDING CREDIT CARD AND THE INTERNET

As a general rule, legal systems in the area of credit cards revolve around major planes.
Firstly, attempt to regulate credit card operations in fiscal terms, i.e. the amount of credit
exposure that the issuing institution can take, the regulations as to persons to whom credit
may be issued, etc. The second is consumer legislation- which attempts to protect the rights
of the consumer, either through ensuring that there is adequate disclosure of possibilities
before the issue of the credit card or through requiring regular billing, etc.15
Credit cards and debit cards were introduced in the United States as early as the 1960s and
in the United Kingdom, this form of plastic money was launched by Barclays Bank in 1966.
In India, credit cards were introduced around the early 1980s. This form of plastic money is
commonly used to buy food, book hotels or airline tickets, buy consumer goods, and pay
service providers, for example, telephone department, and recharge mobile talk time
amongst other services. In India in 2010, statistics of RBI reports that approximately 191.21
million credit cards and debit cards have been issued.16 According to the Reserve Bank of
India, the use of paper-based instruments (like cheques, drafts, and the like) is
approximately 60% of the volume of total non-cash transactions, and in terms of the total
value, it amounts to 11 percent.17 The Indian Negotiable Instruments Act does not apply to
credit cards as it is different from the cheque. Therefore, the principles under the Negotiable
Instruments Act particularly payment in due course, and forged endorsements do not apply
to credit cards.
A legal framework provides a limit to exposure for an issuer of a credit card and prescribes
the rules of eligibility of persons that can avail of the credit card facility. A consumer is also
informed at the time of the issue of the card about the possible liability that a customer may
be exposed to satisfy consumer protection concerns. Generally, the issue of liability is
clarified through contractual arrangements.
In India, the Consumer Protection Act, 1986; offers protection to consumers against unfair
trade practices and deficiency in services, but the Act does not deal with any dispute with
foreign trades. In case it can be proved that the foreign merchant has an office in India or
actively solicits Indian clients such disputes could be adjudicated in India based on
jurisdiction. However, under the IT Act, 2000 and Indian Penal Code, 1860 Section 3 – any
person liable under Indian Law to be tried for an offense committed within India. Further,
Section 4 of the Indian Penal Code, 1860 states that the provisions of the Code also apply to
any offense committed by any Indian citizen in any place beyond India and to any person,
ship, or aircraft registered in India wherever it may be. Moreover, Section 1(2) of the IT Act,
 36

2000 provides that the Act applies to any offense or contravention committed outside by any
person.

Section 75 of the IT Act, 2000 states that the provisions of the Act also apply to any offense
or contravention committed outside India by any person irrespective of his nationality if it
involves a computer, computer system, or computer network located in India. Recently, the
Reserve Bank of India Act, 1934 was amended by the IT Act, 2000.18 In the case of Section
58(2) after clause (p), the amendments inserted a provision to regulate electronic fund
transfer and prescribed rights and obligations of parties and conditions to be complied with
for effecting fund transfer. Through the amendments, the Reserve Bank of India was
empowered to prescribe norms for electronic fund transfer and real-time gross settlement. It
becomes important at this stage to discuss the regulatory regime that the Reserve Bank of
India has in place to govern the electronic payment system in India.

RESERVE BANK OF INDIA’S (RBI’S) NOTIFICATION ON CREDIT CARD

BUSINESS
On 21st November 2005, the Reserve Bank of India issued a notification regarding credit
card operation by non-banking financial companies and banks. This circular is aimed at
providing general guidance to banks/NBFCs on their credit card operations, and the systems
and controls expected of them in managing their credit card business. It also sets out the
best practices that they should aim to achieve. Experience has shown that the quality of
banks’ credit card portfolios mirrors the economic environment in which they operate, and
there is a strong correlation between an economic downturn and deterioration in the quality
of such portfolios. The deterioration may become even more serious if banks have relaxed
their credit underwriting criteria and risk management standards as a result of intense
competition in the market. It is therefore important for banks to maintain prudent policies and
practices for managing the risks of their credit card business which are relevant to the
market environment in which they operate. According to this Notification, every bank/NBFC
is required to form a Fair Practices Code for its credit card operations. This Fair Practice
Code should incorporate the requirements established by this notification.

On the issue of credit cards, the banks are required to independently analyze the risk of
giving credit and add-on cards which may have been issued on the basis that the basic
liability will be that of the main cardholder. The bank ought to also assess the credit limit that
the customer avails from other banks before deciding the credit limit for a customer. All Know
Customer (KYC) norms are required to be complied with. The United Nations Guidelines for
Consumer Protection (UNGCP) provides the Protection of Customer Rights – Guidelines,
Customer’s rights regarding credit card operations primarily relate to personal privacy, clarity
relating to rights and obligations, preservation of customer records, maintaining the
confidentiality of customer information and fair practices in debt collection.
However, this circular also describes the Right to Privacy-
a. Card issuing banks/NBFCs avoid issuance of unsolicited cards which
attracts penalties besides such persons approaching the Banking
Ombudsman for compensation for loss of time, expenses, harassment,
mental anguish, and so on.
 37

b. It is the responsibility of the card-issuing bank/NBFC for any misuse of the

unsolicited cards and the person in whose name the card is issued cannot
be held responsible for the same.

c. The consent for the cards issued or the other products offered along with
the card has to be explicit and should not be implied.

d. Unsolicited loans or other credit facilities should not be offered to credit

card customers.

RESERVE BANK OF INDIA (RBI) MASTER CIRCULAR ON CREDIT CARD OPERATIONS

OF BANKS
This circular is aimed at providing general guidance to banks/NBFCs on their credit card
operations, and the systems and controls expected of them in managing their credit card
business. It also sets out the best practices that they should aim to achieve. Experience has
shown that the quality of banks’ credit card portfolios mirrors the economic environment in
which they operate. Very often, there is a strong correlation between an economic downturn
and deterioration in the quality of such portfolios. The deterioration may become even more
serious if banks have relaxed their credit underwriting criteria and risk management
standards as a result of intense competition in the market. It is therefore important for banks
to maintain prudent policies and practices for managing the risks of their credit card business
which are relevant to the market environment which they operate in. Banks in India can
undertake credit card business either departmentally or through a subsidiary company set up
for the purpose. They can also undertake domestic credit card business by entering into tie-
up arrangements with one of the banks already having arrangements for the issue of credit
cards.

ONLINE PAYMENT SYSTEM IN INDIA: FROM CONVENTIONAL BANKING TO

INTERNET BANKING
The Reserve Bank has taken many initiatives towards introducing and upgrading safe and
efficient modes of payment systems in the country to meet the requirements of the public at
large. The dominant features of the large geographic spread of the country and the vast
network of branches of the Indian banking system require the logistics of collection and
delivery of paper instruments. These aspects of the banking structure in the country have
always been kept in mind while developing the payment systems.

ELECTRONIC PAYMENT MECHANISM IN INDIA

The initiatives taken by RBI in the mid- eighties and early-nineties focused on technology-
based solutions for the improvement of the payment and settlement system infrastructure,
coupled with the introduction of new payment products by taking advantage of the
technological advancements in banks shows the advancements that have been made in this
field. The continued increase in the volume of cheques added pressure on the existing set-
up, thus necessitating a cost-effective alternative system.
 38

1. ELECTRONIC CLEARING SERVICE (ECS) CREDIT:

The Bank introduced the ECS (Credit) scheme during the 1990s to handle bulk and
repetitive payment requirements (like salary, interest, dividend payments) of corporates and
other institutions. ECS (Credit) facilitates customer accounts to be credited on the specified
value date and is presently available at all major cities in the country. During September
2008, the Bank launched a new service known as National Electronic Clearing Service
(NECS), at National Clearing Cell (NCC), Mumbai. NECS (Credit) facilitates multiple credits
to beneficiary accounts with destination branches across the country against a single debit of
the account of the sponsor bank. The system has a Pan-India characteristic and leverages
on Core Banking Solutions (CBS) of member banks, facilitating all CBS bank branches to
participate in the system, irrespective of their location across the country.
2. REGIONAL ECS (RECS):
Next to NECS, RECS has been launched during the year 2009. RECS, a miniature of the
NECS is confined to the bank branches within the jurisdiction of a Regional office of RBI.
Under the system, the sponsor bank will upload the validated data through the Secured Web
Server of RBI containing credit/debit instructions to the customers of CBS enabled bank
branches spread across the jurisdiction of the regional office of RBI. The RECS centre will
process the data, arrive at the settlement, generate destination bank-wise data/reports and
make available the data/reports through a secured web-server to facilitate the destination
bank branches to afford credit/debit to the accounts of beneficiaries by leveraging the CBS
technology put in place by the bank. Presently, RECS is available in Ahmedabad, Bengaluru,
Chennai, and Kolkata.

3. ELECTRONIC CLEARING SERVICE (ECS) DEBIT:

The ECS (Debit) Scheme was introduced by RBI to provide a faster method of effecting
periodic and repetitive collections of utility companies. ECS (Debit) facilitates consumers and
subscribers of utility companies to make routine and repetitive payments by ‘mandating’
bank branches to debit their accounts and pass on the money to the companies. This
tremendously minimizes use of paper instruments apart from improving process efficiency
and customer satisfaction. There is no limit as to the minimum or maximum amount of
payment. This is also available across major cities in the country.
4. ELECTRONIC FUNDS TRANSFER (EFT):
This retail funds transfer system introduced in the late 1990s enabled an account holder of a
bank to electronically transfer funds to another account holder with any other participating
bank. Available across 15 major centres in the country, this system is no longer available for
use by the general public, for whose benefit a feature-rich and more efficient system is now
in place, which is the National Electronic Funds Transfer (NEFT) system.

5. NATIONAL ELECTRONIC FUNDS TRANSFER (NEFT) SYSTEM:

In November 2005, a more secure system was introduced for facilitating one-to-one funds
transfer requirements of individuals/corporates. Available across a longer time window, the
NEFT system provides for batch settlements at hourly intervals, thus enabling near real-time
 39

transfer of funds. Certain other unique features viz. accepting cash for originating
transactions, initiating transfer requests without any minimum or maximum amount
limitations, facilitating one-way transfers to Nepal, receiving confirmation of the date/time of
credit to the account of the beneficiaries, etc., are available in the system.

6. REAL-TIME GROSS SETTLEMENT (RTGS)SYSTEM:

RTGS is a funds transfer system where the transfer of money takes place from one bank to
another on a “real-time” and “gross” basis. Settlement in “real-time” means that the payment
transaction is not subjected to any waiting period. "Gross settlement" means the transaction
is settled on one-to-one basis without bunching or netting with any other transaction. Once
processed, payments are final and irrevocable. This was introduced in 2004 and settles all
inter-bank payments and customer transactions above 2 lakhs.

7. CLEARING CORPORATION OF INDIA LIMITED (CCIL):

CCIL was set up in April 2001 by banks, financial institutions, and primary dealers, to
function as an industry service organization for clearing and settlement of trades in the
money market, government securities, and foreign exchange markets. The Clearing
Corporation plays the crucial role of a Central Counter Party (CCP) in the government
securities, USD –INR forex exchange (both spot and forward segments), and Collateralized
Borrowing and Lending Obligation (CBLO) markets. CCIL plays the role of a central
counterparty whereby, the contract between buyer and seller gets replaced by two new
contracts - between CCIL and each of the two parties. This process is known as ‘Novation’.
Through novation, the counterparty credit risk between the buyer and seller is eliminated
with CCIL subsuming all counterparty and credit risks. To minimize these risks, that it
exposes itself to, CCIL follows specific risk management practices which are as per
international best practices. In addition to the guaranteed settlement, CCIL also provides
non-guaranteed settlement services for National Financial Switch (Interbank ATM
transactions) and rupee derivatives such as Interest Rate Swaps. CCIL is also providing a
reporting platform and acts as a repository for Over the Counter (OTC) products.

AI MECHANISM PAYMENT SYSTEMS

1. Pre-paid Payment Systems:

Pre-paid instruments are payment instruments that facilitate the purchase of goods and
services against the value stored on these instruments. The value stored on such
instruments represents the value paid for by the holders by cash, by debit to a bank
account, or by credit card. The pre- paid payment instruments can be issued in the form
of smart cards, magnetic stripe cards, internet accounts, internet wallets, mobile
accounts, mobile wallets, paper vouchers, etc. Subsequent, to the notification of the PSS
Act, policy guidelines for the issuance and operation of prepaid instruments in India were
issued in the public interest to regulate the issue of prepaid payment instruments in the
country. The use of pre-paid payment instruments for cross-border transactions has not
been permitted, except for the payment instruments approved under Foreign Exchange
Management Act,1999 (FEMA).
 40

2. Mobile Banking System:

Mobile phones as a medium for providing banking services have been attaining
increased importance. Reserve Bank brought out a set of operating guidelines on mobile
banking for banks in October 2008, according to which only banks that are licensed and
supervised in India and have a physical presence in India are permitted to offer mobile
banking after obtaining necessary permission from Reserve Bank. The guidelines focus
on systems for security and inter-bank transfer arrangements through Reserve Bank's
authorized systems. On the technology front, the objective is to enable the development
of interoperable standards to facilitate funds transfer from one account to any other
account in the same or any other bank on a real-time basis irrespective of the mobile
network a customer has subscribed to.
3. ATMs / Point of Sale (POS) Terminals/ Online Transactions:
Presently, there are over 61,000 ATMs in India. Savings Bank customers can withdraw
cash from any bank terminal up to 5 times in a month without being charged for the
same. To address the customer service issues arising out of failed ATM transactions
where the customer's account gets debited without actual disbursal of cash, the Reserve
Bank has mandated the re- crediting of such failed transactions within 12 working days
and mandated compensation for delays beyond the stipulated period. Furthermore, a
standardized template has been prescribed for displaying at all ATM locations to facilitate
the lodging of complaints by customers. There are over five lakh POS terminals in the
country, which enable customers to make payments for purchases of goods and services
using credit/debit cards. To facilitate customer convenience, the Bank has also permitted
cash withdrawal using debit cards issued by the banks at POS terminals.
The POS for accepting card payments also includes online payment gateways. This
facility is used for enabling online payments for goods and services. The online payment
is enabled through its payment gateways or third-party service providers called
intermediaries. In payment transactions involving intermediaries, these intermediaries act
as the initial recipient of payments and distribute the payment to merchants. In such
transactions, the customers are exposed to the uncertainty of payment as most
merchants treat the payments as final on receipt from the intermediaries. In this regard,
safeguarding the interests of customers and to ensure that the payments made by them
using Electronic/Online Payment modes are duly accounted for by intermediaries
receiving such payments, directions were issued in November 2009. Directions require
that the funds received from customers for such transactions need to be maintained in
an internal account of a bank and the intermediary should not have access to the same.
Further, to reduce the risks arising out of the use of credit/debit cards over internet/IVR
(technically referred to as card not present (CNP) transactions), Reserve Bank mandated
that all CNP transactions should be additionally authenticated based on information not
available on the card and an online alert should be sent to the cardholders for such
transactions.
In the last few decades, banking has undergone a revolution in the manner in which the
banks and payment systems function. With the easy accessibility of the internet, the
popularity of computers and mobile banking, the use of ATMs, internet banking has
captured a major proportion of banking activity. In earlier times, internet banking was
only popular only in the US and Europe which gradually gained acceptance even in
developing countries including India. An account holder can easily access his bank
 41

account statements online by entering his account number and personal identification
numbers, commonly known as the login id and passwords. The bank verifies the user’s
identity allowing access to the service available online such as recharging of mobile
numbers and other activity.31Most banks offer special e-services and in certain
countries, even virtual banks exist. The websites of banks not only provide static
information about the services it provides to its customers, it also receives complains or
feedback from its customers through e-mails, blogs, twitter, chat room or other means.
Banks also accept the online request of its customer to transfer money to make
payments for sale and purchases of securities, book air tickets, thereafter shows, or
purchase other products and services online. Most conventional nationalized bank have
also transformed their functioning by adding internet banking facilities to the rage of
service they offer.32The banks are constantly improving their business processes and
security parameters such as installing a PKI system to enhance security protection.
On the legislative front, The Negotiable Instruments Act, 1881 was amended to facilitate
cheque truncation and making e-cheque legally valid and admissible in India.The
Negotiable Instrument Act, 1881 which is the main legislation governing cheque-based
payment mechanism in India includes the ‘electronic image of a truncated cheque’ and a
cheque in the electronic form33 within the definition of the cheque. The Information
Technology Act, 2000, and The Reserve Bank of India Act, 1934 conferred legal
recognition and validity to the use of electronic payment systems in India. For electronic
payment systems such as ECS and EFT, a contract is signed between the participants
and the manager of the system. The Payment and Settlement System Act, 2007, was
recently passed to explain the term ‘netting and finality of settlement’. The Payment and
Settlement System Act, 2007 also defines ‘payment obligation, payment instrument,
payment system, and gross settlement system, netting, settlement in section 2(1) of the
Act, a settlement is defined as “settlement of payment instructions received and this
includes the settlement of securities, foreign exchange or derivative or other transaction”.
The settlement can be affected either on a net basis or on a gross basis.

INTRODUCTION ARTIFICIAL INTELLIGENCE IN ELECTRONIC

SYSTEMS IN INDIA
Banks have traditionally been at the forefront of harnessing technology to improve their
products, services, and efficiency. They have, over a long time, been using electronic and
telecommunication networks to deliver a wide range of value-added products and services.
The delivery channels include direct dial-up connections, private networks, public networks,
etc. and the devices include telephones, Personal Computers including the Automated Teller
Machines, etc. With the popularity of PCs, easy access to the Internet, and the World Wide
Web (WWW), the Internet is increasingly used by banks as a channel for receiving
instructions and delivering their products and services to their customers. This form of
banking is generally referred to as Internet Banking, although the range of products and
services offered by different banks vary widely both in their content and sophistication.
Broadly, the levels of banking services offered through the Internet can be categorized into
three types:

(i) The Basic Level Service is the banks’ websites that disseminate information on
different products and services offered to customers and members of the public
in general. It may receive and reply to customers’ queries through e-mail,
 42

(ii) In the next level are Simple Transactional Websites which allow customers to
submit their instructions, applications for different services, queries on their
account balances, etc., but do not permit any fund-based transactions on their
accounts,

(iii) The third level of Internet banking services is offered by Fully Transactional
Websites which allow the customers to operate on their accounts for the
transfer of funds, payment of different bills, subscribing to other products of the
bank, and transaction purchase and selling of securities, etc.
The above forms of Internet banking services are offered by traditional banks, as an
additional method of serving the customer or by new banks, who deliver banking services
primarily through the Internet or other electronic delivery channels as the value-added
services. Some of these banks are known as ‘virtual’ banks or ‘Internet-only’ banks and
may not have any physical presence in a country despite offering different banking
services. From the perspective of banking products and services being offered through
the Internet, Internet banking is nothing more than traditional banking services delivered
through an electronic communication backbone, viz, the Internet. But, in the process, it
has thrown open issues that have ramifications beyond what a new delivery channel
would normally envisage and, hence, has compelled regulators the world over to take
note of this emerging channel.

Some of the distinctive features of I-banking are:

1. It removes the traditional geographical barriers as it could reach out to customers
of different countries / legal jurisdictions. This has raised the question of
jurisdiction of the law / supervisory system to which such transactions should be
subjected.

2. It has added a new dimension to different kinds of risks traditionally associated

with banking, heightening some of them and throwing new risk control challenges,

3. Security of banking transactions, the validity of an electronic contract, customers’

privacy, etc., which have all along been concerns of both bankers and supervisors
have assumed different dimensions given that the Internet is a public domain, not
subject to control by any single authority or group of users,

4. It poses a strategic risk of loss of business to those banks who do not respond in
time, to this new technology, being the efficient and cost-effective delivery
mechanism of banking services,

5. A new form of competition has emerged both from the existing players and new
players of the market who are not strictly banks.

6. The Regulatory and Supervisory concerns in I- banking arise mainly out of the
distinctive features outlined above. These concerns can be broadly addressed
under three broad categories, viz, Legal and regulatory issues, Security and
technology issues, and Supervisory and operational issues.
 43

QUESTIONS USED IN QUESTIONNAIRE: -

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Responses of the above questions: -

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CONCLUSION
The banking sector in India has experienced a remarkable transformation, primarily
attributed to the integration of Information Technology (IT), which has revolutionized
both the operational efficiency and security of financial transactions. The advent of
mobile and internet banking is on the verge of further transforming the sector,
promising enhanced accessibility and convenience for customers while
simultaneously demanding a heightened focus on cybersecurity measures to
counteract the escalating threats of financial fraud and cyber-attacks. The
exponential growth in electronic payments and online banking activities necessitates
robust systems capable of detecting and mitigating financial crimes effectively. This
digital evolution, coupled with the projected rapid expansion in retail banking, home
loan disbursements, and the proliferation of banking facilities to accommodate the
burgeoning bankable population, underscores the dynamic trajectory of the Indian
banking sector towards embracing more inclusive, efficient, and secure financial
services.

However, recent tumultuous events, such as the crisis faced by Yes Bank,
underscore the critical importance of stringent regulatory oversight and governance
in safeguarding the stability and credibility of the banking industry. The Reserve Bank
of India's (RBI) role as a vigilant supervisor has been pivotal in navigating crises,
highlighting the necessity for both public and private sector banks to adhere to
regulatory frameworks and ethical banking practices. The challenges encountered by
Yes Bank and similar institutions reveal the vulnerabilities within the banking sector
and the imperative for continual reassessment and strengthening of governance
structures. As the sector strides forward, leveraging technological advancements and
expanding its reach, the lessons learned from past pitfalls must inform strategies to
fortify the financial system against potential threats, thereby ensuring the enduring
trust and confidence of depositors and investors in the resilience and integrity of the
Indian banking system.
 54

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