Article No. 668 dt Oct 29, 2007 in www.indianmba.

com

COMMERCIAL BANKING TO CONVENIENCE BANKING

By

Prof. Chowdari Prasad

Professor in Finance & Registrar
Alliance Business School
Bangalore-560 068

Banking Industry in India has been undergoing transformation on an ongoing basis responding to the custome
needs and regulators directions. What was once mere traditional or commercial banking today is referred to
convenience banking. Some banks (including Foreign Banks) also refer their services as Relationship Banki
Private Banking, etc. In the beginning, the functions of a bank were only accepting deposits and lending
selective basis. In course of time, the third activity was added – which included remittances like demand draf
mail or telegraphic transfers, collection and discounting of cheques and bills, safe deposit of articles, safe custo
of scrips, bonds, etc., issue of travelers cheques, letters of credit or bank guarantees and so on.

In the earlier years after Independence, simultaneously development banking and rural banking functions w
added on when India launched its Five Years Plans. However, developmental role was taken up initially by Proj
Finance Institutions like IFCI, ICICI and IDBI as also SIDC and SFCs who have lent high value term loans
encourage industrial units. Rural Banking was looked after by State Bank of India and its subsidiaries followed
Public Sector Banks. In the early seventies SBI, however realized the need for reorganizing itself with a cl
direction to serve the customers through a proper market segmentation of its business into – Personal Banki
Commercial & Institutional Banking, Small Scale Industries & Small Business Banking, Agricultural Banki
International Banking, Merchant / Investment Banking, etc.

Focus was given to each of the clusters of customers by SB Group and the system of Performance Budgeting w
introduced internally. Non-Resident Indians (NRIs) were afforded high importance in order to attract Fore
Exchange business while specialized branches were also opened to cater to all these types of customers by
Group. Industrial Finance Branches, Overseas Branches, SSI Branches, Agricultural Development Branch
Village Branches, etc were opened to intensify its services while according equal importance to its soc
responsibility. Due to certain obvious reasons, the banking industry got itself derailed and passed through b
patches in seventies and eighties when certain experts or committees opined that there was a need for shifting
Universal Banking and Narrow Banking to bring back the industry on rails. One eminent Economist occupyin
high position in the Reserve Bank of India has even got to the extent of coining a new word – lazy banking
when the aspect of profitability or productivity was at the lowest in the industry.

Advent of Technology in eighties and introduction of reforms in the nineties have brought back the glitter to
banking system in India. Today, healthy competition has set in between public, private and foreign banks – al
who are offering a wide variety of products and services. Legal and Technological changes have made the ban
to care the tech-savvy customer to expect Electronic Banking, Internet Banking, Retail Banking, Online Banki
Mobile Banking or Virtual Banking on par with banks world over.

The concept of banking was first introduced in medieval Florence in 1397. A powerful merchant family nam
Medici established a network of shops that allowed patrons to place money on account and withdraw the mon
in another city that had a Medici representative. Many powerful families and even the Church kept their money
Medici banks. This allowed rich people to travel without the need to carry large sums of money and risk
robbery while traveling. Banking continued to gain popularity throughout Europe by 1700. Nearly every coun
in Europe had some form of established banking. Modern banking has come a very long way from those hum
beginnings in Florence. Banking today covers the entire spectrum of finance from simple savings to credit ca
and home loans. Typically, a bank generates profits from transaction fees on financial services or the inter
spread on resources it holds in trust for clients while paying them interest on the asset. Banks today
connected electronically so that banking transactions can be made globally in a split second.

Banking in India is over two centuries old with its foundations laid during the British regime. The industry we
through several ups and downs and has always been in the centre of debates in recent times since it is a v
important service in the day to day life of customers and contributing significantly to the Indian econom
Broadly, Indian banking is discussed with reference primarily to three eras – (1) pre nationalization ie., upto t
year 1969, (2) post nationalization and up to pre-economic reforms ie., 1993 and (3) post reforms ie., after 19
till date with ongoing changes.

The cooperative banking system did not deliver the expected results in the rural areas and hence 14 ma
commercial banks were taken over by GOI with this purpose. Prior to this, formation of State Bank of In
(converting Imperial Bank of India) in 1955 and subsequent take over of eight Maharaja banks as subsidiaries
State Bank was the beginning of expansion of banks in rural India. The Government of India as majority owner
the Public Sector Banks and RBI as regulator have a major say in the working of Indian banks in the pos
Independence era. The industry witnessed several changes in the last four decades due to the Governmen
political and developmental philosophy of taking banking to grass roots in the country transforming from cla
banking to mass banking from 1969 onwards. Lead Bank Scheme and Branch Licensing Policy furth
strengthened this concept. In these years of expansion and transition, there were many handicaps the indus
suffered but continued to sustain and deliver results.

Customer Service was always the focus area in banking. But due to ever changing priorities and several oth
constraints like resorting to loan melas, domination of trade unions in the public sector banks, absence
automation, deficiency of laws for consumer protection or recovery of loans due from willful defaulters, waiv
and write-offs of irrecoverable loans, etc affected the efficient function of commercial banking in seventies a
eighties. Customer Service Committee headed by RK Talwar, then Chairman of State Bank of India gave seve
recommendations in seventies. Gradual changes were brought in by introducing Computers for back-office a
reconciliation work or Clearing House settlements, Advanced Ledger Posting Machines for front offices to rend
better customer service, in a small way. Personal Computers entered the banking scene during eighties but
shortage of trained manpower was always a bottleneck. The decade of eighties had also witnessed MI
cheques, Automated Teller Machines (ATMs) and Credit Cards towards bettering the customer service. Again M
Goiporia, Chairman of SBI headed another Committee on Customer Service in early nineties.

Introduction of Technology in Indian Banking began to take shape during eighties thanks to several committe
constituted by RBI. The following committees are worth mentioning for the purpose.

1. Working Group to consider feasibility of introducing MICR / OCR Technology for Cheque processing in the ye
1982. The Convenor of the Committee was Dr Y B Damle, Advisor, Management Science Department, Rese
Bank of Ind

2. Committee on Mechanisation in the Banking Industry in 1984 headed by Dr C Rangarajan, Deputy Govern
Reserve Bank of In

3. Committees on Communication Network for Banks and SWIFT implementation in 1987 headed by Shri T
Iyer, Executive Director, Reserve Bank of In
4. Committee on Computerisation in Banks in 1988 headed by Dr C Rangarajan, Deputy Governor, Reserve Ba
of In

5. Committee on Technology Issues relating to Payment System, Cheque Clearing and Securities System in t
Banking Industry, in 1994 headed by Shri W S Saraf, Executive Director, Reserve Bank of India

6. Committee on Proposing Electronic Funds Transfers and Electronic Payments in 1995 headed by Smt K
Shere, Principal Legal Advisor, Reserve Bank of India.

Subsequently, several other Committees have gone into the aspects of introduction of Technology a
Networking of banking system in the country, Internet Banking, Cheque Truncation system, etc. In the p
reforms era, banks in India have experienced several structural changes, to bring in productivity in th
working. Introduction of Prudential Norms in 1993 with changes in their accounting systems, Inco
Recognition and Asset Classification norms, provisioning for Non Performing as well as Standard Assets, open
of new Generation Private Sector Banks, inviting more and more Foreign Banks in the post WTO era, extend
working hours, Sunday-banking, deregulation of interest rates, withdrawal of directed lending, reduction of C
and SLR requirements, imposing of new Capital Adequacy Requirements pursuant to banks adopting Base
norms, Voluntary Retirement Schemes for employees, shifting or closing down of loss making branches, involv
of outside agencies for selling insurance products, credit cards, mutual funds, housing and other retail loan
introduction of Asset Liability Management and Risk Management systems, etc., introduction of Ombudsm
Scheme in banking, have brought in dramatic changes in the operational aspects of banks in India.

Table No.1 Distribution of Banks branches in India as on 31st March, 2006

Banks / Branches Rural Sub-urban Urban Metro Total

19 Nationalised 12,900 7,103 6,990 6,929 34,012
8 SB Group 5,229 4,043 2,449 2,110 13,831
1 IDBI Bank 2 17 66 88 173
19 Old Pvt Banks 936 1,447 1,236 947 4,566
8 New Pvt Banks 97 322 674 857 1,950
29 Foreign 0 1 37 221 259
TOTAL 19,254 12,933 11,452 11,152 54,791
Source: Trend and Progress of Banking in India, 2006

The above table gives us the status of Indian banking as on March 31, 2006. The data is exclusive of branches
Regional Rural Banks who are themselves undergoing transformation and consolidation bringing down th
number from the original 196 to 96 as on a recent date. Stupendous efforts are going on to introduce comput
at all these rural and semi urban branches as also to network them for rendering improved customer servic
Going by the market trends, public sector banks in India have began competing with their private sector a
foreign counterparts by offering varieties of services and products with the help of technology in all th
operations.

During the course of reforms in the industry, banks in India have also realized the need for dependence on lar
scale automation. This called for huge investment in hardware and software, training of personnel a
networking of branches and controlling offices.

The many benefits of technology in banking could be listed out as und

a. Increased operational efficiency, productivity and profitabi

b. Offering of superior quality customer service on par with foreign ban
c. Multi-channel, real-time transaction process
d. Ability to better Cross selling of products and servi
e. Improved MIS, management and accountabi
f. Efficient NPA and Risk / Credit Managem
g. Minimising Transaction Costs, etc

Having realized the necessity to modernize and compete with the other players in the Industry all types of ban
- Public, Old and New Private Sector Banks have strengthened their operations by introducing technology a
offering customer-savvy products and services. Banks like State Bank of India and Punjab National Bank open
exclusive all-India level Training Colleges to train their staff in technology. Reserve Bank of India also took
initiative of founding a separate establishment called Institute for Development and Research in Bank
Technology (IDRBT), Hyderabad in the year 1996. It is an autonomous institution funded by RBI for the ben
of banks and financial institutions in India. IDRBT is engaged in Development, Research and Consultancy
Banking as a 'Think Tank'. It established V-Sat based financial network for all banks called 'Infinet' engaged
Data Warehousing and Data Mining. It publishes journals and research papers on IT in banking. It offers we
based training to bank executives and conducts Post Graduate / Research Programs for Banking Professionals.

With the initiatives taken by Reserve Bank of India, the banking industry in India has marched forward in offer
technology based services in a very efficient manner. NICNET, RABMN, I-NET have paved way for introduction
INFINET, BANKNET AND RBINET. The successful experience of MICR / OCR and ATMs in the industry led
furthering to adoption to SWIFT, Demat services, EDI and Internet Banking in a gradual manner. The journ
was further extended to ECS credit and debit, Electronic Funds Transfer, SEFT and Real Time Gross Settlem
schemes to set in the industry.

On the other hand, the banks in India have also felt the need for compliances like Know Your Customer (KY
Asset Liability Management (ALM), Core Banking System (CBS), Risk Management, Customer Relatio
Management (CRM), Basel-II, etc. With the improvement in MIS mechanisms, threats from Money Launderi
and Cyber crimes have also made the banks to tighten their systems and audit procedures. Shared Paym
Network Systems (SPNS or also called SWADHAN) is another facility through which banks have come together
share the ATM services offered and save on costs while offering competitive customer services. In recent yea
banks also started offering mobile ATMs (besides more than 50% of off-site ATMs) and biometric ATMs to ru
customers. As on March 31, 2006 all commercial banks in India had 21,523 ATMs (10,263 on-site and 11,2
off-site) as against a total of 54,791 branches all over India. Almost all the banks are announcing of more a
more ATMs to their Metro and Urban customers which will certainly reduce the manual transaction costs at
branches.

The next best move by the system is to introduce Smart Cards with the advantage of multi-applications. A P
Project has been funded and started by Government of India. The Project is in progress and is partnered
IDRBT, IIT Mumbai and Banks. Smart Card Forum of India (SCAFI) is a non-profit and multi-indus
organization promoting and working for wide-spread acceptance of multi-application smart card technology.

Banking industry in India moving very fast keeping in pace with their global counter parts. After having compl
with Basel-1 requirements and meeting the Capital standards, these banks are gearing up to accomplish h
standards of working and meeting the Basel-2 by March 2008. In the recent years, their deposits and advanc
are growing at a high range of 25-30 per cent per annum. The recent levels of deposits and advances of
banks in India are of the order of Rs. 28,50,000 and Rs. 20,00,000 crores respectively with a Credit Depo
Ratio of above 70 per cent.

Another interesting feature of the Indian banking system is that despite undergoing rapid changes in accounti
legal, structural and technological systems in the past 15 years, it was found to be robust. There have been t
three major financial scams in the stock market, Non Banking Financial Companies, etc during this period b
there was minimal effect on the banking system. There have been instances of some old and new private ban
affected by these calamities resulting in closure of banks like Bank of Karad, Nedungadi Bank, United Weste
Bank, Bharat Overseas Bank, Global Trust Bank, etc. Similarly, there have also been some mergers l
Centurion Bank with Bank of Punjab, Times Bank with HDFC Bank, Ganesh Bank of Kurundwad with Fede
Bank, Bank of Madura and Sangli Bank with ICICI Bank, as also reverse mergers like ICICI with ICICI Bank a
IDBI with IDBI Bank. In an economy which is passing through the transition of reforms since 1991 and attain
a high growth rate of 9 per cent and above as well as containing inflation and Non Performing Assets to less th
three per cent, such corrective steps are inevitable.

One interesting feature in the banking system is its preparedness to change and adaptation by embrac
technology in a big way. In the process, the customer is the best beneficiary to receive excellent service
competitive rates. Government of India and Reserve Bank of India have been bringing necessary changes
introducing legal changes (Section 138 in NI Act, certain changes in Companies Act, introduction of DRTs a
BIFR, redefining of SME and their development, regulation of Credit Rating Agencies Act, regulation of NBF
privatization of Insurance, overseeing of Mutual Funds, Venture Capital Companies, FIIs, etc., enactment
Information Technology Act, SARFAESI Act, Credit Information Bureaus, etc).

Banks in India are increasingly adopting core banking solutions for retaining customers and lowering serv
costs. There is perhaps no area of life that technology has not touched and changed. Banking in India, too, is
the midst of a techno-revolution, thanks to regulations and increasing competition. Information Technology h
been used in two different avenues in banking – communication and connectivity and business process
engineering. It is reported that there are 38.5 million internet users in India, and the number is set to grow t
100 million by 2007-08. An estimated 4.6 million Indian internet users are banking online today and, with
efforts of the government and the industry, the number of people who use the internet and mobile for banking
expected to cross 16 million by 2007-08.

While introduction of technology in all facets of banking as enumerated above is a welcome move, there a
inherent risks that are growing as a menace day by day. Credit Default, Operational and other risks are be
handled by the banks efficiently with use of MIS. The tendency of scamsters and cyber criminals are a
developing in counter intelligence through technology. Frauds in remittances like DDs, ATMs and Credit Cards
being tackled to some extent by training the operating staff. New intelligence is developing in Hacking, Em
Swoofing (Identify Thefts), Phishing, Vishing, Pharming, Trojan and so on. Unless stringent steps are taken
the regulators and law makers, these might act as deterrents to the advancing banking system through intern
banking.

The banking system in India needs to gear up to meeting the Basel II standards, comply with WTO Financ
Services Agreement by inviting more foreign banks and at the same time to stand up to meet the challenges
nullify the above adverse technological developments to offer best operational services to their custom
through IT intervention at all their branches in the country.

References:

1. Reserve Bank of India Occasional Papers – Vol 27, No. 3, Winter-2006 – "The Economics of Informati
Technology: An Introduction" by Hal R. Varian, Joseph Farrell, Carl Shapiro, Cambridge University Pre
Cambridge, 2004

2. Reserve Bank of India Monthly Bulletin, October 20

3. FOCUS – The Week Magazine, October 28, 20

4. "Reinventing Branch Banking in the New Cyber Age' – a paper by Mr K N C Nair - in Contribution
Volume III – A collection of papers on Banking, Insurance, Finance and Technology (Knowledge-Resear
Practices) – Banknet India publication, January 20

5. " Banking Sector Reforms : Policy, Issues and Fresh Outlook" by Dr R K Uppal and Rimpi Kaur publish
in Udyog Pragati, Vol. 31, No.3, July-Sept 20

6. Trend and Progress of Banking in India , Reserve Bank of India, 20

7. "Retail Banking" – Everything you need to know to work in a Bank by Raghu Palat, 2006 – published by In
Book Distributors (Bombay) Ltd., Mumb

8. " Impact of Technology on Payment Systems" – A Study by Narinder Kumar Bhasin and M Balakrishnan
The Indian Banker, Vol II No.9, September 20

9. Information Technology & Electronic Banking – The Indian Institute of Bankers, Mumbai – May 19

10. Banking on Technology – Indian Management - AIMA publication, 20

11. Building CRM – Customer Relationship Management and KYC experience through technology – BANC
2004 – Indian Banker February, 20

Prof. Chowdari Prasad

Professor in Finance & Registrar
Alliance Business School
Bangalore-560 068