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Technology in Banking Sector





I Dr. Rupam Tiwari hereby certify that Mr Arjun Govande, MMS Student of Parle Tilak Vidyalaya Associations Institute of Management, has completed a project titled Technology in Banking Sector in the academic year 2014. The work of the student is original and the information included in the project is true to the best of my knowledge.

Signature of Guide with Date

Signature of the Member

Guide: Dr. Rupam Tiwari

Board PTVA


I, Arjun Jayvant Govande , of Parle Tilak Vidyalaya Associations Institute of Management, pursuing MMS (Sem IV) hereby declare that I have completed a project on Technology in Banking Sector for the academic year 2013-14. The report work is original and the information/data included in the report is true to the best of my knowledge. Due Credit is extended on the work of literature/secondary survey by endorsing it in the Bibliography as per prescribed format

______________ Signature of Student


Acknowledging the wide panorama of people who helped and motivated me to complete this project, I am grateful in presenting to you the rare shades of marketing and technology by documenting the project TECHNOLOGY IN BANKING SECTOR

I am extremely thankful to my college guide, Dr.Rupam Tiwari, Senior Core Faculty, (PTVAS Institute of Management, Vile Parle), whose active co-operation & guidance during the course of completion of project work helped me formulate, redefine and implement a practical approach and finish the project successfully. Lastly, I feel obliged to express my grateful thanks to my colleagues, professors and family, who rendered me all the possible help in the completion of this project.





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Advent of information technology and cyber devices heralded a new world and bought tremendous change in all sectors of the economy. Banking sector always stand at the forefront of the economy and innovation has paramount concern to the application of the modern technical devices. Electronic delivery channels, ATMs, variety of cards, web based banking and mobile banking are few of the outcomes of the process of automation and computerization in banking sector. Technical innovations, automation and IP based network have amplified banks productivity and efficient manifold. This has further led to the move from brick banking to concept of click banking. The present paper attempts to anal yse the applications of IT in Banking Sector. The paper describes the evolution of IT in banking sector. The paper also attempts to analyse the obstacles and risks exposed due to the application of this technical boon to the sector. Information technology is one of the most important facilitators for the transformation of the Indian banking industry in terms of its transactions processing as well as for various other internal systems and processes. The various technological platforms used by banks for the conduct of their day to day operations, their manner of reporting and the way in which interbank transactions and clearing is affected has evolved substantially over the years. The technological evolution of the Indian banking industry has been largely directed by the various committees set up by the RBI and the government of India to review the implementation of technological change. No major breakthrough in technology implementation was achieved by the industry till the early 80s, though some working groups and committees made stray references to the need for mechanization of some banking processes. This was largely due to the stiff resistance by the very strong bank employees unions. The early 1980s were instrumental in the introduction of mechanisation and computerisation in Indian banks. This was the period when banks as well as the RBI went very slow on mechanisation, carefully avoiding the use of computers to avoid resistance from employee unions. However, this was the critical period acting as the icebreaker, which led to the slow and steady move towards large scale technology adoption.


Indian banking sector opened its door for computerised applications and development of communication network basically due to the sheer compulsion and necessity to cope up demand from its customers from different countries. Increasing number of bank branches, growing volume of banking operations, problems inherent in manual system and increasing incidence of frauds made it imperative for banks to signalise favourable response for the need of hour. During the first phase of introduction of computer applications in banking, around 4776 Advanced Level Posting Machines (ALPMs) and 233 minicomputers have been installed. In 1993, employees of banks signed agreement with management regarding computerisation of banking industry in India. Committees headed by C. Rangarajan have given landmark reports strongly recommending the IT applications in banking business. In 1994 Reserve Bank of India (RBI) constituted a committee for technical up gradation of the banks. The committee worked with the representation of different members from banks, technical institutions and government. Based on the recommendations of the committee the Institute for Development and Research in Banking Technology (IDRBT) was established in 1996. The core research areas of the institute include financial network, application architecture, web based technology, payment system, multimedia, data mining, data warehousing and risk management. In 1999 the collaborative efforts of IDRBT and RBI developed a satellite based wide area network known as Indian Financial Network (INFINET). The network is restrictive to be used by the banks and financial institutions only. Presently, the network consists of over 950 Very Small Aperture Terminal (VSATs) located in 127 cities of the country and utilises one full transponder on INSAT 3B. Realising the importance of payment system RBI constituted an operational group and payment system advisory committee in 2000. The prime task assigned to the committee was to develop an efficient and well-integrated system which could serve the purpose of Real Time Gross Settlement.


The following studies on Information technology in banking sector, related directly or indirectly have been reviewed in this chapter. Dr. Satish Tanaji Bhosale, Dr. B.S Sawant, Technological Developments in Indian Banking Sector : This paper talks about the role of banking sector in the development of Indian Economy. So banks need to optionally leverage technology to increase penetration, improve their productivity and efficiency, deliver costeffective products and services, provide faster. Efficient and convenient customer service and thereby, contribute to overall growth and development of the country. It highlights that technology allows transactions to take place faster and offer unparallel convenience through various delivery channels. This paper also talks about various technologies like MICR, Cheque transaction system, RTGS, NEFT etc. Dr. V.S Mangnale, Ms. J.V Chavan, Mr. A.D Randive, E-CRM in Indian Banking Sector, Golden Research Thoughts : This paper highlights that technology, people and customer are the three elements on which hinges the success of banking in the fast changing economic environment. The ultimate performance of a bank depends upon the satisfaction of its customers. In the emerging competitive and technological driven era, banks have to strive hard for retaining and enlarging their customer base. E-CRM is the latest buzzword in the corporate sector and is perceived as one of the effective tool in this direction by banks. This paper analyzes the concept of e-CRM in Indian banks from its various dimensions covering specifically its need, process, present status and future prospects. KPMG, Technology enabled transformation in Banking, The Economic Times Banking Technology, Conclave 2011: The article has concluded that Information technology in banking is fast evolving. From enabling banking services to driving transformation in the industry, Information technology holds a promise to change the face of banking in the next few years. New entrants are looking to leverage their existing strengths in the Indian banking arena. The opportunity available to these entrants through leveraging their understanding of technologies and markets they operate in, promises innovative business models with a focus on delivering customer value. The pace of change aided by regulatory directions will push banks to direct their strategies to a customer centric focus over the next four years.

Computerisation The process of computerisation marked the beginning of all technological initiatives in the banking industry. Computerisation of bank branches had started with installation of simple computers to automate the functioning of branches, especially at high traffic branches. Thereafter, Total Branch Automation was in use, which did not involve bank level branch networking, and did not mean much to the customer.

Networking of branches are now undertaken to ensure better customer service. Core Banking Solutions (CBS) is the networking of the branches of a bank, so as to enable the customers to operate their accounts from any bank branch, regardless of which branch he opened the account with. The networking of branches under CBS enables centralized data management and aids in the implementation of internet and mobile banking. Besides, CBS helps in bringing the complete operations of banks under a single technological platform. CBS implementation in the Indian banking industry is still underway. The vast geographical spread of the branches in the country is the primary reason for the inability of banks to attain complete CBS implementation.


The study has following objectives: To find out the progress of computerization in all the public sector banks of India To analyze the banking innovations after computerization of public sector banks of India. To analyze the ATM progress in the public sector banks of India. To identify challenges in the implementation of I.T. solutions in the public sector banks of India.



The present study is based on the secondary data collected from different journals, magazines, sites and published data from various issues of RBI and different Public sector banks. Various studies on this subject have also been referred in this study. The heads and other functionaries have also been contacted personally to collect the required data for this study. Customers have grown to expect comprehensive financial services from a single point of contact. They are attracted by many new products and services that non-banking institutions have been Offering. The challenge for banks is to package these products and services and deliver them through convenient, user-friendly channels. Only by integrating people, processes, and technology across business lines will banks be able to forge a portfolio of virtual banking services based on the proclivities of specific customer market segments. Consumer behavior is an important factor that will change the functioning and business plans of banks in the next decade. The banking sector will increasingly move towards CRM banking Model where the banks will have to develop and service products suited/ required at different phases of a consumers life. Banks have already started moving towards catching the customers young by providing school and college going students with bank accounts. As the youngster grows banks will have to track and predict the financial needs using sophisticated analytical models and deliver focused products and services. It has always been difficult for large institutions to compile information on a single customer from multiple points of contact. Customers who choose services and products from multiple business areas typically are treated as separate relationships within each area. Because a customer- centric infrastructure does not exist at most banks, customer service representatives do not have the infrastructure support or the incentive to pull the information together. Without clearly understanding the strategic advantages of using a customer data warehouse, bank customer service representatives will not change their behavior, and any competitive advantage will be short-lived. The bank will gain minimal value from the significant investment required to develop the requisite technologies. Knowledge Management treats the behavior of people as an equal and essential component of effective information-sharing. Knowledge management also enables knowledge from similar previous situations to inform current decisions. Both managers and service teams must play a role in building a knowledge culture. Managers must codify relevant experiences, packaging them to maximize their relevance and reusing them in new situations that create value. Once the knowledge has been codified, it needs to be shared with appropriate individuals. An integrated approach to knowledge management enables the bank to group its products to serve specific market segments, such as lawyers, young professionals, retirees. The product groupings would be based on customer feedback as to which products are in demand and on the banks assessment of each products profitability. Once the bank identifies the product groupings, it can provide


high-quality service, with high-quality support from front and back offices, cross-functional data bases, and customer service personnel.

For banks, information technology plays an important role in informed decision-making by creating a means to collect and codify experiences and solutions from similar decisions in such areas as financial management, customer service, or relationship development. The enabling technologies include client/server technology, distributed computing, networking, and data warehousing. Knowledge of what customers need most and are willing to pay a premium to get, should be frequently updated and shared across the bank. Technology allows the bank to accomplish this enormously complex task. Knowledge means more than just having information; it happens when information is put in proper context and shared. For customers, valuable knowledge might be reflected in the performance of their financial portfolio or in the ease and success of making transactions. The data warehouses and graphical interfaces that support the customers portfolio provide real-time access to all customer accounts and present them in an integrated, seamless interface. For the bank, technology creates a tool for gathering knowledge about customers financial behaviors, purchasing proclivities, portfolio performance, and market and competitive alternatives. Profitability analysis is crucial to the banks customer relationships, and it helps identify alternatives for delivering value to customers.



Indian banking industry, today is in the midst of an IT revolution. A combination of regulatory and competitive reasons has led to increasing importance of total banking automation in the Indian Banking Industry. The bank which used the right technology to supply timely information will see productivity increase and thereby gain a competitive edge. To compete in an economy which is opening up, it is imperative for the Indian Banks to observe the latest technology and modify it to suit their environment. Information technology offers a chance for banks to build new systems that address a wide range of customer needs including many that may not be imaginable today.

The Change Brought about by Technology in Indian Banking Sector Banks have changed in their operations and moved towards universal banking along with the increased usage of technology and technology-based services offering alternate channels such as smart cards, ATMs, usage of the internet, mobile and social banking. Banks have started deploying core banking, human resource management (HRM) and enterprise risk (ERP) management and process re-engineering etc to improve on their performance and productivity. Majority of banks are insisting on cashless and paperless payment modes. According to a KPMG study, a research analyst says, as of FY2012, non-cash payments constituted 91 per cent in value terms as compared to 88 per cent in FY in 2010 and 48 per cent in terms of value from 35 per cent in FY 2010. A bank analyst says the payments made through cheques in total non-cash transaction too has come down to 52 per cent from 83 per cent in volume terms, and to nine per cent from 85 per cent in value terms during between FY 2006 and FY 2012. Indian banks get top billing globally:-This has resulted in putting 20 Indian banks in their standing globally. In 2010, the UK-based Brand Finance's annual ranking put these banks in the top 500 banks by their brand value. In 2007, only six Indian banks had the top standing globally. To see further growth in the banking sector regulators and policy makers have been emphasising on financial inclusion to cover all sections of the society. Half of India's population does not bank. The regulators and policy makers have started taking a serious view of this. As a result, the top regulator the Reserve Bank of India (RBI) is now encouraging various entities including nonbanking finance companies (NBFCs), co-operative banks, regional rural banks (RRBs), and self13

help entities, business correspondents in rural areas and microfinance companies which have now given exposure to non-banked rural areas. This shows that at some point of time banking services would reach rural areas as much as they do in urban and semi-urban areas. The government and the regulator have taken several measures including mandatory opening of at least 25 per cent of new bank branches in unbanked rural areas, giving impetus to opening of new branches in tier III-VI cities. The mandatory and simplified Know Your Customer (KYC) detailing for opening small accounts have made things easier for banks to extend their reach. Banks have also become finance providers for community services development. Postliberalisation India has also been attracting banks from various foreign lands. These now number 40 - from 28 in FY in 2008 and have a 7 per cent share of the total assets management. Over 20 Indian banks have now opened over 240 offices overseas. Future outlook:-The banking system has to implement Basel III guidelines as per the directive of the RBI to make it a stronger sector. Some of the key measures of this include creating firm measures to make it foolproof of systemic risks, stringent timelines, ongoing improvement of quality and quantity of capital, liquidity risk management, value-based practices, solid mechanism, disclosures for total transparency and reduction of systemic risk in derivative and other money-related markets. The RBI has stipulated a time frame of five years to implement Basel III norms. But there are economy related hurdles as the government which holds majority stake in the public sector banks (PSBs) copes with the high fiscal deficit. Once the government decides to dilute its shares in the PSBs and brings it down to around 51 per cent, the Indian banking sector would see a sea change. Also, a large number of foreign players and big Indian corporate are awaiting government clearances for setting up new generation banks. Once there is clarity on this issue things would change drastically. Adoption of Banking Technology The IT revolution has had a great impact on the Indian banking system. The use of computers has led to the introduction of online banking in India. The use of computers in the banking sector in India has increased many folds after the economic liberalisation of 1991 as the country's banking sector has been exposed to the world's market. Indian banks were finding it difficult to compete with the international banks in terms of customer service, without the use of information technology. The RBI set up a number of committees to define and co-ordinate banking technology. These have included: In 1984 was formed the Committee on Mechanisation in the Banking Industry (1984)[11] whose chairman was Dr. C Rangarajan, Deputy Governor, Reserve Bank of India. The major

recommendations of this committee were introducing MICR technology in all the banks in the metropolises in India. This provided for the use of standardized cheque forms and encoders. In 1988, the RBI set up the Committee on Computerisation in Banks (1988)[13] headed by Dr. C Rangarajan. It emphasized that settlement operation must be computerized in the clearing houses of RBI in Bhubaneswar, Guwahati, Jaipur, Patna and Thiruvananthapuram. It further stated that there should be National Clearing of inter-city cheques at Kolkata, Mumbai, Delhi, Chennai and MICR should be made operational. It also focused on computerisation of branches and increasing connectivity among branches through computers. It also suggested modalities for implementing on-line banking. The committee submitted its reports in 1989 and computerisation began from 1993 with the settlement between IBA and bank employees' associations. In 1994, the Committee on Technology Issues relating to Payment systems, Cheque Clearing and Securities Settlement in the Banking Industry (1994) was set up under Chairman W S Saraf. It emphasized Electronic Funds Transfer (EFT) system, with the BANKNET communications network as its carrier. It also said that MICR clearing should be set up in all branches of all those banks with more than 100 branches. In 1995, the Committee for proposing Legislation on Electronic Funds Transfer and other Electronic Payments (1995) again emphasized EFT system. Total numbers of ATMs installed in India by various banks as on end June 2012 is 99,218. The New Private Sector Banks in India are having the largest numbers of ATMs, which is followed by off-site ATMs belonging to SBI and its subsidiaries and then by Nationalised banks and foreign banks. While on site is highest for the Nationalised banks of India.


Branches and ATMs of Scheduled Commercial Banks as on end March 2005 Bank type Nationalised banks State Bank of India Old private sector banks New private sector banks Foreign banks TOTAL Number of branches 33,627 13,661 4,511 1,685 242 53,726 On-site ATMs 3,205 1,548 800 1,883 218 7,654 Off-site ATMs 1,567 3,672 441 3,729 582 9,409 Total ATMs 4,772 5,220 1,241 5,612 800 17,645


Information technology in the banking sector: - opportunities, threats and strategies

The New Era The 21st century will bring about an all-embracing convergence of computing, communications, information and knowledge. This will radically change the way we live, work, and think. The growth of high speed networks, coupled with the falling cost of computing power, is making possible applications undreamed of in the past. Voice, data, images, and video may now be transferred around the world in micro-seconds. This explosion of technology is changing the banking industry from paper and branch banks to' digitized and networked banking services. It has already changed the internal accounting and management systems of banks. It is now fundamentally changing the delivery systems banks use to interact with their customers. All over the world, banks are still struggling to find a technological solution to meet the challenges of a rapidly-changing environment. It is clear that this new technology is changing the banking industry forever. Banks with the ability to invest and integrate information technology will become dominate in the highly competitive global market. Bankers are convinced that investing in IT is critical. Its potential and consequences on the banking industry future is enormous.

Technology and Banks Transformation Computers are getting more sophisticated. They have given banks a potential they could only dream about and have given bank customers high expectations. The changes that new technologies have brought to banking are enormous in their impact on officers, employees, and customers of banks. Advances in technology are allowing for delivery of banking products and services more conveniently and effectively than ever before - thus creating new bases of competition. Rapid access to critical information and the ability to act quickly and effectively will distinguish the successful banks of the future. The bank gains a vital competitive advantage by having a direct marketing and accountable customer service environment and new, streamlined business processes.


Major applications: The advantages accruing from computerization are three-directional - to the customer, to the bank and to the employee. For the Customer: Banks are aware of customer's need for new services and plan to make them available. IT has increased the level of competition and forced them to integrate the new technologies in order to satisfy their customers. They have already developed and implemented a certain number of solutions among them: Self-inquiry facility: Facility for logging into specified self-inquiry terminals at the branch to inquire and view the transactions in the account. Remote banking: Remote terminals at the customer site connected to the respective branch through a modem, enabling the customer to make inquiries regarding his accounts, on-line, without having to move from his office. Anytime banking: Anywhere banking: Installation of ATMs which offer non-stop cash withdrawal, remittances and inquiry facilities. Networking of computerized branches inter-city and intra-city will permit customers of these branches, when interconnected, to transact from any of these branches. Telebanking: A 24-hour service through which inquiries regarding balances and transactions in the account can be made over the phone. Electronic Banking: This enables the bank to provide corporate or high value customers with Graphical User Interface (GUI) software on a PC, to inquire about their financial transactions and accounts, cash transfers, cheque book issue and inquiry on rates without visiting the bank. Moreover, LC text and details on bills can be sent by the customer, and the bank can download the same. The technology used to provide this service is called electronic data interchange (EDI). It is used to transmit business transactions in computer-readable form between organizations and individuals in a standard format as information is centralized and updates are available simultaneously at all places, single-window service becomes possible, leading to effective reduction in waiting time.


For the Bank: During the last decade, banks applied IT to a wide range of back and front office tasks in addition to a great number of new products. The major advantages for the bank to implement IT are: Availability of a wide range of inquiry facilities, assisting the bank in business development and follow-up. Immediate replies to customer queries without reference to ledger-keeper as terminals are provided to Managers and Chief Managers. Automatic and prompt carrying out of standing instructions on due date and generation of reports. Generation of various MIS reports and periodical returns on due dates.

Fast and up-to-date information transfer enabling speedier decisions, by interconnecting computerized branches and controlling offices. For the employees IT has increased their productivity through the followings: Accurate computing of cumbersome and time-consuming jobs such as balancing and interest calculations on due dates. Automatic printing of covering schedules, deposit receipts, pass book / pass sheet, freeing the staff from performing these time-consuming jobs, and enabling them to give more attention to the needs of the customer. Signature retrieval facility, assisting in verification of transactions, sitting at their own terminal. Avoidance of duplication of entries due to existence of single-point data entry.


A search of the banking literature reveals that banks are moving rapidly to take advantage of recent and new customer service and cost reduction opportunities that new technologies offer. A sampling is in the table below:

Technology PC Networks Tellers Sales Tracking Software Relational Data Base Automate Credit Scoring E-mail Equipment Management Software Imaging Checks / Statements Imaging Documents Internet Banking Home Page Internet Electronic Office Telebanking Smart Cards Debit Cards Electronic Banking

Current Use 48%

44% 36% 8% 60% 33%

Use in Next 3 Years 80%

80% 76% 48% 95% 57%

12% 7% 3% 1% 56% 35% 12%

72% 45% 25% 15% 88% 70% 76%

Internet: The Internet is rapidly becoming the information superhighway of a global electronic marketplace. The rising commercial interests in the Internet are especially evident in "frontend" applications such as electronic catalogs, yellow pages, storefronts, malls, and customer support centres. All these applications are based on the World Wide Web (WWW) -- the fastest growing segment of the Internet. Although "back-end" applications such as electronic data interchange (EDI) are equally important, their adoption has not been as rapid. One major concern is security: the Internet is generally perceived as not secure enough for transmitting sensitive data such as payments. Upon a closer look, however, this view is not warranted, since technologies such as public key encryption and firewalls address essential security concerns. Moreover, such technologies are already available. The only remaining barrier is the lack of real world users of those technologies.

The pilot project between Bank of America (BofA) and one of its large corporate customers involves transporting financial EDI transactions over the Internet. If successful, BofA expects that this new EDI option will lead to a reduction in telecommunications costs, an improved position with respect to its value-added network (VAN), and valuable learning experience with the Internet environment, which is becoming increasingly important to the bank. The project is also significant beyond BofA: because it is one of the first large-scale, real-world trials, its outcome will help dispel many uncertainties surrounding Internet-based EDI, and encourage more companies to move in this direction.

Investing in technology: According to a survey conducted by the American Bankers Association, US banks expenditure on information technology grew from $16.3 billion in 1994 to $18.7 billion in 1995-an increase of 14.7%, and $1 billion more than the same bankers forecasted they would spend in last year's survey. By 1998, the banks expect to spend $21.2 billion (an increase of 7. 1 %).

How to survive: The key to survival is customer service. Customer loyalty will be determined by convenient and innovative delivery of products and personalized services. In the '70's and '80's, banks were marketing to a generation raised on old style banking: personal interaction at a banking office. That generation was disdainful of "impersonal" service and afraid of computers. Convenience was having a "branch" in one's neighbourhood. Today, personal service and convenience are still the critical factors in the banking relationship, but they are defined differently. Consumers still want to bank with a financial institution they "know," and one who "knows" them, but they do not necessarily want to go to the bank. They are not afraid of computers and technology; they embrace them. Convenience is doing their banking when they want, and where they want. They are now comfortable with personal computers and other Electronic devices. They expect fast, efficient, and accurate service And the only way to cost effectively provide the instant, quality service that customers demand, and that the competition provides, is through intensive use of the most advanced information technologies and through good people trained in the use of these technologies. For all these reasons, the banks delivery systems are completely changing.

The New Delivery Systems: The increasing cost of building brick-and-mortar branches, decreasing cost of computers, high delivery costs and slow revenue growth force a relook at the conventional delivery systems. Moreover, growing comfort of technology usage by the customer is rapidly fostering usage of non-branch channels for routine transactions.


The new strategy changes the focus of the branch from being a high cost transaction centre to a provider of a wide range of services like telebanking, customer service kiosks, ATMs, and remote electronic banking.

New Marketing Opportunities: As the new technology is so expensive banks need to use the new systems to do more than deliver information and basic services. Banks need the ability to also sell insurance and investment products to get a better return on this investment. Telephone banking can bring financial services to the home or office, especially if they are affordable screen phones. By noticing how much interest the customer expresses, the bank can market stock quotes and insurance quotes. Interactive videos are new technology that banks can make available to the customer to maintain personal contact while still lowering the expense of delivery service. With an interactive video an expert employee is not needed in each branch. Complex life insurance products, open brokerage accounts, customized product illustrations can be widely available where needed. The interactive videos will be cost effective expertise. The internet is a medium to allow banks to offer products to customers outside the normal customer base of a branch. Banks are aware of the customer's need for these services and plan to make them available before other sources do.

Current Trends: Another concept, virtual banking or direct transactions and data, banks can improve is gaining ground. This model productivity, optimize costs, provide quicker and offer products, services and better quality customer service. These transactions only through electronic help with the environmental angle delivery channels, generally without any physical branch, has already been tested out in advanced countries such as the United States and Europe. Owing to lower branch maintenance and manpower costs, such banks are able to offer competitive pricing for their products and services vis--vis traditional banks. More and more customers are already moving to non-branch banking, and the direct banking trend will surely catch up in India as technology-savvy banks adopt this model. Though it may appear to save the bank a lot of overheads, in reality, the customer never needing to visit a bank branch, either for completing the account opening process or the subsequent financial activities actually throws up new challenges. The power of technology makes it happen seamlessly and virtually, but customer satisfaction is something which calls for human touch. For all their technological sophistication, virtual banking should be hassle free and a pleasurable experience for the user. The virtual banks need to be aware of this fact in letter and spirit and always ensure that the quality of user experience is paramount and leveraging technology is only an aid to enriching user experience. As Banks adopt more technology, two things stand out using less paper and doing transactions wirelessly. In the last few years, many banks in India have implemented content management solutions and succeeded in conducting paperless transactions using the imaging and workflow

capabilities of such software. Also, automated handling of service requests with proper documentation and tracking facilities has significantly reduced turnaround time. Processing online applications for account opening and other services, transfer of funds without cheques, online account statements are all becoming part of the regular banking process. With digitization of all customer transactions and data, banks can improve better quality customer service productivity, optimize costs, and provide quicker and better quality service. With customers demanding anytime and anywhere access to their money and financial information, banks have no option but to implement wireless solutions in device independent and network-agnostic ways. On the user side, rapid progression of mobile technologies as evidenced by the well known LTE (Long Term Evolution) means banks must increasingly adapt their own infrastructure to the client side needs. On the flip side, unlike PCs, mobile phones are small and are easily lost or stolen, making them more vulnerable to fraudulent transactions. This calls for greater security measures combined with powerful regulation. There are also some privacy issues related to wireless banking that need to be resolved. Overall, there is no denying that there is both challenge and opportunity for banks in enriching customer experience arising from the numerous use case scenarios of powerful smart phones operating wirelessly. By ensuring the ease, comfort, safety, and seamlessness of such operations, banks can assuredly remain in business.

Product innovation and technology The banking industry is going through a period of rapid change to meet competition, challenges of technology, and the demands of the end users. Clearly technology is a key differentiation the performance of banks. Studies reveal that approximately 20% of non-interest expenditure of large banks in the United States is on information technology. The needs of the rural market are quite different and banks have to innovate accordingly. Also, along with new product offerings, they need to work towards existing product optimization. With low cost technology the enablers, supported by innovative products tailored for the rural populace, banks can offer secure investments with good returns and in addition, act as catalysts to alter rural investment patterns along more productive lines. Indian banks need to focus on swift and continued infusion of technology while ensuring its appropriateness and utility for both the rural and urban market.

The Lebanese Case During the last civil war (1975-1990), eighty percent of the Lebanese infrastructure was destroyed. The remaining twenty percent are now outdated. The Lebanese banking sector was heavily affected by the war. They lacked the information technology revolution in the banking

sector. It becomes a strategic necessity for the Lebanese banks to implement the new technologies at all levels, transactional level, managerial level and executive level. In the 1990's they started implementing IT capabilities to change the work organization, raise the productivity, cut costs and deliver the best services to their customers and increase their profits in the same time. Most of the Lebanese bankers believe that IT will enable them to face the foreign competition and the possible consequences of the coming peace. Technology Adoption the vast majority of the Lebanese banks have set very high standards of excellence for themselves in terms of technology, state-of-the-art facilities, customer service and customer orientation with all facets of operations totally computerized. The banks also make extensive use of communication technology to provide off-site banking facilities including ATMs. Their ambition is to position themselves as technology-driven banks offering superior services to both their clientele classes - the corporate customer and the retail customer. The corporate customer typically requires quick disposal of loan applications and maximum returns from the cash balance. The needs of the corporate customer are functions of the speed of response. Technologically the answer to this is a reliable network connecting branches that run on-line. The first steps. At the early stage, Lebanese banks started to build their databases and automate their work procedures. Most banks have adopted readymade packages for their internal operations. Currently, these banks are replacing their old information systems. The banks branches are planning to provide state-of-the-art services to their customers enabling a rapid growth of the bank's performance in a very competitive marketplace. Different approaches are followed in the Lebanese banks to acquire and implement the new technologies. Banque du Liban ET d'outre-mer (BLOM), for example, has developed its own complete banking information system. While Ban k Audi followed another strategy and purchased an on-line information system providing a real time on line branch network with an up-to-date banking and customer information to senior management, middle managers, end users and business analysts. Both information systems, in BLOM in Bank Audi are scheduled to run during this year. The major reasons behind adopting or developing new information systems are: Rapid geographical expansion has forced banks to replace their off-line systems by an on-line system linking the branches to the head office through the telecommunications network. Restructuring bank's processes in order to reduce staff expenses which constitute a large part of the operating costs and a heavy burden on its operating profitability. Incompatibility of the old systems with the strategic necessity of integrating new technologies like ATMs, telebanking, etc. in order to provide the high quality services to the customers and competing on an equal foot with the foreign banks.


The competition The Lebanese banks are also planning to offer the entire range of services like telebanking, ATMs, etc. They also respond very actively in the marketplace in introducing new products and services. Arab Bank was the pioneer in introducing ATMs in Lebanon. Arab bank started to install ATM machines in 1993. Other banks followed, by establishing in 1994 a network called Link Network, using Link cards. About 25 banks have joined this network and are sharing now its almost 60 machines located in the major cities of Lebanon. The central bank is expecting that about 700 ATM machines will be installed in Lebanon by the year 2000. Lebanese banks are also introducing remote banking services. Arab bank was also the first bank in Lebanon to offer this service. Early in 1994, Arab bank installed an interactive voice response system, called Phone Banking. At the same time, it introduced the computer based remote banking service which is called corporate banking. Four other banks, Allied Business Bank, BLOM, Universal Bank, and the British Bank of the Middle East followed and introduced their telephone based remote banking. However these services are providing only inquiry facilities because they are off-line systems.

Technology Assessment The diffusion and successful implementation of IT in Lebanese banks is not an easy process. Lebanese banks are facing enormous challenges in mastering the new tools provided by IT. An important constraint to the diffusion and success of IT implementation is the telecommunications infrastructure, another obstacle is managerial practices and organizational weaknesses. In the following section, I will analyse and discuss these obstacles. In evaluating banks use of technology, we look at both the technology in place to serve today's customer and the plans for serving tomorrow's. The first objective is to examine the bank's deployment of technology

relative to what is available, tested, and proven to enhance bank performance. The second is to examine the bank's preparation for the future. We want to answer the following questions: The most important issues to be analysed are: 1) To what degree is the bank using proven technologies to enhance performance? 2) Are there any technologies not deployed that would have a significant, positive effect on performance? 3) What level of specialized training has been received by the officers and employees assigned to selecting, deploying, and managing technology?

4) What level of systems training has been provided to other officers and employees? 5) How effective are the systems that are being used? 6) Is Management monitoring the evolution of banking technologies and planning for the future?

Telecommunication Infrastructure The greatest obstacle to real time electronic banking in Lebanon is the telecommunications infrastructure. Telecommunications in the banking sector is a major factor to the success or failure of any application or service. The Lebanese telecommunications infrastructure was devastated by the civil war. The process of rehabilitation and modernization of this infrastructure started in 1993.According to the recovery plan developed by CDR the telecommunications rehabilitation plan will be completed by the year 1998. This means that banks will not be able to rely on the public network until 1998. The result of such situation is a delay in implementing new services and products like remote banking, electronic funds transfer, real time bank information systems. This has also an effect on the reliability of the services already implemented like ATMs. In order to face this challenge, banks began studying the feasibility of installing a private telecommunications network. Four banks, Bank Audi, Arab Bank, Byblos Bank, and BLOM, started in the early 1996 considering the installation of a private network to connect their branches and thus conduct real time banking operations. This network will also be used to connect the ATMs machines which will thus function on-line. However three problems are delaying the implementation of such network:

1) Obtaining a license from the Ministry of Post and telecommunications. 2) The high cost of the equipment 0 the lack of coordination between the members of the Lebanese Banks Association.


Human Resources Problems Banking industry is heavily depending upon information technology that needs professionals for development, implementation and support. Despite the programs performed by many banks to develop their local expertise in IT, there is still a real shortage of qualified personnel. According to a recent survey ( T. Abdul Reda and M. Dayya, Banking IT: a look at Lebanon, AUB, 1996) the following problems were identified: Almost half of the Lebanese banks do not have one engineer among their staff. Lack of professional training programs:- Financial institutions in Lebanon offer a wide range of training programs to their employees. However, with respect to their technical IT staff the percentage of training programs is much less, because IT staff are considered to be trained, highly qualified and hence do not need extended training sessions. The consequence of such policy is a reduction of the capability of IT staff to be up to date in the most recent advances . High Turnover Rate of Technical Staff: - The turnover rate of the technical staff in some 40% percent the Lebanese banks is around 20%. The low salaries and better opportunities in other industries are the main reasons for this high rate.

Resistance to Change Resistance to change and the absorption capacity is often neglected once the automation system is adopted. However, this human factor is a critical factor in the success of any banking application of information technology. The only way to solve this problem is to design adequate training programs and increase the awareness of the employees. Most Lebanese banks have realized this fact and some of them have established a training centre. These are the major obstacles for implementing IT in Lebanese banks. Another point that should be mentioned is the necessity of planning very carefully the development of any new application. A computerization plan is the basis for implementing successful information technology solutions. To be relevant, these plans have to be linked closely to organizational strategies, objectives, priorities and processes.

Strategy for the future Banks face a serious challenge. The basic structure of the bank is increasingly in conflict with the changing product, delivery, and service needs of the customers the future belongs to financial service providers not traditional banks. The vast majority of large banks will create value networks. Doing so presents tremendous challenges. Banks will have to first develop a comprehensive distribution system that will enable customers to touch them at multiple points.

Banks must also create performance measurement systems to assure the mix products and services they offer are beneficial to both the customer and the bank. They must determine whether to deploy new technologies themselves or with other service providers. Nevertheless, technology alone will not solve issues or create advantages. This technology needs to be integrated in an organization, with the change management issues linked to people resisting new concepts and ideas. It also needs to support a clearly defined and well communicated business strategy.

Satellite Banking Satellite banking is also an upcoming technological innovation in the Indian banking industry, which is expected to help in solving the problem of weak terrestrial communication links in many parts of the country. The use of satellites for establishing connectivity between branches will help banks to reach rural and hilly areas in a better way, and offer better facilities, particularly in relation to electronic funds transfers. However, this involves very high costs to the banks. Hence, under the proposal made by RBI, it would be bearing a part of the leased rentals for satellite connectivity, if the banks use it for connecting the north eastern states and the under banked districts.

Development of Distribution Channels The major and upcoming channels of distribution in the banking industry, besides branches are ATMs, internet banking, mobile and telephone banking and card based delivery systems.

Automatic Teller Machines ATMs were introduced to the Indian banking industry in the early 1990s initiated by foreign banks. Most foreign banks and some private sector players suffered from a serious handicap at that time- lack of a strong branch network. ATM technology was used as a means to partially overcome this handicap by reaching out to the customers at a lower initial and transaction costs and offering hassle free services. Since then, innovations in ATM technology have come a long way and customer receptiveness has also increased manifold. Public sector banks have also now


entered the race for expansion of ATM networks. Development of ATM networks is not only leveraged for lowering the transaction costs, but also as an effective marketing channel resource.

Introduction of Biometrics Banks across the country have started the process of setting up ATMs enabled with biometric technology to tap the potential of rural markets. A large proportion of the population in such centres does not adopt technology as fast as the urban centres due to the large scale illiteracy. Development of biometric technology has made the use of self service channels like ATMs viable with respect to the illiterate population. Though expensive to install, the scope of biometrics is expanding rapidly. It provides for better security system, by linking credentials verification to recognition of the face, fingerprints, eyes or voice. Some large banks of the country have taken their first steps towards large scale introduction of biometric ATMs, especially for rural banking. At the industry level, however, this technology is yet to be adopted; the high costs involved largely accounting for the delay in adoption.

Multilingual ATMs Installation of multilingual ATMs has also entered pilot implementation stage for many large banks in the country. This technological innovation is also aimed at the rural banking business believed to have large untapped potential. The language diversity of India has proved to be a major impediment to the active adoption of new technology, restrained by the lack of knowledge of English.

Multifunctional ATMs Multifunctional ATMs are yet to be introduced by most banks in India, but have already been recognized as a very effective means to access other banking services. Multifunctional ATMs are equipped to perform other functions, besides dispensing cash and providing account information. Mobile recharges, ticketing, bill payment, and advertising are relatively new areas that are being explored via multifunctional ATMs, which have the potential to become revenue generators for the banks by effecting sales, besides acting as delivery channels. Most of the service additions to the ATM route require specific approval from the regulator.


TM Network Switches ATM switches are used to connect the ATMs to the accounting platforms of the respective banks. In order to connect the ATM networks of different banks, apex level switches are required that connect the various switches of individual banks. Through this technology, ATM cards of one bank can be used at the ATMs of other banks, facilitating better customer convenience. Under the current mechanism, banks owning the ATM charge a fee for allowing the customers of some other bank to access its ATM. Among the various ATM network switches are Cash Tree, BANCS, Cash net MITRE and National Financial Switch. Most ATM switches are also linked to Visa or MasterCard gateways. In order to reduce the cost of operation for banks, IDRBT, which administers the National Financial Switch, has waived the switching fee with effect from December 3, 2007.

Internet Banking Internet banking in India began taking roots only from the early 2000s. Internet banking services are offered in three levels. The first level is of a banks informational website, wherein only queries are handled; the second level includes Simple Transactional Websites, which enables customers to give instructions, online applications and balance enquiries. Under Simple Transactional Websites, no fund based transactions are allowed to be conducted. Internet banking in India has reached level three, offering Fully Transactional Websites, which allow for fund transfers and various value added services. Internet banking poses high operational, security and legal risks. This has restrained the development of internet banking in India. The guidelines governing internet banking operations in India covers a number of technological, security related and legal issues to be addressed in relation to internet banking. According to the earlier guidelines, all internet banking services had to be denominated in local currency, but now, even foreign exchange services, for the permitted underlying transactions, can be offered through internet banking. Internet banking can be offered only by banks licensed and supervised in India, having a physical presence in India. Overseas branches of Indian banks are allowed to undertake internet banking only after satisfying the host supervisor in addition to the home supervisor.

Phone Banking and Mobile Banking Phone and mobile banking are a fairly recent phenomenon for the Indian banking industry. There exist operative guidelines and restrictions on the type and quantum of transactions that can be undertaken via this route. Phone banking channels function through an Interactive Voice

Response System (IVRS) or telebanking executives of the banks. The transactions are limited to balance enquiries, transaction enquiries, stop payment instructions on cheques and funds transfers of small amounts (per transaction limit of Rs 2500, overall cap of Rs 5000 per day per customer). According to the draft guidelines on mobile banking, only banks which are licensed and supervised in India and have a physical presence in India are allowed to offer mobile banking services. Besides, only rupee based services can be offered. Mobile banking services are to be restricted to bank account and credit card account holders which are KYC and AMC compliant. With the rapidly growing mobile penetration in the country, mobile banking has the potential to become a mass banking channel, with very minimum investment required by the banks. However, more security issues need to be addressed before banking can be conducted more freely via this channel.

Card Based Delivery Systems Among the card based delivery mechanisms for various banking services, are credit cards, debit cards, smart cards etc. These have been immensely successful in India since their launch. Penetration of these card based systems have increased manifold over the past decade. Aided by expanding ATM networks and Point of Sale (POS) terminals, banks have been able to increase the transition of customers towards these channels, thereby reducing their costs too.

Payment and Settlement Systems The innovations in technology and communication infrastructure in recent years have impacted banks in a large way through the development of payment and settlement systems, which are central to the major portion of the businesses of banks. In order to strengthen the institutional framework for the payment and settlement systems in the country, the RBI constituted, in 2005, a Board for Regulation and Supervision of Payment and Settlement Systems (BPSS) as a Committee of its Central Board. The BPSS now lays down policies relating to the regulation and supervision of all types of payment and settlement systems, sets standards for existing and future systems, approves criteria for authorisation of payment and settlement systems, and determines criteria for membership to these systems, including continuation, termination and rejection of membership. Thereafter, the government and the RBI felt the need for a legal framework dedicated to the efficient functioning of the payment and settlement systems. The Payment and Settlement Systems Act was passed in December 2007, which empowered the RBI to regulate and supervise the payment and settlement systems and provided a legal basis for multilateral netting and settlement.

Paper Based Clearing Systems Among the most important improvement in paper based clearing systems was the introduction of MICR technology in the mid 1980s. Though improvements continued to be made in MICR enabled instruments, the major transition is expected now, with the implementation of the Cheque Truncation System for the processing of cheques.

Cheque Truncation System (CTS) Truncation is the process of stopping the movement of the physical cheque which is to be truncated at some point en-route to the drawee branch and an electronic image of the cheque would be sent to the drawee branch along with the relevant information like the MICR fields, date of presentation, presenting banks etc. Thus, the CTS reduce the probability of frauds, reconciliation problems, logistics problems and the cost of collection. The cheque truncation system was launched on a pilot basis in the National Capital Region of New Delhi on February 1, 2008, with the participation of 10 banks. The main advantage of the cheque truncation system is that it obviates the physical presentation of the cheque to the clearing house. Instead, the electronic image of the cheque would be required to be sent to the clearing house. This would provide a more cost-effective mode of settlement than manual and MICR clearing, enabling realization of cheques on the same day. Amendments have already been made in the NI Act to give legal recognition to the electronic image of the truncated cheque, providing for a sound legal framework for the introduction of CTS. Currently the effort is on increasing the processing efficiency with respect to paper based transactions, and as far as possible, to reduce the burden on paper based clearing. Through the introduction of advanced electronic funds transfer mechanisms, the RBI has been successful in diverting a large portion of paper based transactions to the electronic route.

Electronic Clearing Service The Electronic Clearing Service (ECS) introduced by the RBI in 1995, is akin to the Automated Clearing House system that is operational in certain other countries like the US. ECS has two

variants- ECS debit clearing and ECS credit clearing service. ECS credit clearing operates on the principle of single debit multiple credits and is used for transactions like payment of salary, dividend, pension, interest etc. ECS debit clearing service operates on the principle of si ngle credit multiple debits and is used by utility service providers for collection of electricity bills, telephone bills and other charges and also by banks for collections of principal and interest repayments. Settlement under ECS is undertaken on T+1 basis. Any ECS user can undertake the transactions by registering themselves with an approved clearing house. Operating from 74 different locations, ECS handles an average of 20 million transactions per month. It enables easy payments and collections for repetitive and bulk transactions. ECS takes off a lot of burden of paper work from the banks, enabling smooth flow of transactions. The volume of electronic transactions has increased at an annual average growth rate of 32.1% during FY05-FY09. The use of ECS (credit) and ECS (debit), in particular, has witnessed substantial growth in the last few years. The RBI has recently launched the National Electronic Clearing Service (NECS), in September 2008, which is an improvement over the ECS currently operational. Under NECS, all transactions shall be processed at a centralized location called the National Clearing Cell, located in Mumbai, as against the ECS, where processing is currently done at 74 different locations. ECS system has a decentralised functioning, and requires users to prepare separate set of ECS data centre-wise. Users are required to tie-up with local sponsor banks for presenting ECS file to each ECS Centre. As on September 2008, 25000 branches of 50 banks participate in the NECS. Leveraging on the core banking system, NECS is expected to bring more efficiency into the system.

Electronic Funds Transfer Systems The launch of the electronic funds transfer mechanisms began with the Electronic Funds Transfer (EFT) System. The EFT System was operationalized in 1995 covering 15 centres where the Reserve Bank managed the clearing houses. Special EFT (SEFT) scheme, a variant of the EFT system, was introduced with effect from April 1, 2003, in order to increase the coverage of the scheme and to provide for quicker funds transfers. SEFT was made available across branches of banks that were computerised and connected via a network enabling transfer of electronic messages to the receiving branch in a straight through manner (STP processing). In the case of EFT, all branches of banks in the 15 locations were part of the scheme, whether they are networked or not. A new variant of the EFT called the National EFT (NEFT) was decided to implemented (November 2005) so as to broad base the facilities of EFT. This was a nationwide retail electronic funds transfer mechanism between the networked branches of banks. NEFT provided

for integration with the Structured Financial Messaging Solution (SFMS) of the Indian Financial Network (INFINET). The NEFT uses SFMS for EFT message creation and transmission from the branch to the banks gateway and to the NEFT Centre, thereby considerably enhancing the security in the transfer of funds. While RTGS is a real time gross settlement funds transfer product, NEFT is a deferred net settlement funds transfer product. As the NEFT system stabilized over time, the number of settlements in NEFT was increased from the initial two to six. NEFT now provides six settlement cycles a day and enables funds transfer to the beneficiaries account on T+0 basis, bringing it closer to real time settlement. The commencement of NEFT led to discontinuation of SEFT, and EFT is now available only for government payments. With the SFMS facility, branches can participate in both the RTGS and the NEFT System. It is envisioned that all the RTGSenabled bank branches would be NEFTenabled too, so that the customer would have a choice between RTGS or NEFT, based on time urgency, value of the transaction and different charges applicable on the two systems. Using the NEFT infrastructure, a one-way remittance facility from India to Nepal has also been implemented by the RBI since 15th May 2008. In order to increase the coverage of NEFT to a wider section of bank customers in semi-urban and rural areas, an enhancement of the NEFT called the NEFT-X [National EFT (Extended)] is also proposed for phase wise implementation. This would facilitate non-networked branches of banks to transfer funds electronically by accessing NEFT-enabled branches for transfer of funds. NEFT (Extended) would work on a T+1 basis and would ensure wide rural coverage of the electronic funds transfer system.

RTGS The other payment and settlement systems deployed were mostly aimed at small value repetitive transactions, largely for the retail transactions. The introduction of RTGS in 2004 was instrumental in the development of infrastructure for Systemically Important Payment Systems (SIPS).




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The payment system in India largely followed a deferred net settlement regime, which meant that the net amount was settled between banks on a deferred basis. This posed significant settlement risks. RTGS was launched by RBI, which enabled a real time settlement on a gross basis. To ensure that RTGS system is used only for large value transactions and retail transactions take an alternate channel of electronic funds transfer, a minimum threshold of one lakh rupees was prescribed for customer transactions under RTGS on January 1, 2007. RTGS minimizes systemic risks too, in addition to settlement risks, as paper based funds settlement through the Interbank clearing are replaced by the electronic, credit transfer based RTGS system. High systemic risks are posed by high value interbank transfers, so, it is considered desirable that all major interbank transfers among commercial banks having accounts with RBI be routed only through the RTGS system. The RTGS system had a membership of 107 participants (96 banks, 8 primary dealers, the Reserve Bank and the Deposit Insurance, Credit Guarantee Corporation and Clearing Corporation of India Ltd.) as at end-August 2009. The reach and utilisation of the RTGS has witnessed a sustained increase since its introduction in 2004. The bank/branch network coverage of the RTGS system increased to 58,720 branches at more than 10,000 centres facilitating the increased usage of this mode of funds transfer.

Technology Vendors Many Indian banks handled technological issues in house till the late 1990s. Thereafter, the complications of the business necessitated the engagement of specialized vendors to handle complex issues. Due to the complexities involved, most banks now prefer to engage IT vendors to introduce specialized softwares to help in their risk management systems, retail and corporate banking, card management systems, complete back office support including data management systems.


Obstacles and Risk associated with IT applications The usage of IT in banking sector has bought ample number of benefits to banks as well as its customers. But at the flip side of changing financial landscape from brick to click banking, the application of IT in banking, exacerbates traditional banking risks and raised many threats to banking authorities. These amplified risks persist even if the system uses closed networks instead of open networks (as in case of closed network programs also, the possibility of insecure telephone connections, password violations, and system attacks exist). Lockett and Littler (1997) also identified risk as a very crucial aspect of electronic banking. The risk involved in using IT in banking operations include security risk, legal risks, strategic risk, money laundering risk, reputation risk etc. Some other obstacles associated with IT applications includes requirement of heavy investment in hardware and software with comparative long gestation period. It may lead to problems concerning cost control, integration of traditional system to new system and chances of excess capacity. Further due to the exponential growth in the number of technical inventions, there is always a fear of getting the implemented technique outdated shortly.



(a) Policy Actions the Banking Sector should: (i) Establish programmes and policies to ensure that their human resources needs will be met. These should make provision for the recruitment of skills which are ancillary to their core disciplines, as well as continuous training, both in-house and through partnering 12 (ii) Be pro-active with respect to developments in the sector. The banks do not always have to wait on governments to set the agenda or make suggestions for the industry. One example in this regard is the idea for a CARICOM numeraire currency which was first mooted by a bankers association. Another issue which would benefit from a jump-start by the banks is the old currency convertibility initiative (iii) Take steps to improve its public image. This can be achieved through public education which explains what banking is about and its benefits to the society The Governments should: (i) Sign the CARICOM Financial Services Agreement as soon as possible. This should quicken the pace of financial integration and the establishment of the regional capital market (ii) Undertake some technical work on a regional basis to better understand the relationship between various levels of taxation and the profitability of the banks. This would help to determine whether tax policies are injurious to the growth of the banking sector and if any incentives are warranted. It would be useful for this work to be undertaken as part of the movement towards the harmonisation of fiscal policy (iii) Establish watchdog agencies that would be charged with protecting the interests of consumers. Examples of these are anti-trust bodies and deposit insurance corporations (iv) Establish a supra-national body to facilitate the efforts of banks to take advantage of opportunities provided in trade agreements 13 The Central Banks should: (i) Continue to use moral suasion to get the banks to allocate a higher proportion of their credit to the foreign-exchange earning sectors. However, they should examine the feasibility of reintroducing credit ceilings on lending for particular activities (ii) Create positions of banking ombudsman to look after complaints about bank fees and charges


(iii) Use public education to make consumers more aware of regulatory practices as well as changes in monetary policy and in the financial environment (b) Data Gaps the Banks should: (i) endeavour to produce and publish a wider range of financial information and analysis (ii) Seek to become familiar with all policies, programmes and agreements which may impact their current and future operations (c) Legislative Changes The Governments should: (i) make whatever amendments are necessary to ensure that there are no inconsistencies between the pieces of legislation under which the banking sector is regulated (ii) Wherever possible harmonise the legislation 14 (iii) Regulate the banking sector as a distinct group (iv) Strengthen the legal provisions relating to governance requirements



Early experiences with electronic commerce in the banking industry, which has been a pioneer in the use of electronic systems, can be used to learn of some potential dangers and issues to be taken into account. The use of Automated Teller Machines and electronic home banking systems has increasingly allowed customers to bank outside of traditional bank facilities, for most of their usual transactions. This was consistent with the cost-savings strategy of most banks, which discovered that electronic transactions were about seven times less costly compared to the manual handling of these transactions by a bank teller. Nevertheless, the fact that customers' only contact with their banks was through (rather unsophisticated) electronic interfaces, and the major difficulties in integrating the legacy systems of a typical bank, prevented banks in many cases from selling additional products to customers (cross-selling). In some European markets, the insurance companies took opportunity of that to grab business from banks, selling savings products to customers through their extensive distribution network. Similarly, the decrease in human interaction with customers could also lead to a less sophisticated understanding of their needs, as they're not always able to express comments, criticisms or requests for new products while interacting with machines. This should lead to a design of electronic commerce systems which incorporate capabilities for customer understanding and for proactive selling of new products. Electronic business transactions can only be successful if financial exchanges between buyers and sellers can occur in a simple, universally accepted, safe and cheap way. Various systems have been proposed, some of them based on traditional mechanisms (e.g. credit cards accounts) while others rely on new designs, such as electronic money. The key here will be to find a few widely accepted mechanisms, which can be used by most actors. The recent agreement between MasterCard and Visa on one security standard for credit card transactions over the Internet, and its backing by most major software vendors is one step in the right direction. This doesn't diminish the need for more specialized systems, for instance to allow micro transactions, the exchange of very small amounts of money (a few cents) in exchange for information or services. These new payment mechanisms will in turn enable new business models such as pay-per-article newspapers.



Information technology offers enormous potential and emancipated various opportunities to the banking sector. It provides cost-effective, rapid and systematic provision of services to the customers. Applications of IT in banks enables sophisticated product development, reliable techniques for risk management, brings transparency to the system and helps banking sector reach geographically distant and diversified markets. IT and communication networking system have crucial impact on money, capital and foreign exchange market. However, extensive adoption of IT techniques may excavate the conventional banking risks. Large scale computerisation may also require huge investment in hardware and software and subsequent maintenance. The fear of being outdated due to the rapid technical innovations further leads to some obstacle in adaptability. Banks should educate its customers regarding precautionary measures and frame suitable guidelines for safety measures. Banks should have a clear strategy driven from the top and should ensure proper management of risks involved in internet banking through adopting effective policies, procedures, and controlling measures. Policy makers and supervisors must continuously assess the existing framework and should introduce required modification in it. In order to make best possible use of prevalent techniques domestic requirements are also subject to be analysed by the regulators. To avoid the probability of failure regularly monitoring of its functions regular security trials are also required. Banks must ensure proper back-up and recovery plans so as to ensure full faith in technology



Bakshi, S., Corporate Governance in Transformation Times, IBA Bulletin, 2003 Bimil Jalan, Strengthening Indian Banking and Finance-Progress and Prospects, The Bank Economist Conference, India, 2002

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