International Journal of Innovations in Engineering and Management, Vol. 1; No.

1: ISSN: 2319-3344

Legislative Framework for Intensification of Internet

Technology in Banking Sector of India
Ritu Sehgal
Assistant Prof., Dept. of Business Administration, DAVIET, Jalandhar, Punjab, India
Sehgalritu77@yahoo.com

Abstract: Indian banking sector is one of the oldest sectors. The status that Indian banking sector has achieved
today is not one day process but it is due to long and hard efforts. In traditional times, banks were meant to
conduct transactions manually and the number of services for customers was very less. But due to technological
developments, it started uncountable services/facilities to the customers. Information technology particularly
Internet has revolutionized the banking sector. In banking sector, IT came into existence through the
recommendations of different committees formed for introduction and intensification of IT in banks. But along
with advent and adaptation of latest technology in the system of banks, it created the need of security and
authorization. In this paper the Information Technology Act and the legislative framework for growth of Internet
in banking sector has been discussed.

Keywords: EFT, IAMAI, Internet, Information technology, MICR, Regulatory Authority.

Accepted On: 18.10.2012

1. Introduction
Banking sector is playing very crucial role for
the development of the economy. Banking sector
is a fundamental part of any financial system
which is playing a key role for economic
development of the country. All economic
progress has been based on complete trade and
industrialization
and
banks
help
in
industrialization by providing funds which
enable the manufacturers to increase their
productive capacity, introduce better technology
and to raise national income. Indias banking
sector has inherited 2876 branches, with Rs. 860
crores deposits and Rs. 760 crores advances on
independence [4]. But Indias banking sector has
expanded to extremely large extent since 1990s.
As on 26-09-2009, there were 88 scheduled
commercial banks in India.
This number
includes 27 public sector banks, out of which 19
are nationalized, 7 belong to SBI and associate
banks and 1 is IDBI (classified as other public
sector bank), 31 private sector banks (dont have
government stake: they may be publicly listed
and traded on stock exchanges) and 38 foreign
banks are there as on the date. As per a report of
RBI, the public sector banks incurred an
expenditure of Rs. 17897 crore on
computerization
and
development
of
communication networks between September
1999 and March 2009. Whereas the share of
nationalized banks was Rs. 11802 crore during
that period and that of SBI group was Rs. 6095

www.gtia.co.in

Crore. As on March 31, 2009 100% branches of

SBI group were fully computerized whereas
95.7% branches of public sector banks were
fully computerized (branches under core banking
solution + other than branches under core
banking solution) and 4.3% partly computerized.
Dr. Y. Venugopal Reddy, Governor, RBI, in
Bank Conference 2004 highlighted that in
India, the share of banking assets in total
financial sector assets is around 75% as of end
March 2004.
Now the banking sector of India is progressing
with leaps and bounds due to spread of
information technology mainly the Internet.
The application of IT has been magnificently
increased in the service industries, particularly in
the banking industry, which by using IT related
products such as online banking, electronic
payments, information exchanges, financial
organizations can deliver high quality services to
clients with less effort [2].

2. Literature Review
In this section, review of literature is conducted
to have an in depth idea related to the field of
study.
Unnithan et al. [10] studied the drivers for
change in the evolution of the banking sector,
and the move towards electronic banking by
focusing on two economies: Australia and India.
The study found that Australia is a country with
Internet ready infrastructure as far as

International Journal of Innovations in Engineering and Management, Vol. 1; No. 1: ISSN: 2319-3344
telecommunication, secure protocols, PC
penetration is concerned. India, by comparison,
is overwhelmed by weak infrastructure, low PC
penetration, developing security protocols and
consumer reluctance in rural sector. Corrocher
[4] investigated the determinants of the adoption
of Internet technology for the provision of
banking services in the Italian context and also
studied the relationship between the Internet
banking and the traditional banking activity, in
order to understand if these two systems of
financial services delivery are perceived as
substitutes or complements by the banks. From
the results of the empirical analysis, banks seem
to perceive Internet banking as a substitute for
the existing branching structure. Agarwal et. al.
[1] explored the role of e-banking in edemocracy. With the development of
asynchronous
technologies
and
secured
electronic transaction technologies, more banks
and departments were using Internet for
transactional and information medium. Lin et
al. [7] focused on Customer Relationship
Management (CRM) and its adoption in
Taiwans banking industry. A number of factors
which can be used to guide companies for a
successful CRM deployment were found. These
factors include primacy of customer service,
customizing
CRM
functions/
modules,
discovering customers needs, maintaining
employees moral and conducting a decision
support system [7]. Thulani et. al. [9] sought to
explore the extent and usage of Internet banking
along with the challenges faced in adoption of
this technology. The results showed that while
majority of the banks in Zimbabwe had adopted
Internet banking but usage level had remained
relatively lower as many customers were not
using Internet banking in Zimbabwe. Sharma
and Uppal [8] conducted inter-group comparison
of financial performance of Indian commercial
banks. The banks were divided on the basis of
usage of technology i.e. partially IT oriented
banks and fully IT oriented banks. Public sector
banks excluding SBI and its associates (Gp 1)
and SBI and its associates (Gp2) were taken
under the category of partially IT oriented banks.
Private sector banks (Gp 3) and foreign sector
banks (Gp 4) were taken under the category of
fully IT oriented banks. It was found that in
banking industry of India, the correlation
between technology induction and financial
productivity was negative although statistically
insignificant.

www.gtia.co.in

3. Introduction of IT in Banking
Industry of India
The introduction of information technology has
changed the way in which the data is processed.
Therefore, almost all services provided by the
banks are influenced by the information
technology thereby opening new opportunities as
well as posing new threats before the banking
industry. There are four generations of online
system of banking, given as under:
a) 1965-1970: the focus during this time was
online balance checking and updating of the
balances with tellers at the counter accessing
centralized computers.
b) 1970-1980: during this phase, the banks
developed applications for online specialized
transactions like foreign exchange and stock
market transactions.
c) 1980-1990: during this phase, automation
was done at the branch level with local
processing and the banks had thousands of
online terminals. Decision support systems
were also developed during this period.
d) 1990 onwards: during this phase, the banks
developed networks which spread across the
globe and also have provided computer
based access to the banks customers for
their transactions. During this period, IT
became a strategic consideration in the
planning process.
Information technology changed the whole
functioning of banks. Today, information of all
kinds is transmitted easily and instantly around
the world with a fingertip access to computer,
cellular phone or palm pilot. Banking industry
provides financial services to the customers such
as acceptance of deposits, giving loans,
providing facilities for transfer of funds, giving
financial guarantees, providing foreign exchange
facilities, etc. all these services are basically
information processing services with cash
operations forming the only physical process
again based on information processing.
The technology adoption in the Indian banks was
a process, which was stemmed out of the
recommendation of different committees formed
by the Reserve Bank of India. In 1984, the main
focus was on customer service and branch
automation. In 1988, the exhaustive plan for
computerization in the banks was declared. The
major
recommendations
included
operationalization of MICR technology of four

International Journal of Innovations in Engineering and Management, Vol. 1; No. 1: ISSN: 2319-3344
metropolitan cities, framing of uniform
regulations of clearing houses, introduction of
credit cards and setting up the network of
Automated Teller Machines (ATMs). Some of
the most important recommendations of the
committee included the establishment of an
Electronic Fund Transfer (EFT) system, MICR
clearing to be introduced at all centres with
more than 100 banks, optimal usage of SWIFT
(Society for Worldwide Interbank Financial
Network for the Transmission), promotion of
card culture and switch over to on-line interbank clearing on a gross basis. In 1995,
legislations on Electronic Funds Transfer (EFT)
and other electronic payments were proposed.
The Government of India have also initiated
steps for promoting Information and Technology
Act, 1999 and consequential amendments to the
Reserve Bank of India Act, 1934, the Bankers
Books Evidence Act, 1881 etc. In 1998,
Dr.Vasudevan
further
recommended
up
gradation of technology in banking sector which
included legal framework of electronic banking,
technology plan for banks, outsourcing of
technology and services, computerization of
government transactions, standardization and
security and communication infrastructure. The
Indian Financial Network (INFINET) was
inaugurated in June 1999. It was based on
satellite communication using VSAT technology
and enabled faster connectivity within the
financial sector. The Government of India
enacted the Information Technology Act, 2000
(generally known as IT Act, 2000), to provide
legal recognition to electronic transactions.
Today, Internet is one of the most alteration
technologies. Internet is revolutionizing our
economy and technological systems of almost all
areas. Internet is a vast network of individual
computers and computer networks connected to
and communicate with each other. When two or
more computers are connected, a network is
created; connecting two or more networks create
Internet. Internet is meant to conduct the
transactions on the web in order to increase
efficiency, attract more and more customers and
retain existing customers. As per a study of
Internet provides opportunities for businesses to
increase their customer base reduce transactions
costs and sell their products globally [6].

www.gtia.co.in

4. Regulatory Authorities of Banks

in India
The Reserve Bank of India (RBI) is the apex
body to look after the overall development of the
banking industry. The Reserve Bank of India
(Amendment) Act, 2006 governs the Reserve
Bank functions which provide comprehensive
powers to regulate the money, foreign exchange
and government securities. The RBI is
responsible for implementing, formulating and
monitoring the policy of India. It is the regulator
and supervisor of financial system. It is the only
body which issues, exchanges and destroys
(which is not fit for circulation) the currency. It
plays wide promotional functions to support the
national objectives and generate goodwill among
citizens of country. It is the banker to banks and
Government. The Banking Regulations Act,
1949 governs the all scheduled commercial
banks. Since the origin of different banks has
been different, so they are governed by different
legislations apart from the Banking Regulation
Act. Other than the Banking Regulations Act,
different legislations are governed on different
bank groups since the origin of different banks
has been different. The nationalised banks are
governed by two acts i.e. the Banking
Companies (Acquisition and Transfer of
Undertakings) Act, 1970 and the Banking
companies (Acquisition and Transfer of
Undertakings) Act, 1980. The State Bank of
India and subsidiaries of State Bank of India are
governed by two legislations i.e. State Bank of
India Act, 1955 and State Bank of India
(Subsidiary banks) Act, 1959 respectively. IDBI
is governed by the Industrial Development Bank
(Transfer of Undertaking and Repeal) Act, 2003.
The private sector banks come under the
Companies Act, 1956. As regards foreign banks,
the RBIs regulatory approach is very liberal
towards branch licenses to foreign banks. As per
the Committee on Financial Sector Assessments
(CFSA), some aspects should be considered for
reviewing the need for entry of foreign banks.
All regulatory guidelines and norms applicable
to private sector banks in India have been made
applicable to them. Their branch licensing policy
could be broadly structured as per the lines of
that followed in new private sector banks. The
Indian subsidiaries of these banks should be
listed on the Indian Stock Exchange and
subjected to all requirements that Indian private
banks are subject to. The Regional Rural Banks

International Journal of Innovations in Engineering and Management, Vol. 1; No. 1: ISSN: 2319-3344
are formed under the Regional Rural Banks
(RRBs) Act, 1976. The capital issued by an RRB
is subscribed by the Central Government, the
State Government and a sponsor bank, generally
a public sector commercial bank. The RRBs are
also governed by the Banking Regulation Act
and the RBI Act. The co-operative banking
structure in India comprises urban co-operative
and rural co-operative credit institutions. As
regards urban co-operative credit institutions, the
regulatory and supervisory responsibilities are
shared between state registrars of co-operative
societies and the Reserve Bank of India.
Whereas in case of rural co-operative sector, the
regulatory powers are vested with the RBI and
the Registrar of Co-operative Societies (RCS)
and the supervisory functions are carried out by
National Bank for Agriculture and Rural
Development (NABARD).

5. Internet
Service
Providers
Association in India (ISPAI)
One must have an account in a host computer,
set up by any one of the Internet Service
Providers (ISPs) in order to access Internet.
Internet Service Providers Association in India
(ISPAI) plays a crucial role to support Internet.
The ISPAI was set up in 1998 with the objective
to promote Internet/broadband for the benefit of
all. Over the years ISPAI has influenced and
shaped the telecom policies so that Internet
service providers and entrepreneurs can set up
and grow their services. Today ISPAI is the
recognized apex body of Indian Internet Service
Providers worldwide. It is a platform for the
service providers community such as hardware
and software manufacturers and suppliers to gain
easy access to their ISP clients and promote their
products and services through personal meetings
supported and sponsored by ISPAI.
M/S Videsh Sanchar Nigam Ltd. (VSNL) was
the first public sector company to introduce
Internet in India in1995. Table 1 depicts the
market share of top five Internet Service
Providers.
Table 1 depicts that BSNL held top position with
56.76% of market share as of March 2010.
MTNL was at second position with market share
of 14.29%. M/s Bharti Airtel Ltd. reported third
position with 8.07% market share followed by
M/s Reliance Communications Infrastructure
Ltd. and M/s Hathway Cable & Datacom Pvt.

www.gtia.co.in

Ltd. with market share of 7.56% and 1.94%

having fourth and fifth place respectively.
Table 1: Market Share of Leading Top 5 Internet
Service Providers (ISPs) (As of March 2010)

Source: ISPAI, 2010

6. The Information
(IT) Act 2000

Technology

The Government of India enacted the

Information Technology (IT) Act on May 17,
2000 and the said legislation received the assent
of the President of India on 9th June 2000. The
IT Act 2000 was the first technology legislation
in India which came into operation with effect
from October 17, 2000 to provide to provide
legal recognition for ecommerce and electronic
transactions, to facilitate e-governance, to
prevent computer based crimes and ensure
security practices and procedures in the context
of widest possible use of information technology
worldwide. RBI had also set up a Working
Group on Internet Banking to examine different
aspects of Internet banking, generally known as
I-banking. The group had focused on three major
areas of I-banking i.e. (a) technology and
security issues (b) legal issues (c) regulatory and
supervisory issues. The IT Act included, among
other things, an amendment to the RBI Act,
which empowers the Reserve Bank to regulate
electronic funds transfer among banks and
financial institutions. Amendments have also
been carried out to the Negotiable Instruments
Act 1881 to enable cheque truncation and to
define e-cheque. RBI had accepted the
recommendations of the working group and
accordingly issued guidelines on Internet
banking in India for implementation by banks.
The Information Technology (amendment) Act
came into existence in 2008. The IT
(amendment) Act 2008 brought a paradigm shift
in data protection and privacy system in India.

International Journal of Innovations in Engineering and Management, Vol. 1; No. 1: ISSN: 2319-3344
Under section 2(1)(W) of the IT (amendment)
Act 2008, banks providing Internet banking and
other support services can be classified as
Intermediaries which is defined as any person
who on behalf of another person receives, stores
and transmits that record or provides any service
with respect to that record. The implementation
of information technology in RBI is based on the
mission information technology for overall
efficiency and excellence. RBI brought out the
vision document delineating the IT plans for
financial sector. This document covered various
areas such as IT Regulation and Supervision, IT
and IDRBT, IT for financial sector and IT for
Government related functions. Continuing
research, development and training is also
essential to ensure IT implementation for
financial sector. These aspects are addressed by
Institute for Development and Research in
Banking Technology (IDRBT).

7. Internet and Mobile Association

of India (IAMAI)
IAMAI is an essential body for banks because of
the increasing usage of Internet in banking
services. The IAMAI was set up in the year 2004
by the top Indian Internet portal. It is registered
under the Societies Act 1896. It is non-profit
organization having its offices in Delhi and
Mumbai. The IAMAI is responsible for
development and innovations of the mobile and
Internet sector in India. It deals with various
issues and challenges faced by the mobile and
Internet industry. The basic activities of IAMAI
are to promote the present strength of the digital
modern day economy, evaluate and suggest
applications and standards to the mobile and
Internet industry.

8. Conclusions
Hence, advanced technology introduced
enormous changes in banking sector. It has
changed the total functioning of the banks. But
by adopting latest technology in banks, it
increases the need to keep a check on the
activities and provide proper authorization to
services through internet. Thus, Information
technology Act, IAMAI, Reserve Bank of India
and ISPAI are the bodies which act as regulatory
authorities for banks in India. These deal with
the various issues and challenges faced by the
banking sector. Further, it becomes the need of

www.gtia.co.in

the hour to have a control over the activities

through Internet.
References:
[1] Agarwal, N., Agarwal, R., Sharma, P. and
Sherry, A. M., Ebanking for comprehensive
EDemocracy: An Indian Discernment,
Journal of Internet Banking and Commerce,
Vol. 8, 2003.
[2] Berger, A.N., The Economic Efforts of
Technological Factors Affecting Perceived
Ease of Use of web Based Learning
Technologies in a Developing Country, The
Electronic Journal on Information Systems
in Developing Countries, Vol. 9, 2003, pp 115.
[3] Chawla, S. and Sehgal, R., India and the
World: The Changing Paradigms in the
Banking Sector Due to Technological
Advancements, PRAJNAN, Vol. XXXIX,
2010, pp 128-142.
[4] Corrocher, N., Does Internet Banking
Substitute Traditional Banking? Empirical
Evidence from Italy, CESPRI, 2002.
[5] Debashish, S.S and Mishra, B.P., E-Banking
In India Major Development and Issues,
Pranjana, Vol. 6, 2003, pp 18.
[6] Forcht, K. and Wex, R., Doing Business on
the Internet: Marketing and Security
Aspects, Information Management and
Computer Security, Vol. 4, 1996, pp.3-9.
[7] Lin, C., Chang, H., Lin, Y. and Yang, W. ,
An Empirical Study of IT Development in
the
Banking
Industry
of
Taiwan,
International
Business
&
Economic
Research Journal, Vol 8, 2009, pp 89-97.
[8] Sharma, D and Uppal, RK., IT- Productivity
Paradox in Banks: A Study of Indian Banks
in Hyper IT Era, International Journal of
Business Economics and Management
Research, Vol 1, 2010, PP 1-21.
[9] Thulani, D., Tofara, C. and Langton, R.,
Adoption and Use of Internet Banking in
Zimbabwe: An Exploratory Study, Journal
of Internet Banking and Commerce, Vol. 14,
2009.
[10] Unnithan, C.R. and Swatman, P., EBanking on the Internet- A Preliminary
Research Comparison of Australian and
Indian Experiences in the Banking Sector,
2001.