Anuj Singh

B.Com(Honours)

2016-17

ABSTRACT

Information technology refers to the acquisition, processing, storage and

dissemination of all types of information using computer technology and

telecommunication systems. Electronic banking is generally an extension of

traditional banking, using the internet as an electric delivery channel for

banking products and services. The banking today is redefined and re-

engineered with the use of IT and it is sure that the future of banking will

offer more sophisticated services to customers with the continuous product

and process innovations. Thus there is a paradigm shift from sellers market

to buyers market. So banks also change their approach from Conventional

Banking to Convenience Banking and Mass banking to Class Banking. The

study examines various relevant issues relating to role of IT in banking and

recommends to ensure privacy and confidentiality of datas, implement IT

and other Cyber laws properly. This will ensure the developmental role of IT

in the banking industry.

KEYWORDS: Information Technology, e-Banking, Services, Innovation,

Challenges.

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RESEARCH METHODOLOGY

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.

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

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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

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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

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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.

CHAPTER 1 - INTRODUCTION

Banking sector plays a significant role in development of Indian economy. So

banks need to optionally leverage technology to increase penetration,

improve their productivity and efficiency, deliver cost-effective products and

services, provide faster, efficient and convenient customer service and

thereby, contribute to the overall growth and development of the country.

Technology enables increased penetration of the banking system, increases

cost effectiveness and makes small value transactions viable. Besides

making banking products and services affordable and accessible, its

simultaneously ensures viability and profitability of providers. Technology

allows transactions to take place faster and offers unparallel convenience

through various delivery channels. Technology enhances choices, creates

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new markets, and improves productivity and efficiency. Effective use of

technology has a multiplier effect on growth and development.

In the five decades since independence, banking in India has evolved

through four distinct phases. During Fourth phase, also called as Reform

Phase, Recommendations of the Narasimham Committee (1991) paved the

way for the reform phase in the banking. Important initiatives with regard to

the reform of the banking system were taken in this phase. Important among

these have been introduction of new accounting and prudential norms

relating to income recognition, provisioning and capital adequacy,

deregulation of interest rates & easing of norms for entry in the field of

banking.

The Indian banking sector is also trying to wake up from sleep and become

proactive till 1990, the Indian banks have been working in a very comfortable

and protected environment. However, since then they have been pushed into

intense competition due to changed economic policies. The technology is

lifting the competition in the banking sector. Traditionally, banks have been

using technology to improve their products and efficiency. Today, technology

is not only changing the environment but also the relationship with

customers. Technology has not broken many barriers but has also brought

about superior products and channels. This has brought customer

relationship into greater focus. It is also viewed as an instrument of cost

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reduction and effective communication with people and institutions

associated with the banking business. The RBI has assigned priority to the up

gradation of technological infrastructure in financial system. Technology has

opened new product and services, new market and efficient delivery

channels for banking industry.

IT refers to processing, storing and transferring information. It uses

computers, electronic devices such as telephones, mobile phones, fax

machines etc. and telecommunication network. IT has defied all geographical

boundaries. Information Technology enables sophisticated product

development, better market infrastructure, implementation of reliable

techniques for control of risks and helps the financial intermediaries to reach

geographically distant and diversified markets. Internet has significantly

influenced delivery channels of the banks. Internet has emerged as an

important medium for delivery of banking products and services.

The customers can view the accounts; get account statements, transfer

funds and purchase drafts by just punching on few keys. The smart cards

i.e., cards with micro processor chip have added new dimension to the

scenario. An introduction of Cyber Cash the exchange of cash takes place

entirely through Cyber-books. Collection of Electricity bills and telephone

bills has become easy. The upgradeability and flexibility of internet

technology after unprecedented opportunities for the banks to reach out to

its customers. No doubt banking services have undergone drastic changes

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and so also the expectation of customers from the banks has increased

greater.

IT is increasingly moving from a back office function to a prime assistant in

increasing the value of a bank over time. IT does so by maximizing banks of

pro-active measures such as strengthening and standardizing banks

infrastructure in respect of security, communication and networking,

achieving inter branch connectivity, moving towards Real Time gross

settlement (RTGS) environment the forecasting of liquidity by building real

time databases, use of Magnetic Ink Character Recognition and Imaging

technology for cheque clearing to name a few. Indian banks are going for the

retail banking in a big way The key driver to charge has largely been the

increasing sophistication in technology and the growing popularity of the

Internet. The shift from traditional banking to e-banking is changing

customers expectations.

With the globalization trends world over it is difficult for any nation big or

small, developed or developing, to remain isolated from what is happening

around. For a country like India, which is one of the most promising emerging

markets, such isolation is nearly impossible. More particularly in the area of

Information technology, where India has definitely an edge over its

competitors, remaining away or uniformity of the world trends is untenable.

Financial sector in general and banking industry in particular is the largest

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spender and beneficiary from information technology. This endeavours to

relate the international trends in it with the Indian banking industry.

The last lot includes possibly all foreign banks and newly established Private

sector banks, which have fully computerized all the operations. With these

variations in the level of information technology in Indian banks, it is useful to

take account of the trends in Information technology internationally as also to

see the comparative position with Indian banks. The present article starts

with the banks perception when they get into IT up gradation. All the trends

in IT sector are then discussed to see their relevance to the status of Indian

banks.

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CHAPTER 2 - The Role of Information Technology

in Banking

The role of information technology in the banking industry has changed

dramatically. Working in the banking industry for the past fifteen years, I

have had the opportunity to witness a complete transformation of the way

business is conducted. IT has made e-business possible in this industry.

One of the internal networks that allow the bank to do e-business its sales

force automation and analytics E-Business solutions which helps streamline

operations and increase customer loyalty and sales effectiveness throughout

its nationwide commercial sales force and network of all its branches.

It supports the company nationwide mobile sales force and give more than

250 workers access to the companys online Customer Relationship

Management system. The system has helped First Union to identify customer

needs and provide more personalized service through any point of customer

interaction. FU strategy was to gain competitive advantage with a more

advance system for collecting, managing and leveraging customer

information that will increase the productivity of the sales force.

Another capability of this network include: centralized and up-to-date

customer information across multiple communications channels; advanced

reporting to analyze data from all customer transactions; management of

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compensation and incentive plans across multiple selling channels; advanced

reporting to analyze data from all customer transactions; management of

compensation and incentive plans across multiple selling channels; accurate

management of sales leads and the revenue pipeline, accurate, real-time

customer quotes and proposals; identification of cross-sell and up-sell

opportunities, and extension of sales channels to the Web.

We have implemented the intranet as an external function. Because we not

only compete with businesses for job candidates. We have managed to

increase the number of employment applications by 10 percent while making

sure that only high-quality candidates are referred. Our employment

recruitment site is a 24/7 operations. The recruitment application runs from

the ralled on the desktops, only a Web-browser and an Internet connection

are required.

Employing an online recruiting system makes the process of applying for a

job easy and understand le, and it helps a public agency in its talent battle

with the private sector. This system saves time when collecting and

screening applications, sending out notifications, and arranging testing and

interviews. The business saves a lot of many by eliminating paper mailings

and now receives about 76 percent of its applications online.

The system consists of an online employment center, which posts jobs,

accepts applications, and permits review and communications directly with

the hiring department. It combines paper-based and electronic forms into a

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single database. The Application Tracking module updates application status

throughout the hiring process, sends notices, and refers them to a hiring

department.

2.1 - Technology and Banking 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. Consistent management and decision

support systems provide the bank that competitive edge to forge ahead in

the banking marketplace.

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

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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 offers

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 a 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

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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.

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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.

2.2 - 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 fold 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

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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)[30] 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 standardised cheque

forms and encoders.

In 1988, the RBI set up the Committee on Computerisation in Banks

(1988) headed by Dr. C Rangarajan. It emphasised that settlement

operation must be computerised in the clearing houses of RBI in

Bhubaneshwar, 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.

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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 emphasised

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 emphasised EFT

system.
In July 2016, Deputy Governor Rama Gandhi of the Central Bank of

India "urged banks to work to develop applications for digital currencies

and distributed ledgers."

2.3 - IT Considerations

Since the early nineties, each Indian bank has done some IT improvement

effort. The first and foremost compulsion is the fierce competition. While

deciding on the required architecture for the IT consideration is given to

following realities.

(1.) Meeting Internal Requirement: The requirements of the banks

are different individually depending upon their nature and volume of

business; focus on a particular segment, spread of branches and a like. Many

a times banks do have the required information but it is scattered. The

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operating units seldom know the purpose of gathering the information by

their higher authorities.

(2.) Effective in Data Handling: As stated earlier the banks have

most of the needed data but are distributed. Further the cost of collection of

data and putting the same to use is prohibitively high. The accuracy and

timeliness of data generation becomes the causalities in the process. Best of

the intentions on computerization are wished away because there is

nonvisible reduction in cost /efforts/time required for the required data

gathering.

(3.) Extending Customer Services: Addressing to rising customers

expectations is significant particularly in the background of increased

competition. In case bank A is unable to provide the required service at a

competitive price and in an accurate manner with speed. 3 www.ssijmar.in

There is always a bank IT at its next-door waiting to hire the customer.

Awareness of customers about the availability of services and their pricing as

also available options have brought into sharp focus the issue of customer

satisfaction.

(4.) Creative Support for New Product Development: It has

become necessary for the banks to vitalize the process of product

development. Marketing functionaries needs a lot of information not only

from the outside sources but also from within the banks. Banks are looking to

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retail segment as the future market places for sales efforts. Having full-

fledged information of existing customer is the key for this purpose. The

emergences of data requirement and an appropriate architecture to support

the same are significant issues to be handled in this regard.

(5.) End-user Development of the Non-technical Staff:

Banking being a service industry, it is the staffs at counters that deliver the

products. In Indian scenario, virtual banking is likely to have a few more

years to establish. The dependence on counter staff is unavoidable. The

staffs are large in number and the majority is non-technical.

2.4 - Trends in Information Technology

Certain trends have been visualized of information technology in banking

sector all over the world.

(1.) Outsourcing: Outsourcing is one of the most talked about as also a

controversial issue. The drivers for getting in to outsourcing are many to

include gaps in IT expectations and the reality, demystification of

computerization in general and IT in particulars, trend towards focusing on

core competencies, increased legitimacy of outsourcing and intention of

getting out of worries and sort of up gradation of hardware and software

versions. Not that the practice is new as earlier it was refused to as buying

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time or service bureau. What is needed is the clear of outsourcing, beside a

definite plan to be more competitive after outsourcing. It is necessary to

have checks and balances to monitor vendor performance. Cost aspects

merit consideration, as also a decision on the part of the process to be

outsourced shall be significance. Exit route and resource on the amount of

failure after outsourcing are the other issue to be looked onto. Not

withstanding these risks, outsourcing has come to say.

(2.) Integration: One of the IT trend is moving from hierarchy to team

approach. The purpose is to see an alternative to retooling, to react speedily

and to develop capabilities rather than exploiting them. Such integration is

necessary so as to address to prevalent situations:

(a) Functions needing data and not getting from others

(b)Sending data to those who do not want to require them.
(c) Global data exist but do not travel to required business functions.

Indian banks seem to follow this trend through the sincere redesign as

described earlier.Instead of vertically divided pyramid type organizational

set-ups, banks are now being to have separate group like finance,

international consumer banking, industrial/commercial credit etc.

(3.) From Solo to Partnership: With the development of IT, two

things are taking place simultaneously. The work force as a percentage of

total staff is going down and spending on IT as percentage of total spending

is going up. The forms of partnership can include binding by superior service,

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accommodation in service sharing network, equal partnership and situations,

where survival is threatened. At times, the partnership becomes necessary to

get out of areas where there is no competitive advantage. Low development

cost or wider geographical coverage is the aspects that create such

partnership. Instances are not frequent, where joint ventures have been

found with the IT vendors.

(4.) Distinctive Edge: It is always said that many use but a few make

use of IT. Historically, the emphasis is on using IT for large volumes like

payrolls, balancing the books, the consolidation etc. That realization on

having IT as matter of competitive edge has come about very lately. It is

recognized that customer service is not an easy thing to provide, but IT is

used as a mean. It does give value additions and erases barriers for

competitors to enter. Banks understand that the cost of cultivating the new

customer is 5 to 6 times of retaining the old one. Customer normally switches

banks due to poor service. The appreciation of these facts has compelled the

banks world over to look upon IT as an instrument to create distinctive edge

over competitors. The private sector banks that were established in 1990s

as a part of finance sector reforms did make good of IT to have an edge over

the others. The foreign banks operating in India have also been able to

market IT superiority as a distinctive edge. The public sector banks are still to

make use of IT in this regard, although they are blessed with huge

information base all across the country. While steps are mooted in this

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direction by leading public sector banks, more offensive postures are

necessary.

(5.) IT as Profit Centre: In the embryonic phases, IT was looked upon

a means to get rid of high processing cost and time and to convert the

manual operation with high volume/low complexity in two mechanical ones.

With the evolutionary the process, it was seen as the best means of

generating, MIS. The same approach gave the status of DSS to IT. All along,

IT has been recognized as the service function in Indian Banks. However, the

new trend that is emerging is considering IT as a profit centre. The cost

benefit analysis of having IT or otherwise in one part. But having IT set up to

generate income for the organization is the new beginning. Getting jobs from

outside the bank for processing data and the like are the current trends. The

outsourcing done by others is the business, cater to by these organizations

the trend of this kind is not deserved in Indian situation particularly banks.

The Banks have been able to just manage what is to consider as their

responsibility as IT, within the individual banks.

(6.) Prospering in Down Market: The trend suggests that when

there is a down turn in the market place, Pro-active corporations take the

benefit of available unutilized resources to upgrade and revisit technology

issues. This is seen as the right time to establish the R & D centre for IT.

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There are false notions about technology and its capability. Some

misconceptions include:

Best-fit possible technology is implemented.

System solution is good enough and there is need to look into user

expectations.

Innovations are generally successful.

Success is related only to novel ideas.

Technology is the sole determinant of business success, and

Measures and standards i.e. audit and inspection issues stand in the way

of innovation.

The time available to debate on similar issues is ample and these false

notions get clarified during the down market. Eventually, the decision makers

reach a consensus that IT is not a panacea but it is an enabler that too when

well supported by BRP (Business Process Reengineering), human resources

initiatives, physical infrastructure and responsive organization set up.

(7.) Leading to Downsizing: The IT initiative is making the

organization lean and flat. For IT functionaries downsizing means transferring

computing power from mainframe to the personal computer and

workstations. Downsizing is a typical issue faced with associated problems.

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Absence of top management commitment, lack of understanding of the

prevalent IT infrastructure, doing too much and too fast and undertaking the

exercise without a framework for controlling the downsizing operations are

primarily the situations that create adversities in downsizing. In any case the

trend of downsizing is very much existent in the IT environment.

(8.) Getting Competitive Intelligence: IT is now seen as a

resource for gathering and dissemination of executive information system

(EIS). The purpose is to minimize that the bombarding and focusing on the

relevance, accuracy and timeliness of the information particularly about the

competitors such information enhances follow up and tracks early warning on

competitor move and also customer expectations. As far as Indian banks are

concerned individually, they have to compete with other banking industry

participants as also with other players in the financial sector.

2.5 - Impact of IT on Banking System

The banking system is slowly shifting from the Traditional Banking towards

relationship banking. Traditionally the relationship between the bank and its

customers has been on a one-to one level via the branch network. This was

put into operation with clearing and decision making responsibilities

concentrated at the individual branch level. The head office had

responsibility for the overall clearing network, the size of the branch network

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and the training of staff in the branch network. The bank monitored the

organizations performance and set the decision making parameters, but the

information available to both branch staff and their customers was limited to

one geographical location.

The modern bank cannot rely on its branch network alone. Customers are

now demanding new, more convenient, delivery systems, and services such

as Internet banking have a dual role to the customer. They provide traditional

banking services, but additionally offer much greater access to information

on their account status and on the banks many other services. To do this

banks have to create account information layers, which can be accessed both

by the bank staff as well as by the customers themselves. The use of

interactive electronic links via the Internet could go a long way in providing

the customers with greater level of information about both their own financial

situation and about the services offered by the bank.

2.6 - Impact of IT on Privacy

Data being stored in the computers is now being displayed when required on

through internet banking mobile banking, ATMs etc. all this has given rise to

the issues of privacy and confidentially of data are:

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The data processing capabilities of the computer, particularly the rapid

throughput, integration, and retrieval capabilities, give rise to doubts in the

minds of individuals as to whether the privacy of the individuals is being

eroded.

So long as the individual data items are available only to those directly

concerned, everything seems to be in proper place, but the incidence of data

being cross referenced to create detailed individual dossiers gives rise to

privacy problems. Customers feel threatened about the inadequacy of

privacy being maintained by the banks with regard to their transactions and

link at computerized systems with suspicion.

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CHAPTER 3 - ANALYSIS OF DATA, FINDINGS AND

INTERPRETATIONS

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.

3.1 - 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)

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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 FY2016, non-cash

payments constituted 91 per cent in value terms as compared to 88 per cent

in FY in 2014 and 48 per cent in terms of value from 35 per cent in FY 2014.

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 2010 and FY 2016.

Indian banks get top billing globally:-This has resulted in putting 20 Indian

banks in their standing globally. In 2014, the UK-based Brand Finance's

annual ranking put these banks in the top 500 banks by their brand value. In

2011, 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 non-banking finance companies (NBFCs), co-operative banks,

regional rural banks (RRBs), and self-help entities, business correspondents

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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.

Future Outlook :-

The banking system has to implement Base 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

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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.

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3.2 - 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,

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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.

According to the latest data released by National Payments Corporation of

India (NPCI), the total number of ATMs in the country is now 1,04,500 till

October. Of these, 61,500 - or 59 per cent - belong to the public sector banks

and State Bank of India Group, the NPCI said.

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Chapter 4 - 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

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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.

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.

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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

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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.

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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

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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

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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.

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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

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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.

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.

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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

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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.

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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.

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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.

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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.

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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

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are allowed to undertake internet banking only after satisfying the host

supervisor in addition to the home supervisor.

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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

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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

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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

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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

single 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

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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

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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

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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 RTGS enabled bank branches would be NEFT-enabled 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.

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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).

Country Year System Network Shape of

Operator Message

flow

Structure

Belgium 1996 ELLIPS SWIFT Y

France 1997 TBF SWIFT Y

Germany 1988 EIL-ZV CB Y

Italy 1997 BI-REL SIA V

Japan 1988 BOJ-NET CB V

Netherlands 1997 TOP CB/ACH V

Sweden 1986 RIX CB V

Switzerland 1987 SIC Telekurs AG V

UK 1984 CHAPS CHAPS L

USA 1918 Fed wire CB V

The payment system in India largely followed a deferred net settlement

regime, which meant that the net amount was settled between banks on a

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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

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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

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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.

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RECOMMENDATIONS AND SUGGESTIONS

(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:

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(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 re-introducing credit ceilings on lending

for particular activities

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(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

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LIMITATIONS OF THE PROJECT

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

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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.

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CONCLUSION

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

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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

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BIBILIOGRAPHY

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

A Bank for the Buck

www.rbi.org.in

www.banknetindia.com

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