CHAPTER 1

INTRODUCTION

Bank is a lawful organisation, which accepts deposits that can be withdrawn on

demand. It also lends money to individuals and business houses that need it. Banks
accept deposits from the general public as well as from the business community.
Anyone who saves money for future can deposit his savings in a bank. Businessmen
have income from sales out of which they have to make payment for expenses. They
can keep their earnings from sales safely deposited in banks to meet their expenses
from time to time. Banks give two assurances to the depositors –

a. Safety of deposit

b. Withdrawal of deposit, whenever needed

Banking in India has a very long history starting from the late 18th century. The
origin of modern banking started from 1770 in the name of “Bank of Hindustan” by
English agency ‘House of Alexander & Co’ in Kolkata however it was closed in
1832. Further in 1786 “General Bank of India” was started and it failed in 1791.

 DEFINITION

“Bank provides service to its clients and in turn receives perquisites in different
forms.”--- P.A. Samuelson.

“Bank is such a financial institution which collects money in current, savings or fixed
deposit account; collects cheques as deposits and pays money from the depositors
account through cheques.”-----Sir John Pagette.

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 Meaning and Origin of Bank:

The word Bank is widely and extensively used and circulated. The Bank in English
carries the same meaning in Bengali. The origin of English word Bank came into
being (when, where and how) which could not be specifically identified. The history
regarding the origin of Bank, even after the twelfth century, is not also clear which
has been based on guesses. According to some writer the word Bank was derived
from “Banco”, “Bancus”, “Banque” or “Banc” all of which mean a bench upon which
the medieval European Money-lenders and Money–Changers used to display their
coins. Anyhow this word has been in use from the middle ages in connection of a
bank. Again, Dutch and French words “Banque”, “Bangko” were used to mean stool
or bench and in course of time the word “Bank” came into effect. In the Medieval age
Italian states were sound and solvent economically and commercially. At that time a
group of people used to conduct business of transaction of money sitting on a stool or
bench which was replaced by “Banco”, “Banko”, “Banca”, “Bangk”, “Bancus”,and
“Banc” etc. It is assumed that the word “Bank” was originated from these words. In
the later age, an English writer Maclead challenged the above concepts. His
contention was that the money-lenders and money-changers used to display their
coins which were not termed as “Banco”, “Banque”, “Banke”, and “Banca”.
However, “Banco” in Italy and “Banke” in German and Australia were understood as
public debt or issue of paper money. In his opinion, these words were used for the
purpose of economic activities of different countries of Europe. So many thinkers
think that the German word “Banke” and the Italian word “Banco” have been
transformed into English word ‟Bank”.

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 The objectives of a commercial bank:

1. To establish as an institution for maximizing profits and to conduct overall

economic activities.

2. To collect savings or idle money from the public at a lower rate of interests and
lend these public money at a higher rate of interests.

3. To create propensity of savings amongst the people.

4. To motivate people for investing money with a view to bringing solvency in them.

5. To create money against money as an alternative for enhancing supply of money.

6. To build up capital through savings.

7. To expedite investments.

8. To extend services to the customers.

9. To maintain economic stability by means of controlling money market.

10. To extend co-operation and advices to the Govt. on economic issues.

11. To assist the Govt. for trade& business and socio-economic development

 Features

1) Service delivery: Most business houses believe that they do deliver superior things
to their clients. But at most times they do not satisfy at least half of their
expectations. Which means that business fail to understand their customers and
there is no innovation in business. When customers appreciate the way a business
is carried then there should be necessarily innovation taking place.
2) Alerts to keep customer on budget: Informing customer when they near their
minimum balance requirement and intimating every time drawls are made through
sms alert or email service.

3) Easy Deposit: Scanning cheques from home and the same may be directly
deposited into the account of the customer, provided the cheque has the MICR
code and other security features. Informing the issuer of the cheque for counter-

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 checking the amount details through email or sms alert can be another innovation
for safety of banking transactions.

4) Account-to-account transfers: Make a transfer to or from an account at another

bank or credit union or consortium arrangement – already banks are doing under
the core banking system. But the cost of service has to be made very less.

5) Free bill pay: Paying bills automatically through registration with the banker.
Many banks are doing such innovative services. When the system turns more
competitive, easy and cheaper, many customers will opt for electronic payment.

6) Live chat support: An interactive voice support system or a 24 hours online

chatting system with the banks representative have to arrange after ensuring with
the system a fraud-free chatting.

7) View every transaction: Customers have to given the choice to see a list of each
deposit and withdrawal, along with images of cheques/drafts that have been
cashed and provide a running statement online - including credit card and debit
card accounts.

8) Enhanced online security: Innovation means also ensuring more security features.
Banks should customize a security phrase and image at login for even greater
protection. This will ensure accidental visitor online from entering into one's
account details.

9) Creditor/debtor online clearing: Though some organizations have resorted to the

practice of direct credit of customer accounts instead of issue of cheque/DDs, but
many organizations has not taken this route as there are some practical problems
like, accountability for tax and online checking of credits and debits.

10) Charges/fee notification: There is a general criticism of customers, especially of

individual customers that, banks charges for deposit in other branches (from non-
base branches), cheque collection, annual ‘card' charges, charges for issue of
statements and the like are charged without notifying the quantum of charges to

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 the customer. It becomes known only when a customer updates his passbook or
gets a statement from the bank. Annoying the customer by these of charges could
be avoided and at the same time the banks could continue charging them, by
giving a sms alert or email that such and such charges are levied and such rate.

11) New technologies for customers: The use of technology like Smart card, mobile
ATMs, coverage of post-offices under electronic payments network in far flung
areas, etc. in providing financial services to the people holds a tremendous
potential for the business growth.

12) Having human touch: Although today's banking system has become mostly
online and a customer need not visit the branch at all for further transactions, yet
most customer walk-back to their branches to have a human touch and see their
account operations done manually at least once in a month and once in two
months. This requires a sort of human touch by the bank employees with the
customer-innovations could be introduced in receiving and dealing with a
customer and minimize his number of visits to the branch.

 Advantages

• Commercial banking can help a small business by making it easier to manage day-
to-day financial tasks.

• An established commercial account with a bank will make it easier to borrow

money when you grow your business.

• Often a business is assigned a representative who works directly with the company
to find the best services and solutions for the issues the business is facing.

• Some banks offer retirement account management for your employees as well as
other employee benefits. This can save you money, and make it easier to manage
all of the services you offer employees.

• Some banks allow you to make deposits online by scanning checks.

• Your bank may offer you discount on your merchant services fees.

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 Disadvantages

• Commercial banking or business accounts are often more expensive than

traditional bank accounts.

• Banks may charge fees for night deposits, for processing a certain number of
checks and for the payroll services.

• Depending on the size of your business, some of the services offered may not be
needed, and you may still be charged for the services even if you're not fully using
them.

• Different banks may offer different services and charge different fees and it can be
difficult to compare the services.

• Signing up for a commercial account before your business is ready for one will
cost you and may slow the growth of the business.

 Source and Origin of Modern Banking:

Banking-experts pass their opinion that banking system was introduced from the
primitive stages of human civilization in some way or other in the world. While
reviewing historical backgrounds of social, economic and religious activities of ages,
origin of modern banking can be better known. From different angles the source and
origin of modern banking can be justified:

1. Introduction of coins: From the ancient times coins were introduced in different
countries as a medium of exchange. So, banking system was in vogue for preservation
and safety of coins. The discovery of archaeological symbols has intensified the
arguments. At that time excess residual coins were kept with the religious and local
elite persons for the purpose of extending help to the needy poor people. Gradually,
this became a profitable business for the businessmen and money-lenders.

2. Different Civilization: At different stages of human civilization, many evidences

were recorded for the existence of banks and coins. The archaeological symbols are
the evidences of this statement. During Indus Civilization (5000-2000) coins were
available in Mohenjudaru of Pakistan, in Egypt coins were found in mummy of

6
Pyramid. In Bangladesh coins of ancient civilization were found at Moynamati of
Comilla and Paharpur of Bogra.

3. Expansion of business and trade: The expansion of business and trade played a vital
role for the advancement of modern banking. Because of the fact that in the middle
age Indo- sub-continent, Middle-East and Europe progressed tremendously and thus
banking business improved for their smooth functioning of transaction.

4. Various Religions and Religious books: A lot of information regarding banking

business was incorporated in the Quran, the Bible, the Bedh and the Mahabharat.

5. The contributions of Goldsmith, money-lenders and the businessmen: For the

growth and development of banking business the Goldsmiths, Money-lenders
(mahajan) and businessmen had positive roles.

(a) The Goldsmiths: From the very ancient periods the Goldsmiths, over and above
their own activities, used to act as custodians of the surplus funds of the general
people of the society. For that reason they were recognized as a symbol of honesty,
sincerity, solvency and security. On receipt of money they used to issue receipts and
on return of money they used to take acknowledgements. Later on, these receipts were
treated deposit slip and cheque respectively. The deposits receipts were undoubtedly
acceptable and popular as notes of the Goldsmiths and afterwards converted into bank
notes. Besides these, they used to lend money with interest to the needy people and
thus, the words interest and profit were introduced. In the middle ages, the Goldsmiths
became very rich and affluent. At one time Goldsmiths used to deposit their money
with the treasury of England. During the regime of King, the First Charles, in 1640,
the reserve funds of the Goldsmiths with London Tower were confiscated and they
had to pay penalty for taka two lakhs pounds. Then they left gold business and got
involved with banking business. Thus, the Goldsmiths had a definite role for the
advancement of modern bank.

(b) The Money-Lenders: The Money-Lenders (Mahajan) also played an important

role for the growth and development of modern banking. They used to keep surplus
money of the people and refund those in case of need. Later, they took it as a
profession. They used to pay interest to the depositors and earn interest on loans. They
also used to take security, mortgage against loan. In Europe they were called Medici,

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Bengkuci, Piti, Missouri and in Indian subcontinent Seth, Chetti, Multani, Kabuliwala
were the Mahajans. In Europe, most of the Mahajans were jews. Amongst them
Shylock of Italy was one of them. Besides, Medici of Lombardi was the world-
famous. Lombardi Street in London was recognized after the name of Medici. Patheh
Chand was also famous in India. The Emperor Farook Shayar ornamented him with
the title of world banker.

(c) Businessmen: Business Class also played vital role for the growth and
development of modern banking. From the ancient periods the Business Class was
trustworthy to the general people. They were honest, faithful and solvent. As a result,
general people used to deposit money to them for the safety and security of fund. In
course of time they were involved in money-lending business. The businessmen of
seven-hills of Rome were world-famous. Brief History of Banking system of
Bangladesh and Indo-Pak Subcontinent.

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 CHAPTER 2

HISTORY

 PRESIDENCY BANKS

These banks were funded by the presidency government at that time.

The 3 presidency banks were:

• Bank of Bengal- Established in 1806

• Bank of Bombay - Established in 1840
• Bank of Madras - Established in 1843

In 1921, the three Presidency banks were amalgamated to form the Imperial Bank of
India, which took up the role of a commercial bank, a bankers' bank and a banker to
the Government. The Imperial Bank of India was established mainly with European
shareholders. After the establishment of Reserve Bank of India (RBI) as the central
bank of the country in 1935, the role of the Imperial Bank of India came to an end.

In 1865, the Allahabad Bank was established purely by Indian shareholders. Punjab
National Bank came into being in 1895. Between 1906 and 1913, other banks like
Bank of India, Central Bank of India, Bank of Baroda, Canara Bank, Indian Bank, and
Bank of Mysore were set up.

After independence, the Government of India started taking steps to encourage the
spread of banking in India. In order to serve the economy in general and the rural
sector in particular, the All India Rural Credit Survey Committee recommended the
creation of a state-partnered and state-sponsored bank taking over the Imperial Bank
of India and integrating with it, the former state-owned and state associate banks.
Accordingly, State Bank of India (SBI) was constituted in 1955. Subsequently, in
1959, the State Bank of India (subsidiary bank) Act was passed, enabling the SBI to
take over eight former state-associate banks as its subsidiaries.

To better align the banking system to the needs of planning and economic policy, it
was considered necessary to have social control over banks. In 1969, 14 of the major
private sector banks were nationalised. This was an important milestone in the history

9
of Indian banking. This was followed by the nationalisation of another six private
banks in 1980. With the nationalisation of these banks, the major segment of the
banking sector came under the control of the Government. The nationalization of
banks boost to branch expansion in rural and semi-urban areas, which in turn resulted
in huge deposit, thereby giving a boost to the overall savings rate of the economy. It
also resulted in scaling up of lending to agriculture and its allied sectors.

To create a strong and competitive banking system, a number of reform measures

were initiated in the early 1990s. The thrust of the reforms was on increasing
operational efficiency, strengthening supervision over banks, creating competitive
conditions and developing technological and institutional infrastructure. These
measures led to the improvement in the financial health, soundness and efficiency of
the banking system.

One important feature of the reforms of the 1990s was that the entry of new private
sector banks was permitted. Following this decision, new banks such as ICICI Bank,
HDFC Bank, IDBI Bank (public bank) and UTI Bank (now Axis Bank) were set up.

Commercial banks in India have traditionally focused on meeting the short-term

financial needs of industry, trade and agriculture. However, the increasing
diversification of the Indian economy, the range of services extended by commercial
banks.

 Nationalisation in the 1960s

Despite the provisions, control and regulations of the Reserve Bank of India, banks in
India except the State Bank of India (SBI), remain owned and operated by private
persons. By the 1960s, the Indian banking industry had become an important tool to
facilitate the development of the Indian economy. At the same time, it had emerged as
a large employer, and a debate had ensued about the nationalisation of the banking
industry. Indira Gandhi, the then Prime Minister of India, expressed the intention of
the Government of India in the annual conference of the All India Congress Meeting
in a paper entitled "Stray thoughts on Bank Nationalisation" The meeting received
the paper with enthusiasm.

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Thereafter, her move was swift and sudden. The Government of India issued an
ordinance ('Banking Companies (Acquisition and Transfer of Undertakings)
Ordinance, 1969') and nationalized the 14 largest commercial banks with effect from
the midnight of 19 July 1969. These banks contained 85 percent of bank deposits in
the country. Jayaprakash Narayan, a national leader of India, described the step as
a "masterstroke of political sagacity." Within two weeks of the issue of the
ordinance, the Parliament passed the Banking Companies (Acquisition and Transfer
of Undertaking) Bill, and it received the presidential approval on 9 August 1969.

A second dose of nationalisation of 6 more commercial banks followed in 1980. The

stated reason for the nationalisation was to give the government more control of credit
delivery. With the second dose of nationalisation, the Government of India controlled
around 91% of the banking business of India. Later on, in the year 1993, the
government merged New Bank of India with Punjab National Bank. It was the only
merger between nationalised banks and resulted in the reduction of the number of
nationalised banks from 20 to 19. Until the 1990s, the nationalised banks grew at a
pace of around 4%, closer to the average growth rate of the Indian economy.

 Current period
• List of Banks in India

The Indian banking sector is broadly classified into scheduled banks and non-
scheduled banks. All banks included in the Second Schedule to the Reserve Bank of
India Act, 1934 are Scheduled Banks. These banks comprise Scheduled Commercial
Banks and Scheduled Co-operative Banks. Scheduled Co-operative Banks consist of
Scheduled State Co-operative Banks and Scheduled Urban Cooperative Banks.
Scheduled Commercial Banks in India are categorised into five different groups
according to their ownership and/or nature of operation:

• State Bank of India and its Associates

• Nationalised Banks
• Private Sector Banks
• Foreign Banks
• Regional Rural Banks.

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By 2010, banking in India was generally fairly mature in terms of supply, product
range and reach-even though reach in rural India still remains a challenge for the
private sector and foreign banks. In terms of quality of assets and capital adequacy,
Indian banks are considered to have clean, strong and transparent balance sheets
relative to other banks in comparable economies in its region. The Reserve Bank of
India is an autonomous body, with minimal pressure from the government.

 Complete List of Banks in India (as of 2017)

• Nationalised Banks
 Allahabad Bank
 Andhra Bank
 Bank of India
 Bank of Baroda
 Bank of Maharashtra
 Canara Bank

 Private-sector banks

• Axis bank
• Bandhan Bank
• Federal Bank
• HDFC Bank
• ICICI Bank
• IDFC Bank
• DCB Bank

 Payments Bank

Payments bank is a new model of banks conceptualised by the Reserve Bank of

India (RBI). These banks can accept a restricted deposit, which is currently limited
to Rs.1 lakh per customer and may be increased further. These banks cannot issue
loans and credit cards. Both current account and savings accounts can be operated by
such banks. Payments banks can issue services like ATM cards, debit cards, net-
banking and mobile-banking. The banks will be licensed as payments banks under

12
Section 22 of the Banking Regulation Act, 1949, and will be registered as public
limited company under the Companies Act, 2013.

 List of Payment Banks in India

• Aditya Birla Idea Payments Bank
• Airtel Payments Bank
• India Post Payments Bank
• Jio Payments Bank
• Paytm Payments Bank

These three presidency bank were re-organised and amalgamated to form a single
entity named "Imperial Bank of India" on 27th January 1927. It was later transformed
into "State Bank of India" in 1955.

 Major change in the conditions

A major change in the conditions of operation of the Banks of Bengal, Bombay and
Madras occurred after 1860. With the passing of the Paper Currency Act of 1861, the
right of note issue of the presidency banks was abolished and the Government of India
assumed from 1 March 1862 the sole power of issuing paper currency within British
India. The task of management and circulation of the new currency notes was
conferred on the presidency banks and the Government undertook to transfer the
Treasury balances to the banks at places where the banks would open branches. None
of the three banks had till then any branches (except the sole attempt and that took a
short-lived one by the Bank of Bengal at Mirzapore in 1839) although the charters had
given them such authority. But as soon as the three presidency bands were assured of
the free use of government Treasury balances at places where they would open
branches, they embarked on branch expansion at a rapid pace. By 1876, the branches,
agencies and sub agencies of the three presidency banks covered most of the major
parts and many of the inland trade centres in India. While the Bank of Bengal had
eighteen branches including its head office, seasonal branches and sub agencies, the
Banks of Bombay and Madras had fifteen each.

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 CHAPTER 3

COMMERCIAL BANK

Their functions and mutual relationships In common parlance, Bank means

Commercial Bank and its functions. Central Bank is a separate entity and plays
distinctive roles. The function of a Bank is to collect deposits from the public and lend
those deposits for the development of Agriculture, Industry, Trade and Commerce.
Bank pays interest at lower rates to the depositors and receives interests on loans and
advances from them at higher rates. In modern banking, Bank carries out many other
activities, e.g. creation of debts and money, transmission of money from one country
to another country, increase of foreign trade, preservation of valuables in safe custody
etc. Thus, Bank earns profits through executing various types of activities.
Commercial Bank: Historically, commercial bank came into being for its commercial
purpose. The inception of modern banking is the outcome of commercial bank. In the
words of Professor Roger, “The bank which deals with money and money’s worth
with a view to earning profit is known as Commercial bank.” Professor Hart says, “A
banker is one who, in the ordinary course of business, honours cheques drawn upon
him by persons for and for whom he receives money on current account.”

The functions of commercial bank are given below:

A: General Functions

1. Receiving Deposits: The first and foremost function of commercial bank is to

receive or collect deposits from the public in different forms of accounts e.g. current,
savings, term deposits. No interest is charged in the current account, lower rate of
interest is charged in the savings account and comparatively higher interest rates
charged in fixed deposits. Thus, commercial bank builds up customer network.

2. Accommodation of loans and advances: Commercial Bank attaches much

importance to providing loans and advances at a higher rate than the deposit rates and
thus earns profits on it. Working capital is accommodated to the borrower for
expansion and smooth running of business. In the similar manner, commercial bank
extends financial accommodation for the development of agriculture 6 and industry.
Credit accommodation is provided to the entrepreneurs for reviving sick and old

14
industries as per Govt. directives. Thus, commercial bank also extends welfare
services to the people at large.

3. Creation of Loan Deposits: Commercial Bank not only receives deposits from
public and accommodates loans to public but also creates loan deposits. For example:
while disbursing loans as per sanction stipulation, the amount of loan is credited to the
borrower’s account. The borrower may not withdraw the full amount at a time. The
residual amount i.e. balance left in the account creates loan deposits.

4. Creation of medium of exchange: Central Bank has got exclusive right to issue
notes. On the other hand, Commercial Bank creates medium of exchange by issuing
cheques. Like notes, cheque is transferrable being popularly used in the banking
transactions.

5. Contribution in foreign trade: Commercial Bank plays a vital role in expediting

foreign exchange and foreign trade business e.g. import, export etc. It contributes
greatly in the economy through import finance and export finance and thus, earn
foreign exchange for the country.

6. Formation of capital: Commercial Bank extends financial assistance for the

formation of capital in the trade, commerce and industry in the country which
expedites its economic development.

7. Creation of Investment Environment: Commercial Bank plays a significant role in

creating investment environments in the country.

B. Public Utility Functions: In modern banking, commercial bank executes

public utility services:

1. Remittance of Money: Remittance of money to the public from one place to

another is one of the functions of commercial bank. Remittance is effected in the form
of demand draft, telegraphic transfer etc. through different branches and
correspondents home and abroad.

2. Help in trade and commerce: Commercial Bank helps expand trade and commerce.
In inland and foreign trade customers are allowed credit accommodation in the form
of letter of credit, bill purchased and discounted etc.

15
3. Safe custody of valuables: Commercial Bank introduces locker services to the
customers for safe custody of valuables e.g. documents, shares, securities, etc.

4. Help in Foreign Exchange business: While opening letter of credit, commercial

bank obtains credit report of the suppliers and thus help expedite import and export
business

5. Act as a Referee: Commercial Bank acts as a referee for and on behalf of the
customers.

6. Act as an Adviser: Commercial Bank provides valuable advice to the customers on

different products, business growth and development, feasibility of business and
industry.

7. Collect utility service bills: As a social commitment, Commercial Bank collects

utility service bills e.g. water, electricity, gas, telephone etc. from the public.

8. Purchase and sale: Purchase and sale of prize bonds, shares etc. Commercial Bank
undertakes to purchase and sale of prize bonds, shares etc. as a part of social
commitment.

9. Help people travel abroad: Commercial Bank helps customers in traveling abroad
through issuance of traveler’s cheques, drafts, cash etc. in favour of the customers.

C. Agency Functions:

Besides above stated functions, commercial bank acts as a representative of the

customers.

1. Collection and payment: Commercial Bank is engaged in collection and payment of

cheque, bill of exchange, promissory notes, pension, dividends, subscription,
insurance premium, interest etc. on behalf of the clients.

2. Purchase and sale of shares and securities: Commercial Bank is entrusted with the
responsibility of purchase and sale of shares and securities on behalf of the customers.

3. Maintenance of secrecy: Maintenance of secrecy is one of the most important

functions of commercial bank.

4. Act as a trustee: Commercial Bank acts as a trustee on behalf of the customer.

16
5. Economic Development and Welfare activities: Commercial Bank contributes
much for the welfare and economic development of the country.

 BUSINESS

The business of the banks was initially confined to discounting of bills of exchange or
other negotiable private securities, keeping cash accounts and receiving deposits and
issuing and circulating cash notes. Loans were restricted to Rs.1 lakh and the period
of accommodation confined to three months only. The security for such loans was
public securities, commonly called Company's Paper, bullion, treasure, plate, jewels,
or goods 'not of a perishable nature' and no interest could be charged beyond a rate of
twelve per cent. Loans against goods like opium, indigo, salt, woolens, cotton, cotton
piece goods, mule twist and silk goods were also granted but such finance by way of
cash credits gained momentum only from the third decade of the nineteenth century.
All commodities, including tea, sugar and jute, which began to be financed later, were
either pledged or hypothecated to the bank. Demand promissory notes were signed by
the borrower in favour of the guarantor, which was in turn endorsed to the bank.
Lending against shares of the banks or on the mortgage of houses, land or other real
property was, however, forbidden.

Indians were the principal borrowers against deposit of Company's paper, while the
business of discounts on private as well as salary bills was almost the exclusive
monopoly of individuals Europeans and their partnership firms. But the main function
of the three banks, as far as the government was concerned, was to help the latter raise
loans from time to time and also provide a degree of stability to the prices are of the
government securities.

17
 CHAPTER 4

RESERVE BANK OF INDIA UPGRADATION

RESOLUTION

 THE RESERVE BANK OF INDIA

RBI was established on 1st April, 1935 in accordance with the provisions of the RBI
act, 1934.Initially it was setup in Calcutta and permanently moved to Mumbai in
1937. Initially the RBI was started with private shareholder’s fully paid up capital of
Rs.5 crores. It also acted as central banking institute for Myanmar till 1948 and till
1947 for Pakistan.

The RBI was nationalized on 1st January, 1949 in accordance with the RBI (Transfer
to Public Ownership) act, 1948.

It empowered RBI to act as central banking institution to control monetary policy of

Indian Rupee and to control, regulate, monitor, inspect banks in the country as
mentioned in the 2nd schedule of RBI act 1934.

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 Recommendations of Committee on Technology Upgradation

The Reserve Bank continued to be involved in shaping the technology vision of the
banking system. Following the recommendations of the Committee on Financial
Sector Reforms, (which is popularly known as the second Narasimham committee), a
Committee on Technology Upgradation was set up by the RBI for the Banking Sector
in 1994. This committee has representation from banks, Government, technical
institutions and the RBI. Among other things, this committee looked into issues
relating to:

• Encryption of Public Switching Telephone Network (PSTN) lines

• Admission of electronic files as evidence

• Record keeping

• Modalities for a satellite based WAN for banks and financial institutions with the
necessary security systems by banks and other financial institutions, to ultimately
develop a sound and an efficient payments system

• Methods by which technological upgradation in banks and financial institutions

could be effected and in the context study the feasibility of establishment of standards,
designing payments system backbone and standards relating to security levels,
messages and smart cards. The Committee realised the urgent need for training,
research and development activities in the Banking Technology area. Banks and
Financial Institutions started setting up Technology based training centres and
colleges. However, a need was felt for an apex level Institute which could be a Think-
tank and Brain Trust for Banking Technology.

• The committee recommended a variety of payment applications which can be

implemented with appropriate technology upgradation and development of a reliable
communication network. The committee also suggested setting up of an Information
Technology Institute for the purpose of Research and Development as well as
Consultancy in the application of technology to the Banking and Financial sector of
the country. As recommended by the Committee, IDRBT was established by RBI in
1996 as an autonomous centre for Development and Research in Banking Technology
at Hyderabad

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 Evolution of Central Banking in India

Global Evolution of Central Banking Evolution of central banking is essentially a

twentieth century phenomenon as there were only about a dozen central banks in the
world at the turn of the twentieth century. In contrast, at present, there are nearly 160
central banks. This is not surprising since the need for central banks obviously
emerged as banking became more complex, while becoming an increasingly
important part of the economy over time. Second, central banks are essentially a
nation state phenomenon, and hence proliferated as nation states themselves emerged
and multiplied: again a twentieth century phenomenon. Third, it is useful to recall
some of the reasons for the origin of central banks: to issue currency; to be a banker
and lender to the government: to regulate and supervise the banks and financial
entities: and to serve as a lender of-last-resort. This is ironic since much of the current
professional thinking is that a central bank should be independent of government,
should no longer be a debt manager of the government, and should not regulate or
supervise commercial banks. The new objective function assigned to the central bank
is to focus on price stability, with financial stability as an additional objective in some
cases. This is perhaps not surprising since price stability was historically achieved,
along with preservation of currency value, through the gold standard, and later
through the dollar anchor and its relation to gold. One quick explanation could be that
the central banks have ‘come-of-age’ in recent years. The Historical Antecedents of
Central Banking in India. In India, the efforts to establish a banking institution with
central banking character dates back to the late 18th century. The Governor of Bengal
in British India recommended the establishment of a General Bank in Bengal and
Bihar. The Bank was set up in 1773 but it was short-lived. It was in the early 20th
century that, consequent to the recommendations of the Chamberlain Commission
(1914) proposing the amalgamation of the three Presidency Banks, the Imperial Bank
of India was formed in 1921 to additionally carry out the functions of central banking
along with commercial banking. In 1926, the Royal Commission on Indian Currency
and Finance (Hilton Young Commission) recommended that the dichotomy of
functions and divisions of responsibilities for control of currency and credit should be
ended. The Commission suggested the establishment of a central bank to be called the
Reserve Bank of India, whose separate existence was considered necessary for
augmenting banking facilities throughout the country. The Bill to establish the RBI

20
was introduced in January 1927 in the Legislative Assembly, but it was dropped due
to differences in views regarding ownership, constitution and composition of its
Board of Directors. Finally, a fresh Bill was introduced in 1933 and passed in 1934.
The RBI Act came into force on January 1, 1935. The RBI was inaugurated on April1
1935 as a shareholders’ institution and the Act provided for the appointment by the
Central Government of the Governor and two Deputy Governors. The RBI was
nationalized on January 1 1949 in terms of the Reserve Bank of India (Transfer to
Public Ownership) Act, 1948 (RBI, 2005). The main functions of the RBI, as laid
down in the statutes are –

a) Issue of currency,

b) Banker to Government, including the function of debt management, and

c) Banker to other banks.

The Preamble to the RBI Act laid out the objectives as “to regulate the issue of bank
notes and the keeping of reserves with a view to securing monetary stability in India
and generally to operate the currency and credit system of the country to its
advantage.” Unusually, and unlike most central banks the RBI was specifically
entrusted with an important promotional role since its inception to finance agricultural
operations and marketing of crops. In fact, the Agricultural Credit Department was
created simultaneously with the establishment of the RBI in 1935. The RBI, as a
central bank, has always performed the function of maintaining the external value of
the rupee. The RBI’s responsibility as banker’s bank was essentially two-fold. First, it
acted as a source of reserves to the banking system and served as the lender of last
resort in an emergency. The second, and more important responsibility, was to ensure
that the banks were established and run on sound lines with the emphasis on
protection of depositor’s interest. A banking crisis in 1913 revealed major weaknesses
in the banking system such as, maintenance of low reserves and large volumes of
unsecured advances. Thus, regulation of the banking system was considered essential
to maintain stability in the economy. In the initial years, banks were governed by the
Indian Companies Act, 1913. Consequently, a special legislation called the Banking
Companies Act was passed in March 1949, which was renamed as the Banking
Regulation Act in March 1966. III. Development Role of the RBI As in many
developing countries, the central bank is seen as a key institution in bringing about

21
development and growth in the economy. In the initial years of the RBI before
independence, the banking network was thinly spread and segmented. Foreign banks
served foreign firms, the British army and the civil service. Domestic/Indian banks
were linked to domestic business groups and managing agencies, and primarily did
business with their own groups. The coverage of institutional lending in rural areas
was poor despite the cooperative movement. Overall financial intermediation was
weak. In an agrarian economy, where more than three-fourth of the population lived
in the rural areas and contributed more than half of GDP, a constant and natural
concern was agricultural credit. Therefore, almost every few years a committee was
constituted to examine the rural credit mechanism. There has perhaps been one
committee every two or three years for over a hundred years. A clear objective of the
development role of the RBI was to raise the savings ratio to enable the higher
investment necessary for growth, in the absence of efficient financial intermediation
and of a well-developed capital market. The view was that the poor were not capable
of saving and, given the small proportion of the population that was well off, the only
way to kick start the savings and investment process in the country was for
government to perform both functions. Thus the RBI was seen to have a legitimate
role to assist the government in starting up several specialized financial institutions in
the agricultural and industrial sectors, and to widen the facilities for term finance and
for facilitating the savings. Over time, various term lending industrial finance
institutions were established with varying degrees of RBI involvement: the Industrial
Finance Corporation of India (IFCI), State Financial Corporation's (SFCs), Industrial
Development Bank of India (IDBI) and the Industrial Credit and Investment
Corporation of India (ICICI). The traditional concern with agricultural credit
continued and the Agriculture Finance Corporation was established in 1963, followed
by its transformation into the National Bank for Agriculture and Rural Development
in 1982 for extending refinance for short, medium and long term finance for
agriculture. The Unit Trust of India was established in 1964 to mobilize resources
from the wider public and to provide an opportunity for retail investors to invest in the
capital market, thereby also aiding capital market development. The National Housing
Bank was set up in the late 1980s to develop housing finance and the Infrastructure
Development Finance Company (IDFC) in the late 1990s for infrastructure finance.
The Reserve Bank also actively promoted financial institutions to help in developing
the Government securities market. The Discount and Finance House of India (DFHI)

22
was set up in 1988; primary dealers were promoted in the late 1990s; and the Clearing
Corporation of India was incorporated in 2001 to upgrade the financial infrastructure
in respect of clearing and settlement of debt instruments and foreign exchange
transactions. More recently, the Board for Regulation and Supervision of Payment
and Settlement System has been constituted in 2005, and the Banking Codes and
Standards Board of India in 2006 to develop a comprehensive code of conduct for fair
treatment of bank customers. The RBI has been continuously involved in setting up or
supporting these institutions with varying degrees of involvement, including equity
contributions and extension of lines of credit. Thus, the developmental role of the RBI
has spanned all the decades since independence and is quite different from central
banks in developed countries. Although the Reserve Bank was actively involved in
setting up many of these institutions, the general practice has been to hive them off as
they came of age, or if a perception arose of potential conflict of interest. There can be
little doubt that the establishment of these institutions has helped financial
development in the country greatly, even though some of them have been less than
successful in their functioning. It can be argued, of course, that similar institutional
development could have taken place through private sector efforts or by the
Government. The availability of financial sector expertise in the Reserve Bank,
however, was instrumental in these tasks being performed over time by the Reserve
Bank. Expansion of Banking In the initial years of the RBI, considerable progress was
made in extending the banking system but there was continuing concern about the
overall accessibility of banking to the needy. In terms of coverage, many rural and
semi-urban areas were yet to be covered by banking services. The transformation of
the Imperial Bank of India into the State Bank of India in July 1955 was mainly
motivated by the desire to extend branches across the country to stimulate banking
activity. It was in continuation of the same policy to serve the needs of the developing
economy that 14 large banks were nationalized in 1969 followed by six more in 1980.
The nationalization of banks, mainly attempted to align banking activities with
national concerns and norms, as it was perceived that the private banks neither
understood social responsibilities nor observed social obligations. The general
inclination in the 1950s, 1960s and 1970s was essentially to get Government to
become active in economic activities where it was felt that the private sector was not
able or willing to perform actively. The increased network of branches certainly led to
a large expansion of rural credit. This dimension of nationalisation and expansion had

23
its impact on the functioning and working of the RBI. Despite such vast expansion, it
is interesting that we still have concern with financial inclusion today. Development
of the Payments System The development of a payments system is one development
role that is common to most central banks. It is well recognized that an efficient
payment and settlement system is essential for a well-functioning modern financial
system. Therefore, in recent years, banks have been making efforts to upgrade
payments and settlement systems utilizing the latest technology. One of the
characteristic features of the Indian economy, historically, has been the widespread
use of cash in the settlement of most financial transactions. While this has been the
trend for several years, it is noteworthy that India had pioneered the use of non-cash
based payment systems long ago, which had established themselves as strong
instruments for the conduct of trade and business. The most important form of credit
instrument that evolved in India was termed as ‘Hundis’ and their use was reportedly
known since the twelfth century. Hundis were used as instruments of remittance,
credit and trade transactions. In modern times, with the development of the banking
system and higher turnover in the volume of cheques, the need for an organized
cheque clearing system emerged. In recognition of the importance of payment and
settlement systems, the RBI had taken upon itself the task of setting up a safe,
efficient and robust payment and settlement system for the country for more than a
decade now. In the recent past, the RBI has been placing emphasis on reforms in the
area of payment and settlement system. It was with this objective that the Real Time
Gross Settlement (RTGS) system was planned, which has been operationalised in
March 2004. The system, once fully operational, in its present form, would take care
of all inter-bank transactions and other features would be added soon. In view of the
positive response to reforms in the financial sector and the banking segment also
coming of age, the RBI has now taken the policy perspective of migrating away from
the actual management of retail payment and settlement systems. This approach has
yielded good results and the RBI now envisions the normal processing functions to be
managed and operated by professional organizations, which could be constituted
through participation of commercial bank. Under this arrangement, the RBI will
continue to have regulatory oversight over such functions without actually acting as
the service provider. The RTGS, which provide for funds transfers across participants
in electronic mode with reduced risk, will continue to be operated by the RBI. The
RBI is a banker to the Central Government statutorily and to the State Governments

24
by virtue of specific agreements with each of them. The loss of autonomy of the RBI
that took place in early decades was not because of any conscious decision based on
the currently prevalent thinking on the relationship between central banks and the
Government, but rather as a consequence of overall economic policy then prevailing
regarding the appropriate dominant role of the Government in the economy as a
whole. Thus, it is useful to review the relationship of the Reserve Bank with the
Government as it has evolved over time. The Indian experience has been no different
and expansionary fiscal policy was indeed financed by resort to automatic
monetization, accompanied by financial repression and effective loss of central bank
autonomy with respect to monetary policy. In 1951, with the onset of economic
planning, the functions of the RBI became more diversified. The provisions of the
Reserve Bank of India Act, 1934 authorizes the RBI to grant advances to the
Government, repayable not later than three months from the date of advance. These
advances, in principle, were to bridge the temporary mismatches in the Government’s
receipt and expenditure and were mainly intended as tools for Government’s cash
management. This automatic monetization led to the RBI’s loss of control over
creation of reserve money. In addition, the RBI also created additional ad hoc
Treasury bills whenever funds were required by the Government. The RBI
endeavored to restrict the monetary impact of budgetary imbalances by raising the
required reserve ratios to be maintained by banks. With the onset of a fiscal
consolidation process, withdrawal of the RBI from the primary market of Government
securities and expected legislative changes permitting a reduction in the statutory
minimum Statutory Liquidity Ratio, fiscal dominance would be further diluted. All of
these changes took place despite the continuation of debt management by the Reserve
Bank. Thus, one can argue that effective separation of monetary policy from debt
management is more a consequence of overall economic policy thinking rather than
adherence to a particular view on institutional arrangements. The core issue of the
conflict of interest between monetary policy and public debt management lies in the
fact that while the objective of minimizing market borrowing cost for the Government
generates pressures for keeping interest rates low, compulsions of monetary policy
amidst rising inflation expectations may necessitate a tighter monetary policy stance.
The Indian experience has itself shown that as such realisation took place in the 1990s
the policy response was to arrive at policy conventions between the Government and
the Reserve Bank that enabled the practice of independent monetary policy, despite

25
debt management continuing to be housed in the RBI. Government paper from April
1, 2006 has implications for the management of interest rate expectations; and
implementation of the proposed amendment to the Banking Regulation Act permitting
flexibility to the RBI for lowering the Statutory Liquidity Ratio (SLR) below 25 per
cent of net demand and time liabilities of banks would reduce the captive subscription
to Government securities. With all of these changes taking place in the monetary
fiscal environment in the near future, there will be great need for a continued high
degree of coordination in debt management between RBI and the Government. In
fact, in the U.S., even though debt management is formally done by the Treasury, the
close co-operation that actually exists between the Federal Reserve Bank of New
York and the Treasury is not very different in function from the relationship between
the RBI and the Government in its debt management function.

 Major Reform Initiatives of Banking Sector in India

The agenda for Banking reforms was set by the Narasimham Committee which was
set up by the Government of India in 1991 to recommend the initiatives required to
strengthen the Banking and financial systems on the lines of international best
practices. Even as the first set of recommendations were getting implemented , the
Government felt the need for commissioning the committee once again in 1999 for a
review and recommending further reform measures in the wake of developments in
the global arena. Since the objective of this article is to reflect on the major reform
measures implemented and how these have impacted banking in India, it is thought
prudent not to deal extensively with the committee recommendations per section
except to reiterate that the measures implemented followed the prescriptions of the
committee through its two reports. Some of the major reform measures
implemented post-1991 which had a tremendous impact on banking is enumerated
below:
Some of the major reform initiatives in the last decade that have changed the face of
the Indian banking and financial sector are:

• In the pre-liberalisation era, the bank’s ability to lend was constrained by pre-
emption of substantial resources by way of Cash Reserve Ratio and Statutory
Liquidity Ratio which were ruling at as high a level as 15% and 38.5% respectively.
Thus, lowering CRR and SLR

26
• Interest rates on deposits and lending have been deregulated with banks enjoying
greater freedom to determine their rates.

• Adoption of prudential norms in terms of capital adequacy, asset classification,

income recognition, provisioning, and exposure limits, investment fluctuation reserve,
etc.

• Reduction in pre-emptions lowering of reserve requirements (SLR and CRR), thus

releasing more lendable resources which banks can deploy profitably.

• Government equity in banks has been reduced and strong banks have been allowed
to access the capital market for raising additional capital.

• Banks now enjoy greater operational freedom in terms of opening and swapping of
branches, and banks with a good track record of profitability have greater flexibility in
recruitment.

• New private sector banks have been set up and foreign banks permitted to expand
their operations in India including through subsidiaries. Banks have also been allowed
to set up Offshore Banking Units in Special Economic Zones.

• New areas have been opened up for bank, financing, insurance, credit cards,
infrastructure financing, leasing, gold banking, besides of course investment banking,
asset management, factoring, etc.

• New instruments have been introduced for greater flexibility and better risk
management: e.g. interest rate swaps, forward rate agreements, cross currency
forward contracts, forward cover to hedge inflows under foreign direct investment,
liquidity adjustment facility for meeting day-to-day liquidity mismatch.

• Several new institutions have been set up including the National Securities
Depositories Ltd., Central Depositories Services Ltd., Clearing Corporation of India
Ltd., Credit Information Bureau India Ltd.

• Universal Banking has been introduced. With banks permitted to diversify into long-
term finance and DFIs into working capital, guidelines have been put in place for the
evolution of universal banks in an orderly fashion.

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 CHAPTER 5

ADOPTION OF BANKING TECHNOLOGY

The IT evolution 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:

 ONLINE BANKING

Online banking, also known as internet banking, e-banking or virtual banking, is

an electronic payment system that enables customers of a bank or other financial
institution to conduct a range of financial transactions through the financial
institution's website. The online banking system will typically connect to or be part of
the core banking system operated by a bank and is in contrast to branch
banking which was the traditional way customers accessed banking services.

To access a financial institution's online banking facility, a customer with internet

access will need to register with the institution for the service, and set up a password
and other credentials for customer verification. The credentials for online banking is
normally not the same as for telephone or mobile banking. Financial institutions now
routinely allocate customers numbers, whether or not customers have indicated an
intention to access their online banking facility. Customer numbers are normally not
the same as account numbers, because a number of customer accounts can be linked
to the one customer number. Technically, the customer number can be linked to any
account with the financial institution that the customer controls, though the financial
institution may limit the range of accounts that may be accessed to, say, cheque,
savings, loan, credit card and similar accounts.

The customer visits the financial institution's secure website, and enters the online
banking facility using the customer number and credentials previously set up. The

28
types of financial transactions which a customer may transact through online banking
are determined by the financial institution, but usually includes obtaining account
balances, a list of the recent transactions, electronic bill payments and funds
transfers between a customer's or another's accounts. Most banks also enable a
customer to download copies of bank statements, which can be printed at the
customer's premises (some banks charge a fee for mailing hard copies of bank
statements). Some banks also enable customers to download transactions directly into
the customer's accounting software. The facility may also enable the customer to
order a cheque book, statements, report loss of credit cards, stop payment on a
cheque, advice change of address and other routine actions.

 Automated Teller machine

An Automated Teller Machine (ATM) is a computerized telecommunications

device that provides the customers of a financial institution with access to financial
transactions in a public space without the need for a human clerk or bank teller On
most modern ATM the customer is identified by inserting a plastic ATM card with
a magnetic stripe or a plastic smart card with a chip that contains a unique card
number and some security information such as an expiration date or CVVC (CVV).
Authentication is provided by the customer entering a personal identification
number (PIN) which must match the PIN stored in the chip on the card (if the card is
so equipped) or in the issuing financial institution's database.

Using an ATM, customers can access their bank deposit or credit accounts in order to
make a variety of transactions such as cash withdrawals, check balances, or credit
mobile phones. If the currency being withdrawn from the ATM is different from that
in which the bank account is denominated the money will be converted at an
official exchange rate. Thus, ATMs often provide the best possible exchange rates for
foreign travellers, and are widely used for this purpose.

29
• Uses

Originally developed as cash dispensers, ATMs have evolved to include many other
bank-related functions:

 Paying routine bills, fees, and taxes (utilities, phone bills, social security, legal
fees, income taxes, etc.)
 Printing bank statements
 Updating passbooks
 Cash advances
 Cheque Processing Module
 Paying (in full or partially) the credit balance on a card linked to a specific current
account.
 Transferring money between linked accounts (such as transferring between
accounts)
 Deposit currency recognition, acceptance, and recycling.

30
Branches and ATMs of Scheduled, Commercial Banks as of end December 2014
Number of On-site Off-site Total
Bank type
branches ATMs ATMs ATMs
Nationalised banks 33,627 38,606 22,265 60,871
State Bank of India 13,661 28,926 22,827 51,753
Old private sector
4,511 4,761 4,624 9,385
banks
New private sector
1,685 12,546 26,839 39,385
banks
Foreign banks 242 295 854 1,149
TOTAL 53,726 85,000 77,409 1,62,543

 CREDIT CARD

A credit card is a payment card issued to users (cardholders) to enable the cardholder
to pay a merchant for goods and services, based on the cardholder's promise to
the card issuer to pay them for the amounts so paid plus other agreed charges. The
card issuer creates a revolving account and grants a line of credit to the cardholder,
from which the cardholder can borrow money for payment to a merchant or as a cash
advance.

A credit card is different from a charge card, where it requires the balance to be repaid
in full each month. In contrast, credit cards allow the consumers a continuing balance
of debt, subject to interest being charged. A credit card also differs from a cash card,
which can be used like currency by the owner of the card. A credit card differs from a
charge card also in that a credit card typically involves a third-party entity that pays
the seller and is reimbursed by the buyer, whereas a charge card simply defers
payment by the buyer until a later date.

• Features

As well as convenient credit, credit cards offer consumers an easy way to

track expenses, which is necessary for both monitoring personal expenditures and the
tracking of work-related expenses for taxation and reimbursement purposes. Credit
cards are accepted in larger establishments in almost all countries, and are available
with a variety of credit limits, repayment arrangements. Some have added perks (such

31
as insurance protection, rewards schemes in which points earned by purchasing goods
with the card can be redeemed for further goods and services or cashback).

• TYPES

 BUSINESS CREDIT CARD

Business credit cards are specialized credit cards issued in the name of a registered
business, and typically they can only be used for business purposes. Their use has
grown in recent decades.

 SECURED CREDIT CARD

A secured credit card is a type of credit card secured by a deposit account owned by
the cardholder. In some cases, credit card issuers will offer incentives even on their
secured card portfolios. In these cases, the deposit required may be significantly less
than the required credit limit, and can be as low as 10% of the desired credit limit.
This deposit is held in a special savings account. Credit card issuers offer this because
they have noticed that delinquencies were notably reduced when the customer
perceives something to lose if the balance is not repaid.

 PREPAID CARD
A "prepaid credit card" is not a true credit card since no credit is offered by the card
issuer: the cardholder spends money which has been "stored" via a prior deposit by
the cardholder or someone else, such as a parent or employer. Unlike debit cards,
prepaid credit cards generally do not require a PIN. An exception is prepaid credit
cards with an EMV chip. These cards do require a PIN if the payment is processed
via Chip and PIN technology.

 DIGITAL CARD
A digital card is a digital cloud-hosted virtual representation of any kind of
identification card or payment card, such as a credit card.

32
 DEBIT CARD
A debit card (also known as a bank card or check card) is a plastic payment card that
can be used instead of cash when making purchases. It is similar to a credit card, but
unlike a credit card, the money comes directly from the user's bank account when
performing a transaction.
Some cards may bear a stored value with which a payment is made, while most relay
a message to the cardholder's bank to withdraw funds from a payer's designated bank
account. In some cases, the primary account number is assigned exclusively for use
on the Internet and there is no physical card.
In many countries, the use of debit cards has become so widespread that their volume
has overtaken or entirely replaced cheques and in some instances, cash transactions.
The development of debit cards, unlike credit cards and charge cards, has generally
been country specific resulting in a number of different systems around the world,
which were often incompatible. Since the mid-2000s, a number of initiatives have
allowed debit cards issued in one country to be used in other countries and allowed
their use for internet and phone purchases.
Unlike credit and charge cards, payments using a debit card are immediately
transferred from the cardholder's designated bank account, instead of them paying the
money back at a later date.
Debit cards usually also allow for instant withdrawal of cash, acting as the ATM
card for withdrawing cash. Merchants may also offer cashback facilities to customers,
where a customer can withdraw cash along with their purchase.
The debit card had limited popularity in India as the merchant is charged for each
transaction. The debit card was mostly used for ATM transactions. RBI has
announced that such fees are not justified so the transaction has no processing fee.
Most Indian banks issue Visa debit cards, though some banks (like SBI and Citibank
India) also issue Master card. The debit card transactions are routed through Visa or
MasterCard networks in India and overseas rather than directly via the issuing bank.
The National Payments Corporation of India (NPCI) has launched a new card
called RuPay. It is similar to Singapore's NETS and Mainland China's Union Pay.

33
 SMART CARD

A smart card usually contains an embedded 8-bit microprocessor (a kind of computer

chip). The microprocessor is under a contact pad on one side of the card. Think of the
microprocessor as replacing the usual magnetic stripe present on a credit card or debit
card. The microprocessor on the smart card is there for security. The host computer
and card reader actually "talk" to the microprocessor. The microprocessor enforces
access to the data on the card. The chips in these cards are capable of many kinds of
transactions. For example, a person could make purchases from their credit account,
debit account or from a stored account value that's reload able. The enhanced memory
and processing capacity of the smart card is many times that of traditional magnetic-
stripe cards and can accommodate several different applications on a single card. It
can also hold identification information, which means no more shuffling through
cards in the wallet to find the right one the Smart Card will be the only one needed.

Smart cards can also be used with a smart card reader attachment to a personal
computer to authenticate a user. Smart cards are much more popular in Europe than in
the U.S. In Europe the health insurance and banking industries use smart cards
extensively. Every German citizen has a smart card for health insurance. Even though
smart cards have been around in their modern form for at least a decade, they are just
starting to take off in the U.S.

 ELECTRONIC FUND TRANSFER (EFT)

Electronic funds transfer (EFT) is the electronic transfer of money from one bank
account to another, either within a single financial institution or across multiple
institutions, via computer-based systems, without the direct intervention of bank staff.
EFT's are known by a number of names. In the United States, they may be referred to
as electronic checks or e-checks.

The term covers a number of different payment systems, for example:

• Cardholder-initiated transactions, using a payment card such as a credit or debit

card
• Direct deposit payment initiated by the payer

34
• Direct debit payments for which a business debits the consumer's bank
accounts for payment for goods or services
• Wire transfer via an international banking network such as SWIFT
• Electronic bill payment in online banking, which may be delivered by EFT or
paper check
• Transactions involving stored value of electronic money, possibly in a private
currency.
A number of transaction types may be performed, including the following:

• Sale: where the cardholder pays for goods or service

• Refund: where a merchant refunds an earlier payment made by a cardholder
• Withdrawal: the cardholder withdraws funds from their account.
e.g. from an ATM. The term Cash Advance may also be used,
• Typically when the funds are advanced by a merchant rather than at an ATM
• Deposit: where a cardholder deposits funds to their own account
(Typically at an ATM)
• Cashback: where a cardholder withdraws funds from their own account at the
same time as making a purchase
• Inter-account transfer: Transferring funds between linked
• Accounts belonging to the same cardholder
• Payment: Transferring funds to a third party account

 REAL TIME GROSS SETTELMENT

Real-time gross settlement is specialist funds transfer systems where the transfer
of money or securities takes place from one bank to another on a "real time" and on a
"gross" basis. Settlement in "real time" means a payment transaction is not subjected
to any waiting period, with transactions being settled as soon as they are processed.
"Gross settlement" means the transaction is settled on one-to-one basis without
bundling or netting with any other transaction. "Settlement" means that once
processed, payments are final and irrevocable.

RTGS systems are typically used for high-value transactions that require and receive
immediate clearing. In some countries the RTGS systems may be the only way to get
same day cleared funds and so may be used when payments need to be settled

35
urgently. However, most regular payments would not use a RTGS system, but instead
would use a national payment system or network that allows participants to batch and
net payments.

RTGS systems are usually operated by a country's central bank as it is seen as a

critical infrastructure for a country's economy. Economists believe that an efficient
national payment system reduces the cost of exchanging goods and services, and is
indispensable to the functioning of the interbank, money, and capital markets. A weak
payment system may severely drag on the stability and developmental capacity of a
national economy; its failures can result in inefficient use of financial resources,
inequitable risk-sharing among agents, actual losses for participants, and loss of
confidence in the financial system and in the very use of money.

RTGS system does not require any physical exchange of money; the central bank
makes adjustments in the electronic accounts of Bank A and Bank B, reducing the
balance in Bank A's account by the amount in question and increasing the balance of
Bank B's account by the same amount. The RTGS system is suited for low-volume,
high-value transactions. It lowers settlement risk, besides giving an accurate picture of
an institution's account at any point of time. The objective of RTGS systems by
central banks throughout the world is to minimize risk in high-value electronic
payment settlement systems. In an RTGS system, transactions are settled across
accounts held at a central bank on a continuous gross basis. Settlement is immediate,
final and irrevocable. Credit risks due to settlement lags are eliminated. The best
RTGS national payment system cover up to 95% of high-value transactions within the
national monetary market.

A payment system is any system used to settle financial transactions through the
transfer of monetary value, and includes the institutions, instruments, people, rules,
procedures, standards, and technologies that make such an exchange possible. A
common type of payment system is the operational network that links bank accounts
and provides for monetary exchange using bank deposits.

It makes a payment system a system is the use of cash-substitutes; traditional payment

systems are negotiable instruments such as drafts (e.g., checks) and documentary
credits such as letters of credit. With the advent of computers and electronic
communications a large number of alternative electronic payment systems have

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emerged. These include debit cards, credit cards, electronic funds transfers, direct
credits, direct debits, internet banking and e-commerce payment systems. Some
payment systems include credit mechanisms, but that is essentially a different aspect
of payment. Payment systems are used in lieu of tendering cash in domestic and
international transactions and consist of a major service provided by banks and other
financial institutions.

Payment systems may be physical or electronic and each has its own procedures and
protocols. Standardization has allowed some of these systems and networks to grow
to a global scale, but there are still many country and product specific systems.
Examples of payment systems that have become globally available are credit card and
automated teller machine networks. Specific forms of payment systems are also used
to settle financial transactions for products in the equity markets, bond markets,
currency markets, futures markets, derivatives markets, options markets and to
transfer funds between financial institutions both domestically using clearing and real-
time gross settlement (RTGS) systems and internationally using the SWIFT network

The term electronic payment can refer narrowly to e-commerce a payment for buying
and selling goods or services offered through the Internet or broadly to any type
of electronic funds transfer.

 ELECTRONIC CLEARING SYSTEM

ECS is an electronic mode of funds transfer from one bank account to another. It can
be used by institutions for making payments such as distribution of dividend interest,
salary and pension, among others. It can also be used to pay bills and other charges
such as telephone, electricity, water or for making equated monthly instalments
payments on loans as well as SIP investments. ECS can be used for both credit and
debit purposes.

• Avail of an ECS scheme

You need to inform your bank and provide a mandate that authorises the institution,
which can then debit or credit the payments through the bank. The mandate contains
details of your bank branch and account particulars. It is the responsibility of the
institution to communicate the details of the amount being credited or debited to their
account, indicating the date of credit and other relative particulars of the payment.

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You will know the money has been debited from your account through mobile alerts
or messages from the bank. The ECS user can set the maximum amount one can debit
from the account, specify the purpose of debit, as well as set a validity period for
every mandate given.

 CORE BANKING

Core banking is a banking service provided by a group of networked bank branches

where customers where customers may access their bank account and perform basic
transactions from any of the members branch offices.

Core banking is often associated with retail banking and many banks treat the retail
customers as their core banking customers. Business are usually managed via the
Corporate banking division of the institution. Core banking covers basic depositing
and landing of money.

Core banking functions will include transaction accounts, loan, mortgages and
payments. Bank makes these services available across multiple channels like
automated teller machines, Internet banking, Mobile banking and branches.

Banking software and network technology allow a bank to centralise its record
keeping and allow access from any location

 MOBILE BANKING

Mobile banking is a service provided by a bank or other financial institution that

allows its customers to conduct financial transactions remotely using a mobile
device such as a smartphone or tablet. Unlike the related internet banking it uses
software, usually called an app, provided by the financial institution for the purpose.
Mobile banking is usually available on a 24-hour basis. Some financial institutions
have restrictions on which accounts may be accessed through mobile banking, as well
as a limit on the amount that can be transacted.

Transactions through mobile banking may include obtaining account balances and
lists of latest transactions, electronic bill payments, and funds transfers between a
customer's or another's accounts. Some apps also enable copies of statements to be
downloaded and sometimes printed at the customer's premises; and some banks
charge a fee for mailing hardcopies of bank statements.

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From the bank's point of view, mobile banking reduces the cost of handling
transactions by reducing the need for customers to visit a bank branch for non-cash
withdrawal and deposit transactions. Mobile banking does not handle transactions
involving cash, and a customer needs to visit an ATM or bank branch for cash
withdrawals or deposits. Many apps now have a remote deposit option; using the
device's camera to digitally transmit cheques to their financial institution.

• Mobile banking services

Typical mobile banking services may include:

Account information

1. Mini-statements and checking of account history

2. Alerts on account activity or passing of set thresholds

3. Monitoring of term deposits

4. Access to loan statements

5. Access to card statements

6. Mutual funds / equity statements

7. Insurance policy management

Transaction

1. Funds transfers between the customer's linked accounts

2. Paying third parties, including bill payments and third party fund transfers(see,
e.g., FAST)

3. Check Remote Deposit

Investments

1. Portfolio management services

2. Real-time stock quotes

3. Personalized alerts and notifications on security prices

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Support

1. Status of requests for credit, including mortgage approval, and insurance coverage

2. Check (cheque) book and card requests

3. Exchange of data messages and email, including complaint submission and

tracking

4. ATM Location

Personalised

It would be expected from the mobile application to support personalization such as :

1. Preferred Language
2. Date / Time format
3. Amount format
4. Default transactions
5. Standard Beneficiary list
6. Alerts

How it works

The message sent by you travels from your mobile phone to the SMS Centre of the
Cellular Service Provider, and from there it travels to the Bank's systems. The
information is retrieved and sent back to your mobile phone via the SMS Centre, all in
a matter of a few seconds. Mobile Banking through WAP Once you log onto your
Bank's WAP site through your WAP/GPRS enabled mobile phone all you need to do
is enter your Customer ID and Net Banking IPIN. Then go to the Transactions Menu
after selecting your account. Select any one of the Transactions like Balance Inquiry,
Mini Statement, Statement Request A Statement of Accounts for the selected account
for the current period will be mailed.

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 ELECTRONIC COMMERCE
E-commerce is a transaction of buying or selling online. Electronic commerce draws
on technologies such as mobile commerce, electronic funds transfer, supply chain
management, Internet marketing, online transaction processing, electronic data
interchange (EDI), inventory management systems, and automated data collection
systems. Modern electronic commerce typically uses the World Wide Web for at least
one part of the transaction’s life cycle although it may also use other technologies
such as E-mail.

E-commerce businesses may employ some or all of the followings:

• Online shopping web sites for retail sales direct to consumers

• Providing or participating in online marketplaces, which process third-party
business-to-consumer or consumer-to-consumer sales
• Business-to-business buying and selling;
• Gathering and using demographic data through web contacts and social media
• Business-to-business (B2B) electronic data interchange
• Marketing to prospective and established customers by e-mail or fax (for example,
with newsletters)
• Engaging in pretail for launching new products and services
• Online financial exchanges for currency exchanges or trading purposes.

 TELEPHONE BANKING

Telephone banking is a service provided by a bank or other financial institution

which enables customers to perform a range of financial transactions over
the telephone, without the need to visit a bank branch or automated teller machine.
Telephone banking times are usually longer than branch opening times, and some
financial institutions offer the service on a 24-hour basis. However, some banks
impose restrictions on which accounts may be accessed through telephone banking
and limits on the amount that can be transacted.

The types of financial transactions which a customer may transact through telephone
banking include obtaining account balances and list of latest transactions, electronic

41
bill payments, and funds transfers between a customer's or another's accounts.
Telephone banking cannot be used for cash or documents (such as cheques) for which
customers must visit an ATM or bank branch.

From the bank's point of view, telephone banking reduces the cost of handling
transactions by reducing the need for customers to visit a bank branch for non-cash
withdrawal and deposit transactions. However, the use of telephone banking services
has been declining in favour of internet banking since the early 2000s.

• Operation

To use a financial institution's telephone banking facility, a customer must first

register with the institution for the service. They would be assigned a customer
number and they may be given or set up their own password (under various names)
for customer verification.

The customer would call a special phone number set up by the bank and
are authenticate through a numeric or verbal password or through security questions
asked by a live representative. The service can be provided using an automated
system; using voice recognition capability, DTMF technology or by live customer
service representatives.

 ELECTRONIC CLEARING SERVICE (ECS)

A clearing house is a financial services company that provides clearing and settlement
services for financial transactions, usually on a futures exchange, and often acts as
central counterparty (the payor actually pays the clearing house, which then pays the
payee). A clearing house may also offer innovation, the substitution of a new contract
or debt for an old, or other credit enhancement services to its members. The term is
also used for banks like Suffolk Bank that acted as a restraint on the over-issuance of
private bank notes.

Clearing on options exchanges the Options Clearing Corporation is an example of a

clearinghouse that functions for the purpose of clearing equity options and bond
derivatives, in order to ensure the proper implementation of these instruments.

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 CHEQUE TRUNCATION SYSTEM

Cheque Truncation System (CTS) or Image-based Clearing System (ICS), in

India, is a project of the Reserve Bank of India (RBI), commencing in 2010, for faster
clearing of cheques. CTS is based on a cheque truncation or online image-based
cheque clearing system where cheque images and magnetic ink character
recognition (MICR) data are captured at the collecting bank branch and transmitted
electronically.

Cheque truncation means stopping the flow of the physical cheques issued by a
drawer to the drawee branch. The physical instrument is truncated at some point en
route to the drawee branch and an electronic image of the cheque is sent to the drawee
branch along with the relevant information like the MICR fields, date of presentation,
presenting banks etc. This would eliminate the need to move the physical instruments
across branches, except in exceptional circumstances, resulting in an effective
reduction in the time required for payment of cheques, the associated cost of transit
and delays in processing, etc., thus speeding up the process of collection or realization
of cheques.

In 2008 the Reserve Bank of India introduced a system to allow cheque truncation—
the conversion of checks from physical form to electronic form when sending to the
paying bank—in India, the cheque truncation system as it was known was first rolled
out in the National Capital Region and then rolled out nationally.

Expansion of banking infrastructure

Physical as well as virtual expansion of banking through mobile banking, internet

banking, tele banking, bio-metric and mobile ATMs is taking place since last decade
and has gained momentum in last few years.

2016 Indian Banks Data Breach

A huge data breach of data of debit cards issued by various Indian banks was reported
in October 2016. It was estimated 3.2 million debit cards were compromised. Major
Indian banks- SBI, HDFC Bank, ICICI, YES Bank and Axis Bank were among the
worst hit. Many users reported unauthorised use of their cards in locations in China.
This resulted in one of the India's biggest card replacement drive in banking history.

43
The biggest Indian bank State Bank of India announced the blocking and replacement
of almost 600,000 debit cards.

 VIRTUAL BANKING

Various technological and payment systems developmental initiatives are undertaken

in the Indian banking and financial sector. The system has moved to a ‘virtual'
banking system gradually in view of IT penetration in every sphere of banking.
The Core Banking concept to a great extent emerged from the IT infrastructure and
this enabled the centralization process and has since received a complete and focused
attention from all the banks for its rapid implementation. The banks have also
undergone a massive change in terms of improvement in the IT Communication
network which has greatly facilitated not only the networking of the internal
communication processes but the integration with the external payment systems
gateways as well.
The offering of electronic banking service channels like Internet Banking, Mobile
Banking, real time fund transfer, ATM Applications and other forms of upcoming
electronic banking channels have become important vehicles of offering banking
services in a cost- efficient manner with wide geographical spread; enhancing the
banks' reputation and brand building addressing the competitive forces as well.
Operational comfort and convenience of operations in a highly challenging
environment for banks. The most important requirement relates to looking at the
convenience of customers either online or offline.

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 CHAPTER 6

STATE BANK OF INDIA

The State Bank of India was formerly known as “Imperial Bank of India” during the
British rule.

It was established on 1st July, 1955 under the recommendations of “Gorwala

committee”.

It was nationalized on 2nd June, 1956 with majority of its share taken by the
Government of India.

The SBI acts as an agent where the Reserve Bank of India has no branch offices.

It has 5 associate banks, State Bank of Bikaner & Jaipur, Hyderabad, Mysore, Patiala
and Travancore.

EVOLUTION OF SBI

The origin of the State Bank of India goes back to the first decade of the nineteenth
century with the establishment of the Bank of Calcutta in Calcutta on 2 June 1806.
Three years later the bank received its charter and was re-designed as the Bank of
Bengal (2 January 1809). A unique institution, it was the first joint-stock bank of
British India sponsored by the Government of Bengal. The Bank of Bombay (15 April
1840) and the Bank of Madras (1 July 1843) followed the Bank of Bengal. These
three banks remained at the apex of modern banking in India till their amalgamation
as the Imperial Bank of India on 27 January 1921.

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Primarily Anglo-Indian creations, the three presidency banks came into existence
either as a result of the compulsions of imperial finance or by the felt needs of local
European commerce and were not imposed from outside in an arbitrary manner to
modernise India's economy. Their evolution was, however, shaped by ideas culled
from similar developments in Europe and England, and was influenced by changes
occurring in the structure of both the local trading environment and those in the
relations of the Indian economy to the economy of Europe and the global economic
framework.

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 CHAPTER 7

CHALLENGES AHEAD IN BANKING SECTOR

The following are challenges faced in banking sector by India:

(i) Improving profitability: The most direct result of the above changes is increasing
competition and narrowing of spreads and its impact on the profitability of banks. The
challenge for banks is how to manage with thinning margins while at the same time
working to improve productivity which remains low in relation to global standards.
This is particularly important because with dilution in banks’ equity, analysts and
shareholders now closely track their performance. Thus, with falling spreads, rising provision
for NPAs and falling interest rates, greater attention will need to be paid to reducing
transaction costs. This will require tremendous efforts in the area of technology and for banks
to build capabilities to handle much bigger volumes.

(ii) Reinforcing technology: Technology has thus become a strategic and integral part
of banking, driving banks to acquire and implement world class systems that enable
them to provide products and services in large volumes at a competitive cost with
better risk management practices. The pressure to undertake extensive
computerisation is very real as banks that adopt the latest in technology have an edge
over others. Customers have become very demanding and banks have to deliver
customised products through multiple channels, allowing customers access to the
bank round the clock.

(iii) Risk management: The deregulated environment brings in its wake risks along
with profitable opportunities, and technology plays a crucial role in managing these
risks. In addition to being exposed to credit risk, market risk and operational risk, the
business of banks would be susceptible to country risk, which will be heightened as
controls on the movement of capital are eased. In this context, banks are upgrading
their credit assessment and risk management skills and retraining staff, developing a
cadre of specialists and introducing technology driven management information
systems.

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(iv) Sharpening skills: The far-reaching changes in the banking and financial sector
entail a fundamental shift in the set of skills required in banking. To meet increased
competition and manage risks, the demand for specialised banking functions, using IT
as a competitive tool is set to go up. Special skills in retail banking, treasury, risk
management, foreign exchange, development banking etc., and will need to be
carefully nurtured and built. Thus, the twin pillars of the banking sector i.e. human
resources and IT will have to be strengthened.

(v) Greater customer orientation: In today’s competitive environment, banks will have
to strive to attract and retain customers by introducing innovative products, enhancing
the quality of customer service and marketing a variety of products through diverse
channels targeted at specific customer groups.

(vi) Corporate governance: Besides using their strengths and strategic initiatives for
creating shareholder value, banks have to be conscious of their responsibilities
towards corporate governance. Following financial liberalisation, as the ownership of
banks gets broadbased the importance of institutional and individual shareholders will
increase. In such a scenario, banks will need to put in place a code for corporate
governance for benefiting all stakeholders of a corporate entity.

(vii) International standards: Introducing internationally followed best practices and

observing universally acceptable standards and architecture. This includes best
practices in the area of corporate governance along with full transparency in
disclosures. In today’s globalised world, focusing on the observance of standards will
help smooth integration with world financial markets.

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 CONCLUSION

The face of banking is changing rapidly. Competition is going to be tough and with
financial liberalisation under the WTO, banks in India will have to benchmark
themselves against the best in the world. For a strong and resilient banking and
financial system, therefore, banks need to go beyond peripheral issues and tackle
significant issues like improvements in profitability, efficiency and technology, while
achieving economies of scale through consolidation and exploring available cost-
effective solutions. Technology is allowing banks to offer new products, operate more
efficiently, raise productivity, expand geographically and compete globally. A more
efficient, productive banking industry is providing services of greater quality and
value.

Over the last three decades the role of banking in the process of financial
intermediation has been undergoing a profound transformation, owing to changes in
the global financial system. It is now clear that a thriving and vibrant banking system
requires a well-developed financial structure with multiple intermediaries operating in
markets with different risk profiles.

Taking the banking industry to the heights of international excellence will require a
combination of new technologies, better processes of credit and risk appraisal,
treasury management, product diversification, internal control and external
regulations and not the least, human resources. Fortunately, we have a comparative
advantage in almost all these areas. Our professionals area the forefront of
technological change and financial developments all over the world. It is time to
harness these resources for development of Indian banking in the new century.

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