Banking Service

History of Banking in India

There are three different phases in the history of banking in India.

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• Pre-Nationalization Era
• Nationalization Stage
• Post Liberalization Era

Pre-Nationalization Era

In India the business of banking and credit was practices even in very early times. The remittance of money through Hundies, an indigenous credit instrument, was very popular. The hundies were issued by bankers known as Shroffs, Sahukars, Shahus or Mahajans in different parts of the country.

The modern type of banking, however, was developed by the Agency Houses of Calcutta and Bombay after the establishment of Rule by the East India Company in 18th and 19th centuries. During the early part of the 19th Century, ht volume of foreign trade was relatively small. Later on as the trade expanded, the need for banks of the European type was felt and the government of the East India Company took interest in having its own bank. The government of Bengal took the initiative and the first presidency bank, the Bank of Calcutta (Bank of Bengal) was established in 180.

In 1840, the Bank of Bombay and IN 1843, the Bank of Madras was also set up.

These three banks also known as “Presidency Bank”. The Presidency Banks had their branches in important trading centers but mostly lacked in uniformity in their operational policies. In 1899, the Government proposed to amalgamate these three banks in to one so that it could also function as a Central Bank, but the Presidency Banks did not favor the idea. However, the conditions obtaining during world war period (1914-1918) emphasized the need for a unified banking institution, as a result of which the Imperial Bank was set up in 1921.

The Imperial Bank of India acted like a Central bank and as a banker for other banks. The RBI (Reserve Bank of India) was established in 1935 as the Central Bank of the Country. In 1949, the Banking Regulation act was passed and the RBI was nationalized and acquired extensive regulatory powers over the commercial banks. In 1950, the Indian Banking system comprised of the RBI, the Imperial Bank of India, Cooperative banks, Exchange banks and Indian Joint Stock banks.

Nationalization Stages

After Independence, in 1951, the All India Rural Credit survey, committee of Direction with Shri.

A. D. Gorwala as Chairman recommended amalgamation of the Imperial Bank of India and ten others banks into a newly established bank called the State Bank of India (SBI). The Government of India accepted the recommendations of the committee and introduced the State Bank of India bill in the Lok Sabha on 16th April 1955 and it was passed by Parliament and got the president’s assent on 8th May 1955. The Act came into force on 1st July 1955, and the Imperial Bank of India was nationalized in 1955 as the State Bank of India.

The main objective of establishing SBI by nationalizing the Imperial Bank of India was “to extend banking facilities on a large scale more particularly in the rural and semi-urban areas and to diverse other public purposes. ” In 1959, the SBI (Subsidiary Bank) act was proposed and the following eight state-associated banks were taken over by the SBI as its subsidiaries. Name of the BankSubsidiary with effect from 1. State Bank of Hyderabad1st October 1959 2. State Bank of Bikaner1st January 1960 3. State Bank of Jaipur1st January 1960 4. State Bank of Saurashtra1st May 1960 5.

State Bank of Patiala1st April 1960 6. State Bank of Mysore1st March 1960 7. State Bank of Indore1st January 1968 8. State Bank of Travancore1st January 1960 With effect from 1st January 1963, the State Bank of Bikaner and State Bank of Jaipur with head office located at Jaipur. Thus, seven subsidiary banks State Bank of India formed the SBI Group. The SBI Group under statutory obligations was required to open new offices in rural and semi-urban areas and modern banking was taken to these unbanked remote areas. On 19th July 1969, then the Prime Minister, Mrs.

Indira Gandhi announced the nationalization of 14 major scheduled Commercial Banks each having deposits worth Rs. 50 crore and above. This was a turning point in the history of commercial banking in India. Later the Government Nationalized six more commercial private sector banks with deposit liability of not less than Rs. 200 crores on 15th April 1980, viz.

1. Andhra Bank.
2. Corporation Bank.
3. New Bank if India.
4. Oriental Bank of Commerce.
5. Punjab and Sind Bank.
6. Vijaya Bank.

In 1969, the Lead Bank Scheme was introduced to extend banking facilities to every corner of the country.

Later in 1975, Regional Rural Banks were set up to supplement the activities of the commercial banks and to especially meet the credit needs of the weaker sections of the rural society. Nationalization of banks paved way for retail banking and as a result there has been an alt round growth in the branch network, the deposit mobilization, credit disposals and of course employment. The first year after nationalization witnessed the total growth in the agricultural loans and the loans made to SSI by 87% and 48% respectively.

The overall growth in the deposits and the advances indicates the improvement that has taken place in the banking habits of the people in the rural and semi-urban areas where the branch network has spread. Such credit expansion enabled the banks to achieve the goals of nationalization, it was however, achieved at the coast of profitability of the banks.

Consequences of Nationalization

• The quality of credit assets fell because of liberal credit extension policy.
• Political interference has been as additional malady.
• Poor appraisal involved during the loan meals conducted for credit disbursals.
• The credit facilities extended to the priority sector at concessional rates.
• The high level of low yielding SLR investments adversely affected the profitability of the banks.
• The rapid branch expansion has been the squeeze on profitability of banks emanating primarily due to the increase in the fixed costs.
• There was downward trend in the quality of services and efficiency of the banks.

Post-Liberalization Era - Thrust on Quality and Profitability

By the beginning of 1990, the social banking goals set for the banking industry made most of the public sector resulted in the presumption that there was no need to look at the fundamental financial strength of this bank. Consequently they remained undercapitalized. Revamping this structure of the banking industry was of extreme importance, as the health of the financial sector in particular and the economy was a whole would be reflected by its performance. The need for restructuring the banking industry was felt greater with the initiation of the real sector reform process in 1992. he reforms have enhanced the opportunities and challenges for the real sector making them operate in a borderless global market place. However, to harness the benefits of globalization, there should be an efficient financial sector to support the structural reforms taking place in the real economy. Hence, along with the reforms of the real sector, the banking sector reformation was also addressed. The route causes for the lackluster performance of banks, formed the elements of the banking sector reforms.

Some of the factors that led to the dismal performance of banks were.

• Regulated interest rate structure.
• Lack of focus on profitability.
• Lack of transparency in the bank’s balance sheet.
• Lack of competition.
• Excessive regulation on organization structure and managerial resource.
• Excessive support from government.

Against this background, the financial sector reforms were initiated to bring about a paradigm shift in the banking industry, by addressing the factors for its dismal performance.

In this context, the recommendations made by a high level committee on financial sector, chaired by M. Narasimham, laid the foundation for the banking sector reforms. These reforms tried to enhance the viability and efficiency of the banking sector. The Narasimham Committee suggested that there should be functional autonomy, flexibility in operations, dilution of banking strangulations, reduction in reserve requirements and adequate financial infrastructure in terms of supervision, audit and technology.

The committee further advocated introduction of prudential forms, transparency in operations and improvement in productivity, only aimed at liberalizing the regulatory framework, but also to keep them in time with international standards. The emphasis shifted to efficient and prudential banking linked to better customer care and customer services.

Private Sector Banks

Private banking in India was practiced since the begining of banking system in India. The first private bank in India to be set up in Private Sector Banks in India was Indus Ind Bank.

It is one of the fastest growing Bank Private Sector Banks in India. IDBI ranks the tenth largest development bank in the world as Private Banks in India and has promoted a world class institutions in India. The first Private Bank in India to receive an in principle approval from the Reserve Bank of India was Housing Development Finance Corporation Limited, to set up a bank in the private sector banks in India as part of the RBI's liberalization of the Indian Banking Industry. It was incorporated in August 1994 as HDFC Bank Limited with registered office in Mumbai and commenced operations as Scheduled Commercial Bank in January 1995.

ING Vaysya, yet another Private Bank of India was incorporated in the year 1930. Bangalore has a pride of place for having the first branch inception in the year 1934. With successive years of patronage and constantly setting new standards in banking, ING Vaysya Bank has many credits to its account. Entry of Private Sector Banks: There has been a paradigm shift in mindsets both at the Government level in the banking industry over the years since Nationalization of Banks in 1969, particularly during the last decade (1990-2000).

Having achieved the objectives of Nationalization, the most important issue before the industry at present is survival and growth in the environment generated by the economic liberalization greater competition with a view to achieving higher productivity and efficiency in January 1993 for the entry of Private Sector banks based on the Nationalization Committee report of 1991, which envisaged a larger role for Private Sector Banks. The RBI prescribed a minimum paid up capital of Rs. 100 crores for the new bank and the shares are to be listed at stock exchange.

Also the new bank after being granted license under the Banking Regulation Act shall be registered as a public limited company under the companies Act, 1956. Subsequently 9 new commercial banks have been granted license to start banking operations. The new private sector banks have been very aggressive in business expansion and is also reporting higher profile levels taking the advantage of technology and skilled manpower. In certain areas, these banks have even our crossed the other group of banks including foreign banks.

Current scenario

Currently (2007), overall, banking in India is considered as 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. Even in terms of quality of assets and capital adequacy, Indian banks are considered to have clean, strong and transparent balance sheets-as compared to other banks in comparable economies in its region. The Reserve Bank of India is an autonomous body, with minimal pressure from the government.

The stated policy of the Bank on the Indian Rupee is to manage volatility-without any stated exchange rate-and this has mostly been true. With the growth in the Indian economy expected to be strong for quite some time-especially in its services sector, the demand for banking services-especially retail banking, mortgages and investment services are expected to be strong. M, takeovers, asset sales and much more action (as it is unraveling in China) will happen on this front in India. In March 2006, the Reserve Bank of India allowed Warburg Pincus to increase its stake in Kotak Mahindra Bank (a private sector bank) to 10%.

This is the first time an investor has been allowed to hold more than 5% in a private sector bank since the RBI announced norms in 2005 that any stake exceeding 5% in the private sector banks would need to be vetted by them. Currently, India has 88 scheduled commercial banks (SCBs) - 28 public sector banks (that is with the Government of India holding a stake), 29 private banks (these do not have government stake; they may be publicly listed and traded on stock exchanges) and 31 foreign banks.

They have a combined network of over 53,000 branches and 17,000 ATMs. According to a report by ICRA Limited, a rating agency, the public sector banks hold over 75 percent of total assets of the banking industry, with the private and foreign banks holding 18. 2% and 6. 5% respectively.

Overview of Banking

Banking Regulation Act of India, 1949 defines Banking as “accepting, for the purpose of lending or of investment of deposits of money from the public, repayable on demand or otherwise or withdrawable by cheque, draft order or otherwise. The Reserve Bank of India Act, 1934 and the Banking Regulation Act, 1949, govern the banking operations in India. Organizational Structure of Banks in India: In India banks are classified in various categories according to differ rent criteria. The following charts indicate the banking structure: Broad Classification of Banks in India:

The RBI: The RBI is the supreme monetary and banking authority in the country and has the responsibility to control the banking system in the country.

It keeps the reserves of all scheduled banks and hence is known as the “Reserve Bank”.

Public Sector Banks

• State Bank of India and its Associates

Nationalized Banks

• Regional Rural Banks Sponsored by Public Sector Banks

Private Sector Banks

• Old Generation Private Banks
• Foreign New Generation Private Banks
• Banks in India

Co-operative Sector Banks

• State Co-operative Banks
• Central Co-operative Banks
• Primary Agricultural Credit Societies
• Land Development Banks State Land Development Banks

Development Banks

Development Banks mostly provide long term finance for setting up industries. They also provide short-term finance (for export and import activities) • Industrial Finance Co-operation of India (IFCI)

• Industrial Development of India (IDBI)
• Industrial Investment Bank of India (IIBI)
• Small Industries Development Bank of India (SIDBI)
• National Bank for Agriculture and Rural Development (NABARD)
• Export-Import Bank of India

Role of Banks: Banks play a positive role in economic development of a country as repositories of community’s savings and as purveyors of credit. Indian Banking has aided the economic development during the last fifty years in an effective way. The banking sector has shown a remarkable responsiveness to the needs of planned economy. It has brought about a considerable progress in its efforts at deposit mobilization and has taken a number of measures in the recent past for accelerating the rate of growth of deposits.

As recourse to this, the commercial banks opened branches in urban, semi-urban and rural areas and have introduced a number of attractive schemes to foster economic development. The activities of commercial banking have growth in multi-directional ways as well as multi-dimensional manner. Banks have been playing a catalytic role in area development, backward area development, extended assistance to rural development all along helping agriculture, industry, international trade in a significant manner. In a way, commercial banks have emerged as key financial agencies for rapid economic development.

By pooling the savings together, banks can make available funds to specialized institutions which finance different sectors of the economy, needing capital for various purposes, risks and durations. By contributing to government securities, bonds and debentures of term-lending institutions in the fields of agriculture, industries and now housing, banks are also providing these institutions with an access to the common pool of savings mobilized by them, to that extent relieving them of the responsibility of directly approaching the saver.

This intermediation role of banks is particularly important in the early stages of economic development and financial specification. A country like India, with different regions at different stages of development, presents an interesting spectrum of the evolving role of banks, in the matter of inter-mediation and beyond. Mobilization of resources forms an integral part of the development process in India. In this process of mobilization, banks are at a great advantage, chiefly because of their network of branches in the country.

And banks have to place considerable reliance on the mobilization of deposits from the public to finance development programmes. Further, deposit mobalization by banks in India acquired greater significance in their new role in economic development. Commercial banks provide short-term and medium-term financial assistance. The short-term credit facilities are granted for working capital requirements. The medium-term loans are for the acquisition of land, construction of factory premises and purchase of machinery and equipment.

These loans are generally granted for periods ranging from five to seven years. They also establish letters of credit on behalf of their clients favouring suppliers of raw materials/machinery (both Indian and foreign) which extend the banker’s assurance for payment and thus help their delivery. Certain transaction, particularly those in contracts of sale of Government Departments, may require guarantees being issued in lieu of security earnest money deposits for release of advance money, supply of raw materials for processing, full payment of bills on the assurance of the performance etc. Commercial banks issue such guarantees also. The Role of Reserve Bank of India (RBI) – Banker’s Bank: The Reserve Bank of India (RBI) is the central bank of India, and was established on April 1, 1935 in accordance with the provisions of the Reserve Bank of India Act, 1934. Since its inception, it has been headquartered in Mumbai. Though originally privately owned, RBI has been fully owned by the Government of India since nationalization in 1949.

RBI is governed by a central board (headed by a Governor) appointed by the Central Government. The current governor of RBI is Dr. Y. Venugopal Reddy (who succeeded Dr. Bimal Jalan on September 6, 2003). RBI has 22 regional offices across India. The Reserve Bank of India was set up on the recommendations of the Hilton Young Commission. The commission submitted its report in the year 1926, though the bank was not set up for nine years.

Main Objective

Monetary Authority

• Formulates, implements and monitors the monetary policy.
• Objective: maintaining price stability and ensuring adequate flow of credit to productive sectors. Regulator and supervisor of the financial system
• Prescribes broad parameters of banking operations within which the country’s banking and financial system functions.
• Objective: maintain public confidence in the system, protect depositors’ interest and provide cost-effective banking services to the public. The Banking Ombudsman Scheme has been formulated by the Reserve Bank of India (RBI) for effective redressal of complaints by bank customers

Manager of Exchange Control

• Manages the Foreign Exchange Management Act, 1999.
• Objective: to facilitate external trade and payment and promote orderly development and maintenance of foreign exchange market in India. Issuer of currency
• Issues and exchanges or destroys currency and coins not fit for circulation.
• Objective: to give the public adequate quantity of supplies of currency notes and coins and in good quality. Developmental role
• Performs a wide range of promotional functions to support national objectives.

In addition to its traditional central functions, the Reserve bank has certain non-monetary functions of the nature of supervision of banks and promotion of sound banking in India. The Reserve Bank Act, 1934, and the Banking Regulation Act, 1949 have given the RBI wide powers of supervision and control over commercial and cooperative banks, relating to licensing and establishments, branch expansion, liquidity of their assets, management and methods of working, amalgamation, reconstruction and liquidation. The RBI is authorized to carry out periodical inspections of the banks and to call for returns and necessary information from them.

The nationalization of 14 major Indian scheduled banks in July 1969 has imposed new responsibilities on the RBI for directing the growth of banking and credit policies towards more rapid development of the economy and realization of certain desired social objectives. The supervisory functions of the RBI have helped a great deal in improving the standard of banking in India to develop on sound lines and to improve the methods of their operation.

The Bank now performs a variety of developmental and promotional functions, which, at one time, were regarded as outside the normal scope of central banking. The Reserve Bank was asked to promote banking habit, extend banking facilities to rural and semi-urban areas, and establish and promote new specialized financing agencies. Accordingly, the Reserve bank has helped in the setting up of the IFCI and the SFC: it set up the Deposit Insurance Corporation of India in 1963 and the Industrial Reconstruction Corporation of India in 1972.

These institutions were set up directly or indirectly by the Reserve Bank to promote saving habit and to mobilize savings, and to provide industrial finance as well as agricultural finance. As far back as 1935, the RBI set up the Agricultural Credit Department to provide agricultural credit. But only since 1951 the Bank’s role in this field has become extremely important. The Bank has developed the co-operative credit movement to encourage saving, to eliminate money-lenders from the villages and to route its short term credit to agriculture.

Their role in rural financing continues to be important even today, and their business in the urban areas also has increased phenomenally in recent years mainly due to the sharp increase in the number of co-operative banks. While the co-operative banks in rural areas mainly finance agricultural based activities including farming, cattle, milk, hatchery, personal finance etc. along with some small scale industries and self-employment driven activities, the co-operative banks in urban areas mainly finance various categories of people for self-employment, industries, small scale units, home finance, consumer finance, personal finance, etc.

Some of the co-operative banks are quite forward looking and have developed sufficient core competencies to challenge state and private sector banks. According to NAFCUB the total deposits & lendings of Co-operative Banks is much more than Old Private Sector Banks & also the New Private Sector Banks. This exponential growth of Co-operative Banks is attributed mainly to their much better local reach, personal interaction with customers, their ability to catch the nerve of the local clientele.

Though registered under the Co-operative Societies Act of the Respective States (where formed originally) the banking related activities of the co-operative banks are also regulated by the Reserve Bank of India. They are governed by the Banking Regulations Act 1949 and Banking Laws (Co-operative Societies) Act, 1965. There are two main categories of the co-operative banks.

• Short term lending oriented co-operative Banks – within this category there are three sub categories of banks viz state co-operative banks, District co-operative banks and Primary Agricultural co-operative societies.
• Long term lending oriented co-operative Banks – within the second category there are land development banks at three levels state level, district level and village level.

Features of Cooperative Banks

Co-operative Banks are organized and managed on the principal of co-operation, self-help, and mutual help. They function with the rule of “one member, one vote”. Function on “no profit, no loss” basis. Co-operative banks, as a principle, do not pursue the goal of profit maximization. Co-operative bank performs all the main banking functions of deposit mobilization, supply of credit and provision of remittance facilities.

Co-operative Banks provide limited banking products and are functionally specialists in agriculture related products. However, co-operative banks now provide housing loans also. UCBs provide working capital loans and term loan as well. The State Co-operative Banks (SCBs), Central Co-operative Banks (CCBs) and Urban Co-operative Banks (UCBs) can normally extend housing loans upto Rs 1 lakh to an individual. The scheduled UCBs, however, can lend upto Rs 3 lakh for housing purposes. The UCBs can provide advances against shares and debentures also.

Co-operative bank do banking business mainly in the agriculture and rural sector. However, UCBs, SCBs, and CCBs operate in semi urban, urban, and metropolitan areas also. The urban and non-agricultural business of these banks has grown over the years. The co-operative banks demonstrate a shift from rural to urban, while the commercial banks, from urban to rural. Co-operative banks are perhaps the first government sponsored, government-supported, and government-subsidized financial agency in India. They get financial and other help from the Reserve Bank of India NABARD, central government and state governments.

They constitute the “most favoured” banking sector with risk of nationalization. For commercial banks, the Reserve Bank of India is lender of last resort, but co-operative banks it is the lender of first resort which provides financial resources in the form of contribution to the initial capital (through state government), working capital, refinance. Co-operative Banks belong to the money market as well as to the capital market. Primary agricultural credit societies provide short term and medium term loans. Land Development Banks (LDBs) provide long-term loans.

SCBs and CCBs also provide both short term and term loans. Co-operative banks are financial intermediaries only partially. The sources of their funds (resources) are

• central and state government,
• the Reserve Bank of India and NABARD,
• other co-operative institutions,
• ownership funds
• deposits or debenture issues.

It is interesting to note that intra-sectoral flows of funds are much greater in co-operative banking than in commercial banking. Inter-bank deposits, borrowings, and credit from a significant part of assets and liabilities of co-operative banks.

This means that intra-sectoral competition is absent and intra-sectoral integration is high for co-operative bank. Some co-operative banks are scheduled banks, while others are non-scheduled banks. For instance, SCBs and some UCBs are scheduled banks but other co-operative bank are non-scheduled banks. At present, 28 SCBs and 11 UCBs with Demand and Time Liabilities over Rs 50 crore each included in the Second Schedule of the Reserve Bank of India Act. Co-operative Banks are subject to CRR and liquidity requirements as other scheduled and non-scheduled banks are.

However, their requirements are less than commercial banks. Since 1966 the lending and deposit rate of commercial banks have been directly regulated by the Reserve Bank of India. Although the Reserve Bank of India had power to regulate the rate co-operative bank but this have been exercised only after 1979 in respect of non-agricultural advances they were free to charge any rates at their discretion. Although the main aim of the co-operative bank is to provide cheaper credit to their members and not to maximize profits, they may access the money market to improve their income so as to remain viable.

Broad Classification of Products in a bank

The different products in a bank can be broadly classified into:

• Retail Banking.
• Trade Finance.
• Treasury Operations.

Retail Banking and Trade finance operations are conducted at the branch level while the wholesale banking operations, which cover treasury operations, are at the hand office or a designated branch.

Retail Banking

• Deposits
• Loans, Cash Credit and Overdraft
• Negotiating for Loans and advances
• Remittances
• Book-Keeping (maintaining all accounting records)
• Receiving all kinds of bonds valuable for safe keeping

Trade Finance

• Issuing and confirming of letter of credit.
• Drawing, accepting, discounting, buying, selling, collecting of bills of exchange, promissory notes, drafts, bill of lading and other securities.

Treasury Operations

• Buying and selling of bullion.
• Foreign exchange
• Acquiring, holding, underwriting and dealing in shares, debentures, etc.
• Purchasing and selling of bonds and securities on behalf of constituents.

The banks can also act as an agent of the Government or local authority. They insure, guarantee, underwrite, participate in managing and carrying out issue of shares, debentures, etc.

If the amount is not paid full by the end of the period, one is charged interest. A credit card is nothing but a very small card containing a means of identification, such as a signature and a small photo. It authorizes the holder to change goods or services to his account, on which he is billed. The bank receives the bills from the merchants and pays on behalf of the card holder. These bills are assembled in the bank and the amount is paid to the bank by the card holder totally or by installments. The bank charges the customer a small amount for these services.

The card holder need not have to carry money/cash with him when he travels or goes for purchasing. Credit cards have found wide spread acceptance in the ‘metros’ and big cities. Credit cards are joining popularity for online payments. The major players in the Credit Card market are the foreign banks and some big public sector banks like SBI and Bank of Baroda. India at present has about 3 million credit cards in circulation.

Debit Cards: Debit Card is a “prepaid” or “pay now” card with some storedvalue. Debit Cards quickly debit or subtract money from one’s savings account,or if one were taking out cash.

Every time a person uses the card, the merchant who in turn can get the money transferred to his account from the bank of the buyers, by debiting an exact amount of purchase from the card. To get a debit card along with a Personal Identification Number (PIN). When he makes a purchase, he enters this number on the shop’s PIN pad. When the card is swiped through the electronic terminal, it dials the acquiring bank system – either Master Card or Visa that validates the PIN and finds out from the issuing bank whether to accept or decline the transaction.

The customer never overspread because the amount spent is debited immediately from the customers account. So, for the debit card to work, one must already have the money in the account to cover the transaction. There is no grace period for a debit card purchase. Some debit cards have monthly or per transaction fees. Debit Card holder need not carry a bulky checkbook or large sums of cash when he/she goes at for shopping. This is a fast and easy way of payment one can get debit card facility as debit cards use one’s own money at the time of sale, so they are often easier than credit cards to obtain.

The major limitation of Debit Card is that currently only some 3000-4000 shops country wide accepts it. Also, a person can’t operate it in case the telephone lines are down.

• Automatic Teller Machine: The introduction of ATM’s has given the customers the facility of round the clock banking. The ATM’s are used by banks for making the customers dealing easier. ATM card is a device that allows customer who has an ATM card to perform routine banking transaction at any time without interacting with human teller. It provides exchange services. This service helps the customer to withdraw money even when the banks ate closed.

Electronic Funds Transfer (EFT)

Many modern banks have computerised their cheque handling process with computer networks and other electronic equipments. These banks are dispensing with the use of paper cheques. The system called electronic fund transfer (EFT) automatically transfers money from one account to another. This system facilitates speedier transfer of funds electronically from any branch to any other branch. In this system the sender and the receiver of funds may be located in different cities and may even bank with different banks.

Funds transfer within the same city is also permitted. The scheme has been in operation since February 7, 1996, in India. The other important type of facility in the EFT system is automated clearing houses. These are the computer centers that handle the bills meant for deposits and the bills meant for payment. In big companies pay is not disbursed by issued cheques or issuing cash. The payment office directs the computer to credit an employee’s account with the person’s pay.

Telebanking

Telebanking refers to banking on phone services.. customer can access information about his/her account through a telephone call and by giving the coded Personal Identification Number (PIN) to the bank. Telebanking is extensively user friendly and effective in nature.

• To get a particular work done through the bank, the users may leave his instructions in the form of message with bank.
• Facility to stop payment on request. One can easily know about the cheque status.
• Information on the current interest rates.
• Information with regard to foreign exchange rates.
• Request for a DD or pay order.
• D-Mat Account related services. And other similar services.

Mobile Banking

A new revolution in the realm of e-banking is the emergence of mobile banking. On-line banking is now moving to the mobile world, giving everybody with a mobile phone access to real-time banking services, regardless of their location. But there is much more to mobile banking from just on-lie banking. It provides a new way to pick up information and interact with the banks to carry out the relevant banking business. The potential of mobile banking is limitless and is expected to be a big success.

Booking and paying for travel and even tickets is also expected to be a growth area. According to this system, customer can access account details on mobile using the Short Messaging System (SMS) technology6 where select data is pushed to the mobile device. The wireless application protocol (WAP) technology, which will allow user to surf the net on their mobiles to access anything and everything. This is a very flexible way of transacting banking business. Already ICICI and HDFC banks have tied up cellular service provides such as Airtel, Orange, Sky Cell, etc. in Delhi and Mumbai to offer these mobile banking services to their customers.

Internet Banking

Internet banking involves use of internet for delivery of banking products and services. With internet banking is now no longer confirmed to the branches where one has to approach the branch in person, to withdraw cash or deposits a cheque or request a statement of accounts. In internet banking, any inquiry or transaction is processed online without any reference to the branch (anywhere banking) at any time. The Internet Banking now is more of a normal rather than an exception due to the fact that it is the cheapest way of providing banking services.

As indicated by McKinsey Quarterly research, presently traditional banking costs the banks, more than a dollar per person, ATM banking costs 27 cents and internet banking costs below 4 cents approximately. ICICI bank was the first one to offer Internet Banking in India.

Benefits of Internet Banking

• Reduce the transaction costs of offering several banking services and diminishes the need for longer numbers of expensive brick and mortar branches and staff.
• Increase convenience for customers, since they can conduct many banking transaction 24 hours a day.
• Increase customer loyalty. Improve customer access.
• Attract new customers.
• Easy online application for all accounts, including personal loans and mortgages

Financial Transaction on the Internet:

• Electronic Cash: Companies are developing electronic replicas of all existing payment system: cash, cheque, credit cards and coins.
• Automatic Payments: Utility companies, loans payments, and other businesses use on automatic payment system with bills paid through direct withdrawal from a bank account.
• Direct Deposits: Earnings (or Government payments) automatically deposited into bank accounts, saving time, effort and money.
• Stored Value Cards: Prepaid cards for telephone service, transit fares, highway tolls, laundry service, library fees and school lunches. Point of Sale transactions: Acceptance of ATM/Cheque at retail stores and restaurants for payment of goods and services. This system has made functioning of the stock Market very smooth and efficient.
• Cyber Banking: It refers to banking through online services. Banks with web site “Cyber” branches allowed customers to check balances, pay bills, transfer funds, and apply for loans on the Internet. ) Demat: Demat is short for de-materialisation of shares. In short, Demat is a process where at the customer’s request the physical stock is converted into electronic entries in the depository system. In January 1998 SEBI (Securities and Exchange Board of India) initiated System to regulate and to improve stock investing. As on date, to trade on shares it has become compulsory to have a share demat account and all trades take place through demat.

To be able to survive and grow in the changing market environment banks are going for the latest technologies, which is being perceived as an ‘enabling resource’ that can help in developing learner and more flexible structure that can respond quickly to the dynamics of a fast changing market scenario. It is also viewed as an instrument of cost reduction and effective communication eith people and institutions associated with the banking business. The Software Packages for Banking Applications in India had their beginnings in the middle of 80s, when the Banks started computerising the branches in a limited manner.

The early 90s saw the plummeting hardware prices and advent of cheap and inexpensive but high powered PC’s and Services and banks went in for what was called Total Branch Automation (TBA) packages. The middle and late 90s witnessed the tornado of financial reforms, deregulation globalisation etc. coupled eith rapid revolution in communication technologies and evolution of novel concept of convergence of communication technologies, like internet, mobile/cell phones etc. Technology has continuously played on important role in the working of banking institutions and the services provided by them.

Safekeeping of public money, transfer of money, issuing drafts, exploring investment opportunities and lending drafts, exploring investment being provided. Information Technology enables sophisticated product development, better market infrastructure, implementation of reliable techniques for control of risks and helps the financial intermediaries to reach geographically distant and diversified markets. Internet has significantly influenced delivery channels of the banks. Internet has emerged as an important medium for delivery of banking products and services.

The customers can view the accounts; get account statements, transfer funds and purchase drafts by just punching on few keys. The smart card’s i. e. , cards with micro processor chip have added new dimension to the scenario. An introduction of ‘Cyber Cash’ the exchange of cash takes place entirely through ‘Cyber-books’. Collection of Electricity bills and telephone bills has become easy. The upgradeability and flexibility of internet technology after unprecedented opportunities for the banks to reach out to its customers.

No doubt banking services have undergone drastic changes and so also the expectation of customers from the banks has increased greater. IT is increasingly moving from a back office function to a prime assistant in increasing the value of a bank over time. IT does so by maximizing banks of pro-active measures such as strengthening and standardising banks infrastructure in respect of security, communication and networking, achieving inter branch connectivity, moving towards Real Time gross settlement (RTGS) environment the forecasting of liquidity by building real ime databases, use of Magnetic Ink Character Recognition and Imaging technology for cheque clearing to name a few. Indian banks are going for the retail banking in a big way The key driver to charge has largely been the increasing sophistication in technology and the growing popularity of the Internet. The shift from traditional banking to e-banking is changing customer’s expectations.

• E-Banking: E-banking made its debut in UK and USA 1920s. It becomes prominently popular during 1960, through electronic funds transfer and credit cards.

The concept of web-based baking came into existence in Eutope and USA in the beginning of 1980. In India e-banking is of recent origin. The traditional model for growth has been through branch banking. Only in the early 1990s has there been a start in the non-branch banking services. The new pribate sector banks and the foreign banks are handicapped by the lack of a strong branch network in comparison with the public sector banks. In the absence of such networks, the market place has been the emergence of a lot of innovative services by these players through direct distribution strategies of non-branch delivery.

Traditional Banking Sector

The modern bank cannot rely on its branch network alone. Customers are now demanding new, more convenient, delivery systems, and services such as Internet banking have a dual role to the customer. They provide traditional banking services, but additionally offer much greater access to information on their account status and on the bank’s many other services. To do this banks have to create account information layers, which can be accessed both by the bank staff as well as by th customers themselves.

The use of interactive electronic links via the Internet could go a ling way in providing the customers with greater level of information about both their own financial situation and about the services offered by the bank.

The New Relationship Oriented Bank

Impact of IT on Privacy and Confidentiality of Data: Data being stored in the computers, is now being displayed when required on through internet banking mobile banking, ATM’s etc. all this has given rise to the issues of privacy and confidentially of data are:

The data processing capabilities of the computer, particularly the rapid throughput, integration, and retrieval capabilities, give rise to doubts in the minds of individuals as to whether the privacy of the individuals is being eroded.

So long as the individual data items are available only to those directly concerned, everything seems to be in proper place, but the incidence of data being cross referenced to create detailed individual dossiers gives rise to privacy problems. Customers feel threatened about the inadequacy of privacy being maintained by the banks with regard to their transactions and link at computerised systems with suspicion. Aside from any constitutional aspect, many nations deem privacy to be a subject of human right and consider it to be the responsibility of those who concerned with computer data processing for ensuring that the computer use does not revolve to the stage where different data about people can be collected, integrated and retrieved quickly. Another important responsibility is to ensure the data is used only for the purpose intended.

Today, we are having a fairly well developed banking system with different classes of banks – public sector banks, foreign banks, private sector banks – both old and new generation, regional rural banks and co-operative banks with the Reserve Bank of India as the fountain Head of the system. In the banking field, there has been an unprecedented growth and diversification of banking industry has been so stupendous that it has no parallel in the annals of banking anywhere in the world. During the last 39 years since 1969, tremendous changes have taken place in the banking industry.

The banks have shed their traditional functions and have been innovating, improving and coming out with new types of the services to cater to the emerging needs of their customers. Massive branch expansion in the rural and underdeveloped areas, mobilisation of savings and diversification of credit facilities to the either to neglected areas like small scale industrial sector, agricultural and other preferred areas like export sector etc. have resulted in the widening and deepening of the financial infrastructure and transferred the fundamental character of class banking into mass banking.

There has been considerable innovation and diversification in the business of major commercial banks. Some of them have engaged in the areas of consumer credit, credit cards, merchant banking, leasing, mutual funds etc. A few banks have already set up subsidiaries for merchant banking, leasing and mutual funds and many more are in the process of doing so. Some banks have commenced factoring business. The major challenges faced by banks today are as to how to cope with competitive forces and strengthen their balance sheet. Today, banks are groaning with burden of NPA’s.

It is rightly felt that these contaminated debts, if not recovered, will eat into the very vitals of the banks. Another major anxiety before the banking industry is the high transaction cost of carrying Non Performing Assets in their books. The resolution of the NPA problem requires greater accountability on the part of the corporate, greater disclosure in the case of defaults, an efficient credit information sharing system and an appropriate legal framework pertaining to the banking system so that court procedures can be streamlined and actual recoveries made within an acceptable time frame.

The banking industry cannot afford to sustain itself with such high levels of NPA’s thus, “lend, but lent for a purpose and with a purpose ought to be the slogan for salvation. ” The Indian banks are

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Banking Service. (2018, Feb 05). Retrieved from https://phdessay.com/banking-service/

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