Modernation in Banking Industry

7/27/2019 Modernation in Banking Industry

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INDEX

SR.NO. PARTICULARS PAGE NO.

1 Summary

2 Meaning of Banks

3 The Present Banking Scenario And

Banking Global Scenario

4 Structure Of Present Banking Scenario

5 Basic Principles Of Banking

6 Functions Of Banks

7 Emerging Trends In Modern Banking

8 Important Features Of Modern Day

Banking

9 The Challenges Facing Banks Today

10 To Face The Challenges Bank Should

Work Hard On Following Parameters

11 Modern Banks Commitments To

Customers And Customers Rights And

Duties

12 The Technology Implications Of Bank

Modernization

13 Advantage and Disadvantages of

technology in banking sector

14 E-Banking And Benefit or E-banking

15 Implications For Financial Modernization

16 Conclusion

17 Recommendations


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SUMMARY

The Indian banks are changing towards modern banking system.

Modernization in banking is changing banking services, products and operational

methods of banking. Traditional banking system in depends up on man force but

modern banking is partially or totally machine and technology based banking.

All these developments are lead to facilities to customers delight as well as

operational efficiency of banks and reducing operational expenses of banking

services.

technology (IT) revolution in the Indian economy has made steady

inroads into the banking institutions and has brought about a significant change

in many aspects in the form of computerization of transactions and new delivery

channels such as Internet Banking, Phone Banking, ATMs, EFT, ECS and EDI

etc. With migration of traditional paper-based funds movements to quicker and

more efficient electronic mode, funds transfers have become easy andefficient to perform.

Now-a-days banking is known as innovative banking. Developments in

Information technology have. given a rise to innovations in the product &

service designing and their supply in the banking sector and finance industries,

customer services and satisfaction are their centre point of all the efforts. One of

the most important areas of banking where Information Technology have a

positive influence so on substitutes for traditional funds movement services.

With the advent of online banking, electronic funds transfer and other similar

products & services for funds transfer within quick time which was impossible a

few years age.


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MEANING OF BANKS

A bank is a financial institution that serves as a financial intermediary. The

term bank may refer to one of several related types of entities.

A central bank circulates money on behalf of a go9vernment and acts asits monetary authority by implementing monetary policy, which regulates

the money supply.

A commercial bank accepts deposits and pools those funds to providecredit ,either directly by lending , or indirectly by investing through the

capital markets. Within the global financial markets, these institutions

connect market participants with capital deficits (borrowers) to market

participants with capital surpluses (investors and lenders ) by

transferring funds from those parties who have surplus funds to invest

(financial assets) to those parties who borrow funds to invest in

real assets.

A savings bank (known as a building society in the UnitedKingdom) is similar to a savings and loan association (S&L).They can

either be stockholder owned or mutually owned, in which case they are

permitted to only borrow from members of the financial cooperative.

The asset structure of savings banks and savings and loan association

is similar, with residential mortgage loans providing the principal

assets of the institutions portfolio.

Because of the important role depository institutions play in the financial

system, the banking industry is generally regulated with government

restrictions on financial activities by banks varied over time and by

location. Current global bank capital requirements are referred to as Basel

II. In some countries, such as Germany, banks have historically owned


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major stakes in industrial companies, while in other countries, such as

the United States, banks have traditionally been prohibited from owning

non-financial companies. In Japan, banks are usually the nexus of a cross-

share holding entity known as the Keiretsu. In Iceland, banks followed

international standards of regulation prior to the recent global financial

crisis that began in 2007.

A Banks main source of income is interest paid on loans. A bank pays

out at a lower interest rate on deposits and receives a higher interest rate

on loans. The difference between these rates represents the banks net

income, cash Management services, Mortgage loan closing costs and

points.

Bank is a lawful organization , which accepts deposits that can

be withdrawn on demand. It also lends money to individuals and

business houses that need it.

Bank also render many other useful services -like collection of bills,

payment of foreign bills , safe-keeping of jewellery and other valuable items

, certifying the credit worthiness of business, and so on.

Banks can be explained as :-

Banks are organized institution. Banking activities include acceptance of deposits as well as lending

of money.

Banks meet the needs of people in general and the businesscommunity in particular.

Banks accept tangible and personal security against loans. The process of recovery of loans is flexible.


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THE PRESENT BANKING SCENARIO

As Narasimham committee report (1991) pointed out that the major

policy trust was to improve the operational and allocate efficiency of thefinancial system. Liberalization process that was initiated in India in 1991 posed

some challenges for the bankers to act more efficiently. The government set

their agenda for action and directed the flow of credit

Bankers were enjoying the speed and they were not bothered about their

efficiency and leading effectiveness. Indian Banking system has made a

remarkable progress since independence. It has seen a number of phases till

now. A number of innovations were made in the field of social banking like

flow of bank credit into the priority sector, poverty alleviation programmers ,

rural development program and self-employment of educated unemployed

youth


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STRUCTURE OF PRESENT BANKING SCENARIO


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PUBLIC SECTOR BANK1)State Bank Group And Nationalized Banks:

This group has the largest number of branches in metros and rural

areas throughout the country. The group contributes about 75% of the

total deposits and about 70% of total advances of all commercial banks in

India. after 1994, most of these banks have made public issues of their

shares, divesting government shareholdings.

2)Regional Rural Banks :

These are also scheduled banks, but unlike commercial banks , are

small localized banks operating in rural areas limited to specified

districts. such bank focused development of the rural population. Each

RRB operates in one to five allotted districts

3) Private Sector Bank :

These are incorporated in India and their shares/ownership is held by

business houses and individuals. RBI has also permitted setting up of

Local Area Banks for the development of backward and less developed

districts. Such banks have minimum capital of Rs 5 crore and their area

of operation is spread over 3 districts.

4) Foreign Banks :-This are the banks incorporated abroad but granted

license by Reserve Bank Of India to conduct banking business in India

through their Indian branches.


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CO-OPERATIVE BANKS:-1)Urban Cooperative Bank: Urban cooperative banks meet

financial needs of small size trade and commerce activities

operating in urban areas. Basically there are legal structural

and size wise differences between the commercial banks and

co operative banks.

2) Primary Agricultural Credit Society (PACS ):- are associations ofborrowers and non-borrowers who are the residents of non-locality.

Working funds of these societies comprise Own fund , Deposits from

members and non-members , Loans from district, central co operative

banks

3)District Central Co Operative Banks :- It is a federation of primary

agricultural credit societies located in a specific area. i.e. district these

organizations are linking points between primary co-op. agricultural

credit societies and state co op. banks. District central coop. banks

undertake banking related activities. They also grant credit to customers

on the basis of first class gilt securities, gold etc.

4) Stated Co-Operative Bank: - SCB occupies a key position in the co-

operative credit structure. The RBI reaches to the cultivators through the

states cooperative banks. Resource of such state level co operative bankscomprises share capital, reserve fund, various type of deposits, loans and

overdrafts and surplus funds of district central co-op banks affiliated to

the respective banks. These banks lend to affiliated district central co-op

banks.


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DEVELOPMENT BANKS:-1)Industrial Finance Corporation Of India Ltd.(IFCI):- set up in

1948 for providing medium and long term credit and become public

limited. Company from 1st

July 1993. There are three types of services

are provided by IFCI.

2) Industrial Development Bank Of India(IDBI):- it provides financein the form of loans, equity participation and guarantees and refinance

to banks, bills re-discounting, lines of credit to unstitutions. Under

financial services, it provides service of merchant banking , forex

services and debenture trusteeship.

3) Small Industries Development Bank Of India (SIDBI):-It wasestablished in April, 1990 the business domain of SIDBI consists of

SSI units, which contribute significantly the national economy in

terms of production, employment and exports.

4) National Bank For Agricultural &Rural Development :- It is andapex institution concerned with the policy, planning and operations in

the field of agriculture and other rural economic activities. The major

functions of NABARD are provision of refinance to scheduled

commercial banks, state co-operative banks, land development banks

and district central co-operative banks.

5) Export-Import Bank Of India (EXIM Bank):- It take over theoperations of international finance wing of the IDBI and to provide

financial assistance to exporters and importers and to function as the

principal financial institution for coordination the working of other

institutions engaged in financing of exports and import of goods and

services. The EXIM banks provides refinance facilities to the

scheduled commercial banks and financial institution against their

export-import financing activities.


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BANKING GLOBAL SCENARIO

The globalization means Integrating the economy of a country with the

world economy .With the growing integration of economies and the markets

around the world, global banking has arrived and is here to stay. Globalization

will get further fillip with the opening up of financial services

Banks in India need to be focused and disciplined. They need a long-

term plan ,to know what they want to achieve , consider the strategic benefits

(of going global) assess the risks ,and identify the competencies and

challenges.


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BASIC PRINCIPLES OF BANKING

Principle Of Intermediation :- Banks are called financial intermediaries

because the act as the link between the savers of money and users ofmoney. Banks invest or lend funds of depositors who themselves are

unable to lend their funds, due to risk and other factors involved in

direct lending.

Principle Of Liquidity:- Banks are required to return the money

collected form depositors as and when demanded, they cannot invest all

deposit monies in lending or investment. This feature of re playability on

demand is unique for bank deposits. It is for the purpose that a bank must

keep a certain portion of its deposits liabilities in liquid from so as to be

able to repay the same on demand or maturity date to the depositors.

This principle is reinforced by the regulatory requirements of the reserve

bank of India that every bank has to maintain deposits with the RBI as

cash reserve ratio , which currently stands at 6% of the banks demand andtime liabilities and statutory liquidity ratio, wherein, every bank securities.

However, these ratios are subject to change by RBI from time to time.

Principle Of Profitability:- Solvency connotes long term financial

soundness of a bank, achieved by adherence to prudent policies in lending,

retention of some part of profits for business growth, implementation of

professional management systems and following the mandatory rules and

procedures in day-to-day operations.

Principle Of Trust:- The trust that customers existing and potential

repose in a bank is its hallmark as it connotes dependability in the

opinion of its customers.


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FUNCTIONS OF BANKS

The functions of the bank can be classified into

Traditional Functions Modern functions

Traditional Functions :- 1)accepting deposits a bank acceptsmoney from its customers

2) lending another traditional function is lending money to

business by way of loans and advances of various kinds.

3) Funds remittance banks have branch network spread in various

cities/ regions/states in the country of their incorporation/operations.

Some bank have branches and correspondent banks overseas, as well.Banks remit customers funds from one place to another in the same

country or overseas through their branches and correspondent banks

by mail/telegraphic/electronic funds transfer or by issuing bank drafts.

4) Miscellaneous services in addition to the above, banks also render

other services, which are useful to businesses and members of the

society. These services include issue of credit/debit cards, safe

deposit lockers, safe custody of and guarantees , collection of

outstation cheques/bills/hundies ; furnishing opinion reports on their

customers, acting as agents for government business, correspondents

trusteeship and executors business.


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Modern Functions

The modern commercial banking function mainly comprises of activities

such as cross-border banking, merchant banking, credit cards, factoring,

leasing, and insurance and other financial services undertaken by the

banks

Cross-border banking is classified as follows

1) Cross-border fund-raising services External commercial borrowing Global depository receipts , American depository receipts ,

Indian depository receipt

Non-resident external , foreign currency Non-resident account Syndication of foreign currency loans

2)Cross-border banking service

Import financing/leasing Export financing/forfeiting /leasing


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EMERGING TRENDS IN MODERN BANKING

1) Universal Banking:-It refers to the provision of a wide range of financial services by

an organization, under one roof e.g. commercial banking, merchant

banking, mutual funds and insurance. The main advantage of

universal banking lies in the ability of banks to cross sell their

products to a vast clientele of customers and thereby earn both fee

based and a non-fee based income. The customer is equally

benefited as it saves for him a lot of time and travel and help him in

getting speedy delivery of the products at one place.

2) Electronic Banking:-In the wake of recent developments in information and

communication technologies, majority of banking operations have

been computerized. Electronic banking provides a bouquet of new

channels like internet banking, telephone banking, ATM banking,

mobile banking which are different from the traditional brick and

mortar branch banking. These have made possible anywhere and

anytime banking and contributed to speed, accuracy and

confidentiality of customer transactions while enhancing customers

convenience. Funds transfer, cheques clearing and collection of bills of

exchange are also done electronically with accuracy, speed and

safety.

3) Globalization of BankingThis has come about as a result of the policy of liberalization

and opening up of banking and other sectors pursued after 1991 in

India. Foreign banks that wish to set-up their office/branches in India

have been granted licenses by RBI on liberal and on reciprocal

basis.


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IMPORTANT FEATURES OF MODERN DAY BANKING

1) Centralized Systems :-Centralized banking means inter connection of all bank

branches with central server, so that customers can do anywhere

banking. It offers integrated products and services to customers

round the clock and a customer can do transaction from any branch in

same city or another city. Nowadays most banks use core banking

applications to support their operations where CORE stands for

centralized online real-time exchange. This facilitated funds transfer

between different branches of the same bank.

2) Electronic Payments System:-Automated Teller Machines : ATM are primarily used for

performing some of the banking function such as withdrawal of cashor deposit of cash/cheque etc., by using an ATM card. Each customer is

provided with an ATM card with a unique Personal Identification

Number(PIN)

National Electronic Fund Transfer (NEFT) System :- EFT

Facilitates quick movement of funds through electronic media. Reserve

Bank of India has introduced a system called The Reserve Bank of India

National Electronic Funds Transfer System which may be referred to as

NEFT system. It include a set of procedural guidelines for the

participating banks and institutions with the required computer system

and communication network through which funds transfer operation

takes place between different bank up to a specified amount..


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Real-Time Gross Settlement (RTGS) system :- RTGS is an electronic

payment environment where payment instructions processed on a

continuous of real-time basis and settled on a Gross or Individual

basis. This is similar to NEFT but used for higher value transaction.

3)Tele Banking/ Phone Banking:-

Telephone banking is a service provided by a financial institution,

which allows its customers to perform transactions over the telephone.

Telephone banking representative are usually trained to do what was

traditionally available only at the branch loan application, investment

purchases and redemptions, cheque book orders, debit card replacements,

change of address etc.

4) Mobile Phone Banking :-

With this facility , customer on his mobile screenscash check his

bank balance, or order a demand draft, stop cheque payment, request fora cheque book, look at the current interest rates, or even the last three to

five transactions round the clock.

5) Mobile Banking :-

This is different from mobile phone banking. It is a mobile banking

set up, working under the control of a branch but moving to various areasto provide banking facilities to customers who may be located far from

the branch. Due to its lower cost structure, it can become an important

tool for financial inclusion.


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6) Internet Banking :-

With the popularity of PCs and easy access to internet and World

Wide Web , Banks increasingly use internet as a channel for receiving

instructions and delivering their products and services to their customers.

7) ICT Driven banking and Customer service:-

Various new services which are being offered to customers on

account of the use of information and communication technology result

in time saving and convenience to customers. Some of the new services

are fee based. Availing or use of these services requires the customer to

be conversant with various security aspects failing which they may be put

to loss. Banks should clearly intimate beforehand the precautions and

costs involved. Security aspects must be well explained to customers such

that they do not incur losses on account of lack of knowledge.


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THE CHALLENGES FACING BANKS TODAY

1) Generating Revenues And Profit In Difficult Conditions

The most fundamental challenge, as always, is to generate strong

revenues and healthy profits. This is no easy task in the difficult economic

conditions that prevail in certain parts of the world, especially in Europe

where the sovereign debt crisis continues and where banks still face high

credit risks.

2) Domestic And Foreign Expansion

Generating good revenues and profits in uncertain times is only part of the

story. Most banks have ambitious expansion strategies for domestic and foreign

markets, which they hope will bear fruit once economic conditions get better.

. Emerging markets present the best opportunities . not just the populous,

relatively sophisticated BRIC countries of Brazil, Russia, India and China, but

also the smaller CIVETS nations of Colombia, Indonesia, Vietnam, Egypt,

Turkey and South Africa

3) Improving Risk, Capital And Liquidity Management

bankers will have to keep a close eye on how they manage risk, capital and

liquidity. Law-makers and regulators have been piling on the pressure in this

respect, but sound risk management, capital adequacy, and liquidity

management depend on sound internal policies and procedures as much as on

any externally imposed requirements, and bank leaders realize this.


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4) Being competitive

The need to become and remain more competitive is a serious challenge.

The banking market is saturated with providers, products and services .

particularly in the retail, small business, corporate and wealth management

sectors, but investment bankers are up against stiff competition too. Financial

services has always been a competitive business, but banks are finding it even

harder today to differentiate themselves from existing providers and the steady

trickle of new entrants.

5) Developing New Products And Delivery Channels

Even though customers regard quality of service as the most important

aspect of their banking experience, they also value relevant, competitively

priced and innovative products, and effective delivery channels. plastic cards,

telephone banking, online banking and now mobile banking, many customers

still regard the branch as an important channel .

6) Political Interference And The Burden Of Financial Regulation

There is no doubt that banks are facing the biggest regulatory onslaught

of all times, as governments and regulators try to curb what they see as excesses

and defects in banks and in the financial system as a whole.

Bankers around the world understand the need for regulatory reform, but

are concerned about overkill. Christian Clausen, Chief Executive of the Swedishbank Nordea, and President of the European Banking Federation (EBF), in an

interview in The Banker said that one of his priorities at the EBF is to ensure

that the new wave of regulation on capital, liquidity, funding and so on strikes a

balance between avoiding another banking crisis and not over-regulating to the

extent that it hurts customers and the economy.


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7) Interest Rate Risk :-

Interest rate risk can be defined as exposure of banks net interest income

to adverse movements in interest rates. A banks balance sheet consists mainly

of rupee assets and liabilities. Any movement in domestic interest rate is main

source of interest rate risk.

Over the last few years the treasury departments of banks have been

responsible for a substantial part of profits made by banks. Between July 1997

and Oct 2003, as interest rates fell, the yield on 10-year government bonds (a

barometer for domestic interest rates) fell, from 13 per cent to 4.9 per cent. withyields falling the banks made huge profits on their bonks portfolios.

Now as yields go up (with the rise in inflation, bond yields go up and

bond prices fall as the debt market starts factoring a possible interest rate hike),

the banks will have to set aside funds to mark to market their investment.

This will make it difficult to show huge profits from treasury operations.

This concern becomes much stronger because a substantial percentage of bank

deposits remain invested in government bonds.

Banking in the recent years had been reduced to a trading operation in

government securities. Recent months have shown a rise in the bond yields has

led to the profit from treasury operations falling. The latest quarterly reports of

banks clearly show several banks making losses on their treasury operations. Ifthe rise in yields continues the banks might end up posting huge losses on their

trading books.


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8) Competition In Retail Banking :-

The entry of new generation private sector banks has changed the entire

scenario. Earlier the household savings went into banks and the banks then lent

out money to corporate. Now they need to sell banking. The retail segment,

which was earlier ignored, is now the most important of the lot, with the banks

jumping over one another to give out loans. The consumer has never been so

lucky with so many banks offering so many products to choose from. with

supply far exceeding demand it has been a race to the bottom, with the banksundercutting on another. A lot of foreign banks have already burnt their fingers

in the retail game and have now decided to get out of a few retail segments

completely.

The nimble footed new generation private sector banks have taken a lead

on this front and the public sector banks are trying to play catch up.

The PSBs have been losing business to the private sector banks in this

segment. PSBs need to figure out the means to generate profitable business

from this segment in the days to come.


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TO FACE THE CHALLENGES BANK SHOULD WORK

HARD ON FOLLOWING PARAMETERS

1) The trend of high business growth shall be kept up

2) Branch network shall be expanded

3) New product and services shall be introduced and vigorously marketed

to achieve higher growth in business and income

4) The Bank shall initiate steps to effect cash recoveries and make efforts

to double the amount of NPAs closed

5) The Bank shall draw up a programme for enhancing the skills of

specialized IT personnel through appropriate training in reputed external

institutions so as to improve the competence of the Bank in generating

requisite IT solutions in tune with the fast changing technology.

6) Top executives of the bank shall visit the branches ,specially the rural

and semi-urban branches at least for one day in a month to interact with and

motivate the branch personnel and get feedback from the customers.


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MODERN BANKS COMMITMENTS TO CUSTOMERS AND

CUSTOMERS RIGHTS AND DUTIES

Banks will act courteously, fairly and reasonably in all our dealings withcustomers.

Banks will ensure that their documents and procedures are clear and notmisleading and that customers are given clear information about our

products and services.

When an account or service is chosen customers will be given clearinformation about how it works, the terms and conditions and the interest

rates which apply to it.

Banks will help customer by sending regular statements (whereappropriate) and they will keep customer informed about changes to the

interest rates, charges or terms and conditions.

Banks will deal quickly and sympathetically with things that go wrong bycorrecting mistakes quickly ,handling complaints quickly and reversing

any bank charges applied in error.

Banks will treat all personal information of customers as private andconfidential , and operate secure and reliable banking and payment

systems.

Banks will publish and adopt a Citizens charter, have copies available andmake sure that their staff is trained to put it into practice.


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TECHNOLOGY IN MODERN BANKING:-

With the help of innovative information technology , banks are able to

reduce transaction cost and handle a large number of transaction in no

time. Now banks can provide customized products easily and customers

could access their customers, banks are embracing Customer Relationship

Management (CRM) facilitated by the availability of conductive

technology. Innovation is technology is also helping banks to cross sell the

products of insurance and securities firms , which are swelling their fee-

based income in the total income.

Innovative technology not only brings benefits, but risks too. Major

impediments and risks associated with the implementation of innovative

technology are ;

Increased capacity due to a new technology could result excesscapacity in the financial institution

Another problem banks face with implementation of latesttechnology is integration of existing system with the new one.

Banks could face cost overrun or cost control problems. Innovative technology has brought new risks like daylight overdraft

risk


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THE TECHNOLOGY IMPLICATIONS OF BANK

MODERNIZATION

We have described the main challenges facing bankstoday. We have discussed how and why, in order to meet those challenges,

banks have to modernize their business strategies and operating models. We

will now explore the technology implications of that modernization imperative,

in particular how banks must review their software and IT architecture, and

update it where necessary, so that it can be an enabler of the modernization

program.

1) Attracting And Engaging CustomersBeing truly customer centric . putting customers at the centre of

everything banks do, and improving the customer experience .A key business

strategy to develop, as was reviewing the fundamental purpose of banking, andimproving delivery channels. And also what operating model changes were

needed to ensure that those customer strategies would be effective

for example, reviewing operational processes, enhancing customer

service and adopting a multiple distribution channel approach.

2) Core BankingAt the heart of customer relationships is core banking software, which

manages customer accounts and financial transactions. Core retail banking

software holds basic customer data . name, address, age maintains links between

accounts and customers, ideally providing a single view of the customer

provides routine maintenance activities, such as opening and closing accounts,

processing deposits and withdrawals, calculating interest, processing directdebits, and making and receiving payments, and runs the bank. General ledger


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showing, among other things, the cost of staff and premises, income and

customers balances. The legacy systems that most banks use are typically

account-centric, with customers. These decades-old legacy core systems are

inflexible, and each time a bank wants to launch a new product, they must

hard-code the system, which can take 12 months or more.

3) Customer Relationship ManagementWhen CRM applications were first introduced in the 1990s, many

failed to live up to expectations. Software developers and banks havesince collaborated closely to iron out the problems, to make today.

offerings much more relevant, reliable and useful. If a bank customer

management software does not offer the features and benefits listed

below, it is time to renew it. Manage relationships across all channels

and, ideally, all business units

for example, branches, contact centers and online, and across retail

banking, wealth management, SME and other units. Increase sales of

products and services to existing customers through cross-selling and up-

selling. Assist in customer acquisition Maximize customer profitability.

Retain customers Be easily integrated with other applications and

databases.

4) Managing risk

Managing risk enterprise-wide, adjusting risk appetites, finding new and

affordable sources of capital and liquidity, concentrating on business lines or

products that are less regulated, and more closely aligning risk management

with the finance function .And also what changes to operating policies and

procedures were needed to execute these risk management strategies. in other

words, banks have to improve their GRC (governance, risk management and


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regulatory compliance) models, and that requires better data management and

analysis to enable informed and rapid decision-making. Banks might even

consider moving business operations to countries which have lighter-touch

regulation. So what software is available to help banks manage risk more

effectively? There is a wide range,

for example: Risk management software, for managing all areas of risk

(especially credit, market, operational, liquidity, business and reputation risk)

5) Customer Service

Contact centre and branch staff can do a more efficient job if they use the

latest customer service software, as it will make them an integral part of the

bank. total sales, marketing and service delivery strategy. It will help them to

handle service, support and sales seamlessly across all communications

channels, thereby improving service delivery while lowering costs.

The latest contact centre software should include the following features

360-degree view of the customer relationship to enable more relevant and

targeted sales offers and improved customer experiences. Computer telephony

integration (CTI) to identify customers before conversations begin and provide

instant customer record screens to agents

6) Regulatory Compliance :-

Compliance software provides enhanced visibility for compliance, risk,

legal, internal audit, finance, business line managers and others so they can

monitor the organizations adherence to all applicable laws, regulations,

standards and internal rules, relating not just to risk but all banking activities.

Such software should also be integrated within a wider GRC framework.


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Examples of current and proposed regulations that such software can help

manage include:

7) Transforming Business Operations :-

Transforming and standardizing business processes is, of course, central

to any operating model modernization project. All manual processes that remain

should be reviewed and automated if possible; and all automated processes

should be reviewed and standardized. Straight-through processing should be the

objective where achievable. There are three broad categories of software that

can help banks transform their operations Core banking, for managing customer

accounts and their financial transactions. Customer service, for making it

possible for to provide a seamless service. Revenue management and billing, for

improving the billing of corporate and retail customers and avoiding revenue

leakage.

8) Service-Oriented Architecture (SOA) :-Integrated applications and centralized processing are essential for

modern, efficient banking. To achieve these technological and operational

goals, SOA is essential. SOA will interoperate with all parts of the IT

architecture to integrate all business applications, moving them on to a common

service bus and a common workflow engine .Integrating and standardizing all

applications in a short space of time, Centralizing and improving processefficiency ,Reducing costs ,Increasing scalability ,Improving visibility.

9) Database machines :-

Banks store massive amounts of data, much of which needs to be

accessed quickly, especially for processing online transactions. Database

machinescomputer systems specially designed for database access, and which

are much faster than mainframes


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BENEFITS OF TECHNOLOGY IN MODERN BANKING

SECTOR

Competition

Studies show that compet i t ive pressure i s the chief

driving force behind increasing use of Internet banking technology,

ranking ahead of cost reduction and revenue enhancement, in secondand third place respectively. Banks see Internet banking as a way to

keep existing customers and attract new ones to the bank.

Cost Efficiencies

National banks can deliver banking services on the Internet at

t ransact ion costs far lower than t radi t ional brick-and-mortar

b ranches. The actual costs to execute a transaction will vary

depending on the delivery channel used. For example, according to

Booz ,Allen & Hamilton, as of mid- 1999, the cost to deliver manual

transactions at a branch was typically more than a dollar, ATM and call

center transactions cost about 25 cents, and Internet transactions cost about a

penny. These costs are expected to continue to decline. National banks have

significant reasons to develop the technologies that will help them deliver

banking products and services by the most cost-effective channels. Many

bankers believe that shifting only a small port ion of the estimated 19-

bil lion payments mailed annual ly in the U.S. to electronic delivery

channels could save banks and other businesses substantial sums of

money. However, national banks should use care in making product

decisions. Management should include in their decision making the


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development and ongoing costs associated with a new product or service,

including the technology, marketing, maintenance, and customer

support functions. This will help management exercise due diligence,

make more informed decisions, and measure the success of their business

venture.

Geographical Reach

Internet banking allows expanded customer contact through increased

geographical reach and lower cost delivery channels. In fact some

banks are doing business exclusively via the Internet they do not have

traditional banking offices and only reach their customers online. Other

financial institutions are using the Internet as an alternative delivery

channel to reach existing customers and attract new customers.

Branding

Relationship building is a strategic priority for many national

banks. Internet banking technology and products can provide a

means for national banks to develop and maintain an ongoing

relationship with their customers by offering easy access to a broad array

ofproducts and services . Internet Banking 4 Comptrollers Handbook

By capitalizing on brand identification and by providing a broad array of

financial services, banks hope to build customer loyalty, cross-sell, and enhance

repeat business.


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Customer Demographics

Internet banking allows national banks to offer a wide array

of options to their banking customers. Some customers will rely on traditional

branches to conduct thei r banking business. For many, this is the most

comfortable way for them to transact their ba nk in g bu si ne ss . Th os e

customers place a premium on person-to-person contact .

Other customers are early adopters of new technologies that arrive in the

marketplace. These customers were the first to obtain PCs and the first to

employ them in conducting their banking business. The demographics

of banking customers will continue to change. The challenge to

national banks is to understand their customer base and find the right mix of

delivery channels to deliver products and services profitably to their various

market segments.


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NEGATIVE EFFECTS OF TECHNOLOGY IN BANKING,

W h i l e I C T p r o v i d e s s o m a n y a d v a n t a g e s t o t h e

b a n k i n g i n d u s t r y , i t a l s o p o s e s s e c u r i t y cha l lenges to

banks and thei r cus tomers . Even though Internet banking

provides ease and convenience , i t i s most vulnerable to hackers

an d cy be r cr im in al s. Onl in e fr au d is st il l bi g business around the

world. Even though surveillance cameras, guards, alarms, security screens, dye

packs, and law enforcement efforts have reduced the chances of a

criminal stealing cash from a bank branch, criminals can still penetrate the

formidable edifice like the banking industry through other means. Using

Internet banking and high tech credit card fraud, it is now possible to steal large

amounts of money anonymously from financial institutions from the comfort of

your own home, and it is happening all over the world .Further, identity

thef t , a l so known as phishing, i s one of the fastest growing

ep id em ic s in electronic fraud in the world. Identity theft occurs when

fraudsters gain access to personal detai l s of unsuspect ing vict ims

through various e lect ronic and non-elect ronic means. This

information is then used to open accounts (usually credit card), or

initialize loans and mobile phone accounts or anything else involving

a line of credit. Account theft, which is commonly mistaken for

identity theft, occurs when existing credit or debit cards or financial

records are used to steal from existing accounts. Although account theft is a

more common occurrence than identity theft, financial losses caused by identity


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theft are on average greater and usually require a longer period of time to

resolve.

Spam scams involve fraudsters sending spam e-mails informing

customers of some seemingly legitimate reason to login to their accounts. A

link is provided in the e-mail to take the user to a login screen at their bank site;

however the link that is provided actually takes the user to a ghost site, where

the fraudster can record the login details. This information is then used

to pay bills and or transfer balances forthe fraudsters financial reward.


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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. Theconcept of web-based baking came into existence in Europe 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 private 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. All these banks are using

home banking as a key pull factor to remove customers away from the well

entered public sector banks. Many banks have modernized their services with

the facilities of computer and electronic equipments. The electronics revolutionhas made it possible to provide ease and flexibility in banking operations to the

benefit of the customer. The e-banking has made the customer say good-bye to

huge account registers and large paper bank accounts. The e-banks, which may

call as easy bank offers the following services to its customers:

EDI (Credit Cards/Debit Cards ATM E-Cheques EFT (Electronic Funds Transfer) Mobile Banking Telephone Banking Internet Banking Electronic Data Interchange


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BENEFITS OF E-BANKING:

To The Customer:

Anywhere Banking no matter wherever the customer is in the world.Balance enquiry, request for services, issuing instructions etc., from

anywhere in the world is possible.

Anytime Banking Managing funds in real time and most importantly,24 hours a day, 7days a week.

Convenience acts as a tremendous psychological benefit all the time. Brings down Cost of Banking to the customer over a period a period of

time.

Cash withdrawal from any branch / ATM On-line purchase of goods and services including online payment for the

same

To The Bank:

Innovative, scheme, addresses competition and present the bank astechnology driven in the banking sector market

Reduces customer visits to the branch and thereby human intervention

Inter-branch reconciliation is immediate thereby reducing chances offraud and misappropriation

On-line banking is an effective medium of promotion of various schemesof the bank, a marketing tool indeed.

Integrated customer data paves way for individualized and customizedservices.


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IMPLICATIONS FOR FINANCIAL MODERNIZATION

If the roots of banking are in loan making and liquidity provision, how

will financial innovations and financial integration shape banking future?

Regarding financial innovations, the most noticeable trend in the loan making

process is the movement towards securitization and fee-based activities.

Securitization :-

means packaging bank loans into securities for resale, which permits

banks to move those loans off their balance sheets. According to theory, good

securitization candidates are less information-intensive assets, such as

mortgages and credit card receivables, but not the more information-intensive

assets, which include most business loans. Thus, this self-selection of loans for

securitization leaves the bank's balance sheet with a high concentration of

information-intensive loans. This may make the bank less flexible in dealing

with liquidity shocks.) Because the fragile capital structure calls for banks toinvest in relatively low-risk assets that can be liquidated to meet depositors'

withdrawal demand, this implies that there is a limit to how extensively

securitized assets can be shifted outside of the banking system.

Fee-Based Activities:-

where banks do not make loans but provide credit lines, creditenhancements, or credit guarantees. Banks can provide these fee-based services

because of their credibility, which stems from their commitment to low-risk

assets as dictated by their fragile capital structure. Although banks can leverage

their reputation capital, they can do so only up to a limit. To stay credible, banks

need a core of low-risk assets on their books that are funded by demand

deposits, and the scale of these core activities must be proportional to the

overall organization.


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Regarding financial integration, the driver seems to be linking activities in

which banks can share expertise and operating systems, as well as the potential

for providing one-stop-shopping for financial services to individual customers.

Consider first securities underwriting. Both securities underwriting and loan

making involve pricing financial assets. In loan making, a bank underwrites a

loan and then funds it by putting it on its book. In securities underwriting, a

bank underwrites a security but quickly turns around and resells it to the public.

Thus, banks already have the know-how and infrastructure to engage in

securities activities and would seem likely to realize a degree of scope

economies by engaging in these activities.


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EXPECTATIONS FROM BANK EMPLOYEES IN MODERN

BANKING

In present scenario it is challenging for bank staff to meet growing demands

of customers. The bank personnel have to imbibe marketing orientation

to satisfy their clients in order to retain existing accountholders and to

create new accountholders. Only when this ethos is internalized , a bank

will be in a position to achieve its corporate goal, hold on it and increase

market share and build an image of customer caring bank. For flourishing

in present time, bank personnel have to train and retain themselves

constantly to develop skills, which would enable them to work smartly.

They have to keep learning to remain a part of the dynamic world.

Banking personnel should develop specialization in banking profession

with regard to banking and finance , management , in particular

organization Management and Human Resource Management and project

Appraisal . Therefore they have to keep pace with emerging requirements

to Indian Banking.

In order to make bank functioning more smooth and systematic, RBI has

provided some guidelines to all operating banks to know their customers

and cash transactions. Its broad gist is as under

The RBI has directed banks to apply the Know Your Customerprocedure during account opening; this would be part of the apex

banks guidelines relating to identification of depositors.

To know your customer will be applicable to all new account withimmediate effect.


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The objective is to put in place systems and procedures to helpcontrol financial frauds, banks have been informed.

Where documents such as passport or driving license are notavailable, verification of the new customers credentials by existing

account holders or their introduction by a person known to the

bank may suffice

The board of directors of banks should have in place adequatepolicies to monitor transactions of a suspicious nature in accounts,

and have systems of conducting due diligence and reporting such

transactions.

An independent evaluation of the controls for identifying highvalue transactions should be carried out on a regular basis by the

internal audit function in the banks.

It has been emphasized that all operating and management staffmust fully understand the need for strict adherence to know your

customer norms. Hence ,all institutions must have ongoing training

programmes so that their staffs are adequately trained.

The Role Of The Bank Manager

The mangers are the navigators who are taking their team to

accomplish customer satisfaction. Bank manager has to devote their

energy and that of his staff towards a better understanding of his

customers financial circumstances and needs. Bank manager needs

to be more creative and need to develop customer friendly

productive environment. Bank manager should have more positive

approach to the selling of services that the more passive roletraditionally associated with the manage


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market accounts, CDs, high-interest online savings accounts and basic

savings accounts.

To protect your money from electronic theft, identity theft, and otherforms of fraud, its important to implement basic precautions such as

shedding account statements, having complex passwords and only doing

online banking through secure internet connections.


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RECOMMENDATIONS

In this white paper I started by outlining the challenges that face banks today.

They range from the need to generate strong revenues and healthy profits and toexpand into emerging markets, though to becoming more customer centric and

dealing with the growing regulatory burden. I went on to say that, in order to

meet these challenges, banks need to modernize their business strategies and

operating models. If they do not modernize, they are likely to fail fail to give

customers what they want, fail to generate adequate profits, and fail to deliver

shareholder value.

Then I explored the technology implications of all of the above in particular

the important role that software and IT architecture plays in any bank

modernization program.


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BIBLIOGRAPHY

BANKING IN NEW MILLENNIUM (Issues , challenges andstrategies)

CUSTOMER SERVICE AND BANKING CODES ANDSTANDARDS

MODERN BANKING OF INDIA


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Modernation in Banking Industry

Documents

Transcript of Modernation in Banking Industry