23

Structure of Banking System and Emergence of e-Banking

in India

Technology has become a part of all walks of life and across all business

sectors, and even more so in banking. There has been immense use of technology

across many areas of banking business in India, both from the asset and the liability

side of a bank‟s balance sheet. Delivery channels have massively increased the

choices presented to the customers to conduct transactions with ease and convenience.

Various wholesale and retail payment and settlement systems have enabled faster

means of moving the money to settle funds among banks and customers, facilitating

improved turnover of commercial and financial transactions. Banks have been taking

up new projects like data warehousing, customer relationship management and

financial inclusion initiatives to further innovate and strategies for the future and to

widen the reach of banking.

This chapter will describe the emergence and evolution of electronic banking

in India. This chapter shows the structure and evolution of banking in India. It also

describes automation in the Indian banking system in the next section. In next part of

this chapter an attempt has been made to elaborate progress and development of each

electronic service in details.

2.1 Evolution of Banking in India:

In modern times, banking occupies fairly an important place in the financial

framework of every economy. The word „bank‟ is used in the sense of a commercial

bank. It‟s of Germanic origin though some persons trace its origin to the French word

„Banqui‟ and the Italian word „Banca‟. It referred to a bench for keeping, lending, and

exchanging of money or coins in the marketplace by moneylenders and money

changers (Krishna and Gopal, 2008).

Banking in India originated in the last decades of the 18th century. The first

bank was The General Bank of India which started in 1786, and followed by the

establishment of the Bank of Hindustan, both of which are now defunct. The oldest

bank in existence in India is the State Bank of India, which originated with the name

24

of the Bank of Calcutta in June 1806, which almost immediately became the Bank of

Bengal. This was one of the three presidency banks, the other two being the Bank of

Bombay and the Bank of Madras. All three were established under charters from the

British East India Company (Mumtaz, 2009). The business of these presidency banks

were initially confined to discounting of bills or other negotiable private securities,

keeping cash accounts, receiving deposits, and issuing and circulating notes (Bhasin,

2006). The three banks merged in 1921 to form the Imperial Bank of India which

became the State Bank of India after independence. Indian merchants in Calcutta

established the Union Bank in 1839, but it failed in 1848 as a consequence of the

economic crisis of 1848-49. The Allahabad Bank, established in 1865 and still

functioning today, is the oldest Joint Stock bank in India (Joint Stock Bank: A

company that issues stock and requires shareholders to be held liable for the

company's debt). It was not the first though. That honor belongs to the Bank of Upper

India, which was established in 1863, and which survived until 1913, when it failed,

with some of its assets and liabilities being transferred to the Alliance Bank of Simla.

Foreign banks too started to arrive, particularly in Calcutta, in 1860s. The Comptoire

d'Escompte de Paris opened a branch in Calcutta in 1860, and another in Bombay in

1862 followed by branches in Madras and Puducherry, then a French colony. HSBC

established itself in Bengal in 1869. Calcutta was the most active trading port in India,

mainly due to the trade with the British Empire, and so became a banking center. The

first entirely Indian joint stock bank was the Oudh Commercial Bank, established in

1881 in Faizabad. It failed in 1958. The next was the Punjab National Bank,

established in Lahore in 1895 which has survived to the present and is now one of the

largest banks in India. The period between 1906 and 1911, saw the establishment of

banks inspired by the Swadeshi movement. The Swadeshi movement inspired local

businessmen and political figures to found banks of and for the Indian community. A

number of banks established then have survived to the present such as Bank of India,

Corporation Bank, Indian Bank, Bank of Baroda, Canara Bank and Central Bank of

India. The fervour of Swadeshi movement lead to establishing of many private banks

in Dakshina Kannada and Udupi district which were unified earlier and known by the

name South Canara ( South Kanara ) district (Mumtaz, 2009).

In spite of all these developments, independent India inherited a rather weak

banking and financial system marked by a multitude of small and unstable private

25

banks whose failures frequently robbed their middle-class depositors of their life‟s

savings. After independence, the Reserve Bank of India was nationalized in 1949 and

given wide powers in the area of bank supervision through the Banking Companies

Act (later renamed Banking Regulations Act). The nationalization of the Imperial

Bank through the formation of the State Bank of India and the subsequent acquisition

of the state owned banks in eight princely states by the State Bank of India in 1959

made the government the dominant player in the banking industry. In keeping with

the increasingly socialistic leanings of the Indian Government, 14 major private

banks, each with deposits exceeding Rs. 50 crores, were nationalized in 1969. This

raised the proportion of scheduled bank branches in government control from 31% to

about 84%. In 1980, six more private banks each with deposits exceeding Rs 200

crores were nationalized further raising the proportion of government controlled bank

branches to about 90%. As in other areas of economic policy-making, the emphasis

on government control began to weaken and even reverse in the mid-1980s and

liberalization set in firmly in the early 1990s (Chakrabarti, 2005).

2.2 Structure of Financial System in India

The Indian financial system comprises the following institutions:

1. Commercial banks:

a. Public sector

b. Private sector

c. Foreign banks

d. Cooperative institutions

(i) Urban cooperative banks

(ii) State cooperative banks

(iii) Central cooperative banks

2. Financial institutions:

a. All-India Financial Institutions (AIFIs)

b. State Finance Corporation‟s (SFCs)

c. State Industries Development Corporations

(SIDCs)

3. Non Banking Financial Companies (NBFCs)

4. Capital Market and Intermediaries.

26

Indian commercial banks are classified into scheduled banks and non-scheduled

banks. Scheduled banks include nationalized banks, State Bank of India and its

subsidiaries, Private sector banks and foreign banks. Non-scheduled banks are those

which are not included in the 2nd

schedule of Reserve Bank of India (RBI) Act

(Krishna and Gopal, 2008).

1. Scheduled Banks: The second schedule of the Reserve Bank of India Act

contains a list of banks, which are described as “Scheduled Banks”. A bank in

order to be designed as a scheduled bank should have a paid up capital and

reserves as prescribed by the Act. In the terms of Sec. 42 (6) of the RBI Act,

1934, the required amount is only Rs. 5.00 lakh. However, presently to start a

commercial bank, the RBI prescribed a minimum paid up capital of Rs. 200

crores and its business must be managed in a manner, which, in the opinion of

the Reserve Bank of India, is not harmful to the interest of its depositors. The

scheduled banks are also required to maintain with the Reserve Bank of India

a deposit in the form of Cash Reserve Ratio (CRR), based on its demand and

time liabilities at the prescribed rate.

2. Non-Scheduled Banks: The commercial banks, not included in the Second

Schedule of the RBI Act are known as non-scheduled banks. They are not

entitled to get facilities like refinance and rediscounting of bills, etc from RBI.

They do not get the prestige like Scheduled banks. They are mainly engaged in

lending money, discounting, and collecting bills and various agency services.

They insist higher security for loans. As on March 2005, there were only four

non-scheduled banks are in operation. RBI currently does not encourage the

opening of non-scheduled banks.

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Figure 4.1: Structure of Scheduled Commercial Banks in India

2.3 Reforms in Indian Banking System

After Independence in 1947, the government took the view that loans extended

by colonial banks were biased toward working capital for trade and large firms.

Moreover, it was perceived that banks should be utilized to assist India‟s planned

development strategy by mobilizing financial resources to strategically important

sectors. Reflecting these views, all large private banks were nationalized in two

stages. Subsequently, quantitative loan targets were imposed on these banks to expand

their networks in rural areas and they were directed to extend credit to priority sectors.

These nationalized banks were then increasingly used to finance fiscal deficits.

Although non-nationalized private banks and foreign banks were allowed to coexist

with public-sector banks at that time, their activities were highly restricted through

entry regulations and strict branch licensing policies. Thus, their activities remained

negligible (Sayuri, 2001).

Nationalization of commercial banks was a mixed blessing in India. After

nationalization there was a shift of emphasis from industry to agriculture. The country

witnessed rapid expansion in bank branches, even in rural areas and nationalized

Scheduled Commercial

Banks

Public sector banks

Nationalized bank

State bank Banks

Foreign banksPrivate sector

banks

Old private Banks

New private Banks

28

banks played significant role in the mobilization of savings and pay attention to the

weaker sections of society.

The reforms were initiated in the middle of a “current account” crisis that

occurred in early 1991. The crisis was caused by poor macroeconomic performance,

characterized by a public deficit of 10 per cent of GDP, a current account deficit of 3

per cent of GDP, an inflation rate of 10 per cent, and growing domestic and foreign

debt. Prior to the reforms, India‟s financial sector had long been characterized as

highly regulated and financially repressed. The prevalence of reserve requirements,

interest rate controls, and allocation of financial resources to priority sectors increased

the degree of financial repression and adversely affected the country‟s financial

resource mobilization and allocation.

Until the early 1990s, the banking sector suffered from lack of competition,

low capital base, low productivity and high intermediation cost, commenting on the

performance of the nationalized banks. Therefore, since 1991, the banking sector was

facing the problems listed below (Uppal and Kaur, 2006):

1. Highly regulated by the RBI

2. Low productivity and efficiency of public sector banks

3. Continuous losses born by public sector banks year after year

4. Increasing NAPs

5. Deteriorated portfolio management

6. Poor customer service

7. Obsolete technology

8. Unable to meet competitive environment

Hence, in light of above distortions, the Narasimham Committee was

appointed in 1991. The main motive of the reforms was to improve the operational

efficiency of the banks to further enhance their productivity and profitability.

2.3.1 First Phase of Banking Sector Reforms: These included the following:

1. Reduction in SLR (Statutory Liquidity Ratio) and CRR (Cash Reserve Ratio)

2. Deregulation of interest rates

3. Transparent guidelines or norms for entry and exit of private sector banks

4. Public sector banks allowed for direct access to capital markets

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5. Branch licensing policy has been liberalized

6. Setting up of Debt Recovery Tribunals

7. Asset classification and provisioning

8. Income recognition

9. Asset Reconstruction Fund (ARF)

10. At least 40 per cent of the total advances should be in priority sector

The first phase of banking sector reforms, termed as „Curative‟ measures, came

up with its main objective to improve the operational efficiency of banks. Although,

the first phase of banking sector reforms has seen improvement in the performance of

the banks, but competition has also increased with more liberalization, privatization

and globalization (Uppal and Kaur, 2006).

2.3.2 Second Phase of Banking Sector Reforms: In spite of the optimistic views

about the growth of the banking industry in terms of branch expansion, deposit

mobilization etc, several distortions have still crept into the system which are

enumerated as follows:

1. Lack of competition

2. Increasing NAPs

3. Obsolete technology

Hence, while observing above distortions, the government of India appointed

second Narasimham Committee under the chairmanship of M. Narasimham in

1998 to review the first phase of banking sector reforms and chart out a

programme for further reforms, necessary to strengthen India‟s financial system

so as to make it internationally competitive. The committee reviewed the

performance of the banks in light of the first phase of reforms and submitted its

report with some repaired and new recommendation (Uppal and Kaur, 2006).

These recommendations can be broadly grouped as (RBI. 1998):

1. Stricter prudential norms in line with the international best practices

2. Reduction of government stake in banks to 33%

3. Setting up of the asset reconstruction fund for better monitoring of NPAs

4. Consolidation of the banking industry by merging the stronger banks

5. Rehabilitation of the weak banks by introducing narrow banking

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6. Freedom to negotiate wages independently by the banks

7. Adoption of the scientific tools for managing risks

8. Technology improvements to modernize the banking system

9. Legal reforms to expedite recovery of banks‟ dues

10. Increasing Capital Adequacy Norms to 10% by 2002

As the process of second banking sector reforms is going on since 1999, it has

shown improvement in the performance of banks and on the other side, many changes

have occurred due to the entry of banks in the global market.

After the introduction of financial sector reforms in 1991, there has been a

massive increase in the number of private sector banks in India. Before 1991, there

were 25 private sector banks operating in the country. During the year 1995-96, 9

private sector banks were issued a license and they commenced their operations. The

number of foreign banks operating in India as on March 2011 was 34. The policy of

liberalization and globalization increased the competition among the banks in the

economy. Thus, the paces of development of the Indian banks lead to branch opening

and transformation of brick banking to electronic banking.

2.4 Automation in Banking Industry

The history of computerization itself has a short past-form from a tool for

military operations during the Second World War to a labor saving device and fast

calculating machine in the commercial sector. Since then not only the very size of

computer got miniaturized but its use, too, went through a tremendous transformation.

After the development of first two commercial models, UNIVAC-1 and model-650 of

International Business Machines (IBM) during the 1950s and its adoption by the

business world, there is no going back on the issue of computerization. The Bank of

America and the First National City Bank of New York were first two in the banking

industry to experiment with computer processing in the U.S.

The adoption of computer in the banking industry on the one hand is closely

related to a change in the structure of the organization and nature of operations in

banking industry itself, and on the other hand, to the emergence of computer as a

significant organizational tool.

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In India too, computerization started somewhere during the 1950s, when

Indian Statistical Institute, Calcutta (ISIC) installed a first generation computer. Till

the year 1974 some twenty seven computers were installed in India (of which fifteen

were in the Public sector, five in education and R&D and remaining seven in private

sector) (Gopalkrishnan and Narayanan, 1975).

2.4.1 Computerization in Indian Banking Industry

The issue of mechanization / computerization in the banking industry is

closely related to the massive growth of the industry and diversification of its

activities. The banks which were confined to urban and commercial centers before

nationalization of fourteen major banks in 1969 were required to play an effective role

in the economic development of the nation and social upliftment of its people. The

very concept of banking has undergone a sea change, a rapid business expansion,

diversification and increasing social orientation. Apart from substantial growth on the

financial fronts, banks have been taking many steps to meet changing requirements

and one of them is the computerization.

The most fundamental way in which technology has changed the face of the

Indian banking sector has been through computerization. While new private sector

banks and foreign banks have an edge in this regard, public sector banks have been

investing in upgrading their operations by way of computerization.

2.4.1.1 Computerization during 1960s and 1970s

The effort to computerize India banks dates back to 1962 with the introduction

of Unit Record Machine at the Reserve Bank of India (RBI) (Padwal, 1988). But if we

take the financial institutions as a whole, then, in true sense Life Insurance

Corporation of India was perhaps the first to install a computer in 1963, for

maintenance and processing of insurance policies (RBI, 1984). Subsequently, in 1967

both RBI and SBI installed computer systems, the former to process statistical data

and for research purpose and the later to reconcile inter-branch transactions (RBI,

1984).

Since the beginning of 1970 various committees and working groups

appointed by RBI, National Institute of Banking Management (NIBM), Indian Banks‟

32

Association (IBA), recommended that computerization was inevitable, though in

selected areas of operations only (RBI, 1984). Following the IBA‟s settlement (first

Bi-partite settlement) with All India Bank Employees‟ Association in 1966, Ledger

Posting Machines (LPMs) at branches and the Unit Record Machine at head offices

were allowed (First Bi- Partite Settlement, 1966).

2.4.1.2 Computerization in RBI

Even before the formal installation of computer by RBI, it made use of

computer on a time sharing basis with the Tata Institute of Fundamental Research.

The model CDC-3600 was used for forecasting of various business parameters like

deposits, bank credits, etc., and also for processing the returns related to deposit

surveys. It acquired Honeywell-400 in 1967/68 and an enlarged version Honeywell

Bull Cii 64/60 a third generation computer. The latter was installed at the then

department of statistics (Srivastava, 1987).

2.4.1.3 Computerization during 1980s

The decision of the National Industrial Tribunal (popularly known as the

Dighe Award), towards the end of 1981 may said to be the turning point in the history

of computerization in banking in India. After a full lengthy discussion with the

disputants; namely RBI and unions of the employees, who opposed computerization

on the ground of retrenchment of staff and reduction in job opportunities in the future,

the tribunal, gave an unequivocal award in favor of use of computers and other

sophisticated machines. But the tribunal puts the restriction that not more than ten per

cent staff should be displaced owing to computerization (RBI, 1984).

The Indian Bank‟s Association (IBA) entered into an agreement with All

Indian Bank Employees Association (AIBEA) and the National Confederation of

Bank Employee (NCBE), on 8th

September 1983. This was the first industry level

settlement on computerization and mechanization and paved the way for the use of

Electronic Legal Posting / Accounting Machines, Micro-processor / Mini computer

and Mainframe systems to support specific functional area at branch / zonal and head

offices of banks subject to certain conditions. Accounting machines with attached

memory modules were to be utilized in banks for the purpose of current accounts,

deposit accounts, general ledger accounts, cash, credit and loan accounts in urban and

33

metropolitan centers. Computers were allowed for clearing operations, inter-branch

reconciliation, remittances, foreign exchange dealings, investment management,

personal inventory, payrolls, provident funds accounts, merchant banking and

management information systems. But no mechanization was allowed for rural and

semi-urban branches having fifteen or less staffs. This agreement was valid for a

period of three years from the date of agreement (Memorandum of Settlement, 1983).

A few months before the first bi-partite settlement on computerization, the

RBI appointed a committee in July 1983, known as Committee on Computerization /

Mechanisation in Banking Industry to consider the question of computerization and to

draw up a phased programme bearing in mind the future expansion. The committee

was headed by Dr. C. Rangaranjan, then Deputy Governor, Reserve Bank of India.

The committee conducted a detailed study and prepared a plan for mechanisation /

computerization and submitted it in 1984.

The committee submitted a detailed plan for a five year period from 1985-

1989. The computerization was to take place at the following three levels:

1. Head office level

2. Regional / Zonal level, and

3. Branch level

The Rangaranjan Committee recommended mechanization / computerization at all

three levels of banking structure in two phases. In the first phase between 1985- 87,

the head offices of the bank were to be equipped with mainframe computer systems.

The Zonal offices should be equipped with microprocessor systems. About 2500

branches were to be equipped with Electronic Ledger Posting Machines (ELPMs) and

microprocessor systems. In the first 10000 ElPM, 200 microprocessors and 25

mainframes were to be procured and installed (Israrul Haque, 1994).

Initially standardized hardware systems and software specifications were

prescribed for Regional / Zonal systems. These were finalized with the help of

Computer Maintenance Corporation Limited (CMC Limited). Thus VME bus, MC

68000 family chops, UNIX operating system, UNIFY Database, Micro focus COBOL

etc., were prescribed and vendors expanded on that basis. CMC Limited was also

requested to develop standard software packages for the applications listed in the

34

committee's report. Banks had the option to acquire them from CMC or developed it

in-house. CMC Limited came out with the following seven packages: on Credit

Information System, Personnel Inventory System, and Weekly Returns to RBI,

Performance Budgeting, Cash Management, Provident Funds Accounting and Payroll.

Most banks have operationalised these packages and quite a few of them have

developed several packages in-house, such as Investment Management, Outstanding

Entry in Suspect Accounts, Compilation of Annual Closing Returns, and Agricultural

Credit Monitoring, Share Applications, and Pension Payments etc. (Israrul Haque,

1994).

In order to accomplish the massive task of computerization, the immediate

establishment of Electronic Data Processing (EDP) Cells was recommended. It was

envisaged that 40000 to 45000 data entry personnels and about 1000 system analysts

would be required and the staffing requirement would totally be met from within.

They should be trained in individual banks‟ Training and Staff Training centers (TC /

STC) for low level skills while for high level skills, NIBM and other allied

institutions will impart training.

There were three considerations for mechanization / computerization; viz,

1. Volume and type of data required to be captured

2. Objectives of information to be extracted from the data and the type of

processing involved, and

3. From where these data are to be stored and retrieved subsequently.

Although the banks embarked on the programme of mechanisation from the

beginning of 1985 but it was not until the second bi-partite settlement on 29th march

1987 that any smooth result could be achieved (Mookerjee, 1992). The agreement laid

down a detailed norm for computerization.

Committees on Communication Network for Banks and Security for

Worldwide Interbank Financial Transfer (SWIFT) implementation (1987) were held

under Chairmanship of Shri T.N.A.Iyer, Executive Director, Reserve Bank of India.

The main recommendations of committee were:

35

1. Setting up of X.25 based packet switching network called 'BANKNET'. This

was supposed to be jointly owned by the Reserve Bank and the public sector

banks. It suggested that the computer system resources of the four IBM

Mainframes (installed at the four metros for check processing operations)

could be used during the daytime by BANKNET for data communication with

additional equipment.

2. BANKNET to be implemented in two phases. In Phase I the computer systems

available in the Head Offices of the Public Sector Banks in the four

metropolitan cities would be connected to the four IBM Mainframe servers. In

the second phase connectivity could be gradually extended to eight to ten

banking intensive centers and to a hundred centers over a three year period.

The applications that were identified were:

Inter-bank fund transfers on banks' own account and on customers' account;

inter-branch funds transfers on banks' own account and on customers' account;

currency chest transactions; government transactions; improvements in payment

systems by facilitating automated clearing services [similar to the Bankers'

Automated Clearing Services (BACS)]; any branch banking, etc.

1. India should join the SWIFT (Society for Worldwide Interbank Financial

Telecommunication) Network for the transmission and reception of

international financial messages.

2. BANKNET should strive to emulate SWIFT in matters of data security,

encryption, and authentication and SWIFT message standards which are

internationally accepted should be adopted by BANKNET.

The second Rangarajan committee (1989) suggested full automation of 2000

to 2500 branches by the end of 1994. It also suggested installation of additional

minicomputers at the Regional / Zonal level to take the total to 900 minicomputers.

But the agreements of 1983, 1987, and 1989 diluted the target. Instead of 30000

ALPMs, only 5700 or less than 19 percent were installed. The plan of

computerization of 2000-2500 branches was reduced to one branch per bank per year

in 1989 agreement. However, no major changes were carried out at the head office

level and Regional / Zonal level (ROs / ZOs). Against the target of 300

microprocessors the agreement of 1983 itself suggested for 18 mini computers per

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bank at the ROs / ZOs and at the Apex level one mainframe per bank was agreed

upon (RBI).

2.4.1.4 Computerization Scenario in 1990s

Computerization in banking in this decade was to be largely governed by the

Second Rangarajan Committee (1989) report and in accordance with the third Bi-

partite settlement of 1993 (i.e.,. the agreement of 29th October 1993 between the

Management of 58 banks as represented by the Indian Banks‟ Association and their

workmen, represented by All India Bank Employee Association (AIBEA) in

supersession of all previous industry level Bi-partite settlements on computerization

and mechanization). This agreement does not put any restriction on individual banks

entering into any agreement with their unions for a higher degree of computerization.

But the benefits would be on the basis of standards set by the industry level

agreement.

Branch level computerization as per the 1993 Agreement: Banks may partly or

fully computerize / mechanize some or all operations in branches as specified below:

All branches falling in the category where 750 or more vouchers are processed

daily and fall in urban, metropolitan, urban agglomeration and peripheral territories

treated at par with urban and metropolitan centre for the payment of House Rent

Allowance (HRA) / City Compensatory Allowance (CCA). Branches not covered

above but categorized as special branches and non-business branches / offices

carrying out „special functions‟ (Israrul Haque, 1994). Besides, each bank may fully

or partly computerize branches every year on the following basis;

1. Bank with branches not exceeding 500, one per cent or a minimum of 3

branches every year.

2. Banks with total number of branches exceeding 500, ½ percent, with a

minimum of 5 branches every year.

The banks may also install ATMs on similar lines as in 1&2 above. The

provisions for Note Counting Machine, Signature Verification Equipment, Pass Book

Printers and Demand Draft Printers have also been made.

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The Reserve Bank continued to be involved in shaping the technology vision of

the banking system. Following the recommendations of the Committee on Financial

Sector Reforms, (which is popularly known as the second Narasimham committee), a

Committee on Technology Upgradation was set up by the RBI for the Banking Sector

in 1994. This committee has representatives from banks, Government, technical

institutions and the RBI. Among other things, this committee looked into issues

relating to

1. Encryption of Public Switching Telephone Network (PSTN) lines.

2. Admission of electronic files as evidence.

3. Record keeping.

4. Modalities for a satellite based Wide Area Network (WAN) for banks and

financial institutions with the necessary security systems by banks and other

financial institutions, to ultimately develop a sound and an efficient payment

system.

5. Methods by which technological upgradation in banks and financial

institutions could be affected and in the context study the feasibility of

establishment of standards, designing the payments system backbone and

standards relating to security levels, messages and smart cards.

The Committee realized the urgent need for training, research and

development activities in the banking technology area. Banks and financial

institutions started setting up technology based training centers and colleges.

However, a need was felt for an apex level institute which could be a think-tank and

brain trust for banking technology.

The committee recommended a variety of payment applications which can be

implemented with the appropriate technology upgradation and development of a

reliable communication network. The committee also suggested setting up of an

Information Technology Institute for the purpose of research and development as well

as consultancy in the application of technology in the banking and financial sector of

the country. As recommended by the Committee, Institute of Development and

Research in Banking Technology (IDRBT) was established by RBI in 1996 as an

38

autonomous center for Development and Research in Banking Technology in

Hyderabad (Kannan, 2004).

In 1995 also, a committee was set up by RBI for proposing Legislation on

Electronic Funds Transfer and other Electronic Payments. This committee was headed

by Smt. K.S. Shere, Principal Legal Adviser, Reserve Bank of India. The main

recommendations of this committee were:

1. EFT system could be introduced immediately by framing regulations under

Section 58 of the RBI Act. A Model Customer Contract agreement to govern

the banker-customer relationship with regard to Electronic Fund Transfer

(EFT) should be adopted by all banks participating in the system.

2. As a long term measure, a new legislation needed for regulating, defining and

determining the rights and obligations of the system providers and users.

In order to upgrade the country's payment and settlement systems in 1999, the

Reserve Bank of India took the initiative of providing a communication backbone in

the form of the satellite based Indian Financial Network (INFINET) using Very Small

Aperture Terminal (VSAT) technology to the banking and financial Sector. The task

of designing and developing the communication network (INFINET) was entrusted to

the Institute for Development and Research in Banking Technology (IDRBT). (RBI,

1999)

The Vasudevan committee on technology upgradation in the banking sector'

has suggested an amendment in the Reserve Bank of India Act, 1934 to enable the

central bank to regulate and supervise payment and settlement systems. The

committee has also recommended a new legislation on electronic funds transfer

system to facilitate multiple payment systems to be set up by banks and financial

institutions. The committee has called for setting up a standing committee of members

drawn from the legal departments of RBI, Indian Banks' Association (IBA) and a few

banks to examine legal issues in electronic banking and also to scrutinize issues of

confidentiality of data in the computerized environment and in the context of banker's

secrecy obligations. (RBI, 1999)

The committee has suggested that INFINET (Indian financial network) should

be a blend of satellite, microwave and terrestrial links and may be expanded by using

39

a blend of satellite and land links as media for payment and settlement system's

backbone with the growth in network traffic. It has stated that there should be an

appropriate institutional arrangement for key management and authentication by way

of a certification agency and Institute for Development and Research in Banking

Technology (IDRBT) should be appointed for the purpose. The Vasudevan committee

has said that RBI and banks should also have a standing committee with members

having the requisite expertise to periodically review standards, security policies,

software system and their implementation. The committee has recommended banks to

outsource software technology since it is a better option in the context of rapid

changes in the Information Technology (IT) industry. All branches of banks dealing

with government transactions need to be computerized and suggested that in the first

phase, computerization of all focal point branches and state government link cells

should be completed by March 31, 2000 (RBI, 1999).

According to this report all the banking companies, financial institutions under

the purview of the CVC (Central Vigilance Commission) will have to compulsorily

offer electronics clearance services to their customers with immediate effect. This step

is visualized as a method of checking fraud because a significant part of the frauds in

the banks are related to the remittances and collection in the payment system.

The Reserve Bank of India puts up a network of 438 VSATs linked with their

hub so that the Wide Area Network (WAN) became operational, within one year. The

CVC took up the matter with the concerned authorities to see that requisite

transponder capacity is made available to RBI. RBI may examine whether the spare

capacity of earth stations in the software technology parks of the Department of

Electronics can be utilized by them to quickly set up a WAN so that the electronic

clearance system becomes operational at the earliest. According to that plan RBI had

to be able to have its VSAT network in place later before 1.1.2000. Also, all the banks

were called to ensure that 70% of their business is captured through computerization

before 1.1.2001 (RBI, 1999).

2.4.1.5 Computerization during 2000-2010

During 1999-2000, the Reserve Bank of India focused on two major areas in

the field of computers and information technology (IT). One of the issues of concern

40

related to smooth year 2000 transition which entailed a thorough examination of the

hardware, software, operating system and networking systems in vogue in the entire

financial sector and in particular, in the banking sector so as to ensure that there

would be business continuity. The efforts made by the RBI to encourage and to foster

implementation of necessary action in this regard by commercial banks helped to

further improve IT infrastructure with latest equipments and solutions and integrated

networks. The second area of focus was on overall technological up-gradation in

banks, essentially to facilitate smooth and efficient payment and settlement, improved

customer service and the resultant increase in profitability (RBI, 2001).

It was in this direction that the committee on technology upgradation in the

banking sector set up by the Reserve Bank of India made wide-ranging

recommendations based on which the Reserve Bank of India drew up an Action Plan

for implementation of the recommendations. Besides, three sub-groups have also been

constituted to (i) review periodically security policies, message formats, software,

etc.; (ii) examine legal issues of electronic banking; and (iii) monitor progress of

computerization of branches of banks handling government transactions.

Furthermore, an institutional mechanism in the form of the National Payments

Council has been constituted in May 1999, with Deputy Governor Shri S.P. Talwar as

the Chairman, to focus and recommend broad policy parameters that provide the basis

for designing and developing an integrated payment and settlement system.

As part of the restructuring of the banking sector in 2000, special emphasis

from RBI has been accorded to improvements in payment and settlement systems.

Prominent among the measures initiated in these areas include introduction of

Electronic Funds Transfer (EFT), Real Time Gross Settlement System (RTGS),

Centralized Funds Management System (CFMS), the Negotiated Dealing System

(NDS) and the Structured Financial Messaging Solution (SFMS) and determined the

SFMS as the backbone for all message-based communication over the Indian

Financial Network (INFINET). The work on the operationalization of the RTGS

system continued during the year 2000. The major project components completed

during the year include the finalization of the design for RTGS system, the issue of

the tender for the development of the software, evaluation of the technical

41

components of the bids received, site visits and evaluation of the commercial

proposals Centralized Funds Management System (CFMS) (Kannan, 2004).

In case of regional rural bank also in July 2001 Government of India and

National Bank for Agriculture and Rural Development (NABARD) advised the RRBs

(Regional Rural Banks) to initiate immediate steps so that Head Office, Area Office

and a minimum of 50 percent of the branches can be computerized in a phased

manner in the next five years. Sponsor banks were also advised to formulate RRB-

wise Action Plans, keeping in view the financial position of RRBs, infrastructure

facilities available in their command area and the business potential of the RRB

branches. Necessary support to implement the programme was also required to come

from the sponsor bank. NABARD made a beginning by extending support to select

RRBs by providing PCs, peripherals, standard software packages as also customized

MIS package (Management Information System) and training inputs under its Swiss

Agency for Development and Cooperation (SDC) programme (RBI, 2008).

The Reserve Bank of India implemented the Real Time Gross Settlement

System (RTGS) during the year 2003-04 The impetus given towards retail payment

systems also continued, with a new facility being made available – the Special

Electronic Funds Transfer (SEFT) System, which covered about 127 centers of the

country in the same year. In view of the substantial progress made in the payment and

settlement system as envisioned in the „Payment System Vision Document 2001-04‟,

the Reserve Bank of India also has taken steps to draft a document on „Payment and

Settlement Systems Vision for 2005-08‟ under the guidance of the National Payment

Council. The draft document was in the view to help the banks in efficient

management of their funds. The document also tried to eliminate avoidable movement

of funds around various centers for settlement purposes. For this purpose a National

Settlement System (NSS) was introduced in a phased manner by linking up different

clearing houses managed by the Reserve Bank of India and other banks for

centralized settlement at one place and also at the same time the Institute for

Development and Research in Banking Technology (IDRBT), Hyderabad, set up a

National Financial Switch (NFS) to facilitate apex level connectivity of other switches

established by banks for better operation of ATMs in whole country (RBI, 2004).

42

In 2005, in order to provide focused attention to the payment and settlement

systems, the Reserve Bank of India constituted the Board for Regulation and

Supervision of Payment and Settlement Systems (BPSS) as a Committee of its Central

Board. The BPSS is headed by the Governor of the Reserve Bank of India with the

Deputy Governor in-charge of Payment and Settlement Systems as the Vice-

Chairman and the other Deputy Governors and two members of the Central Board of

the Reserve Bank of India as members. Functions and powers of the BPSS included

formulating policies relating to the regulation and supervision of all types of payment

and settlement systems, setting standards for existing and future systems, authorizing

the payment and settlement systems and determining criteria for membership (RBI,

2006).

The National Payments Council, which was set up in 1999, has been

designated as a Technical Advisory Committee of the BPSS. To assist the BPSS in

performing its functions, a new department, the Department of Payments and

Settlement Systems (DPSS), was set up in the Reserve Bank of India in March 2005.

For modernizing the payment and settlement systems in India, a three-pronged

approach has been adopted with due emphasis on consolidation, development and

integration. The consolidation of the existing payment systems involves the

strengthening of computerized cheque clearing and expanding the reach of Electronic

Clearing Services (ECS) and Electronic Funds Transfer (EFT). The retail payment

system was given an impetus to the introduction of a new facility, Special Electronic

Funds Transfer (SEFT) System which covered about 169 centers of the country. The

critical elements of the development strategy involve opening of new clearing houses,

interconnection of clearing houses through the Indian Financial Network (INFINET),

development of RTGS system, Centralized Funds Management System (CFMS),

Negotiated Dealing System (NDS) and the Structured Financial Messaging System

(SFMS). Integration of various payment products with the systems of individual

banks has been another thrust area. The focus has been on a high degree of

standardization within a bank and seamless interface across banks. With the

implementation of RTGS, the paper-based inter-bank clearing has been discontinued

in a phased manner beginning with the closure of inter-bank clearing at Mumbai in

November 2004 (RBI, 2006).

43

The Reserve Bank of India has arranged a Vision Document for 2005-08

which has been prepared after taking into consideration the feedback from the various

stakeholders such as banks, technology solution providers, members of the public and

other experts in the field. The Vision Document sets out the roadmap for

implementing the vision for payment and settlement systems within the next three

years. The key themes of the action plans identified in the Vision Document were

safety, security, soundness and efficiency (Triple-S and E). While safety in payment

and settlement systems relates to risk reduction measures, security implies confidence

in the integrity of the payment systems. All payment systems are envisaged to be on a

sound footing with adequate legal backing for operational procedures and

transparency norms. Efficiency enhancements are envisaged by leveraging the

benefits of technology for cost effective solutions. Most of the initiatives regarding

technology during 2004-05 were aimed at providing better and more efficient

customer service by offering multiple options to the customer. Many banks have

commenced the process of setting up core banking solutions in 2005 and networking

also has received focused attention by banks. This activity is also being monitored by

the Reserve Bank of India. Most banks have worked on their own corporate networks

to facilitate inter-branch and branch-controlling office communication in an electronic

mode. Inter-bank and inter-city communication takes place through the Indian

Financial Network (INFINET). As part of the INFINET, the terrestrial lines have been

augmented to provide for increased data transfer capabilities. All these have resulted

in the dependence of banks on network-based computing which has benefited the

customers (RBI, 2005).

The Board for Regulation and Supervision of Payment and Settlement

Systems (BPSS), set up in March 2005 as a committee of the Central Board of the

Reserve Bank of India, which was the apex body for giving policy direction in the

area of payment and settlement systems. The BPSS gave important policy

directions/decisions. These include: (i) setting targets for usage of the RTGS system;

(ii) publishing frequently asked questions (FAQ) on payment systems; (iii) publishing

the charges levied by banks for electronic payment systems; (iv) setting up an

umbrella organization for all retail payment systems in the country; (v) finalizing the

Payment and Settlement Systems Bill; and (vi) preparing the Electronic Funds

Transfer Regulations under the Reserve Bank of India, Act. The operationalization of

44

the NEFT in November 2005 was a major step in the direction of setting up and

operating a national level payment system. The NEFT is a secured network, which

uses the SFMS messaging format with public key infrastructure (PKI) enabled digital

signatures retail electronic payment system having a nation-wide network. All the

SEFT clearing banks were advised to migrate to NEFT system by December 15,

2005. With the implementation of NEFT, the SEFT (Special electronic fund transfer)

system was discontinued since February 2006. The Reserve Bank of India has also

advised banks to adopt the centralized fund management system (CFMS), which

enables banks to transfer funds across its accounts with various offices. The Reserve

Bank of India has also decided to implement the National Settlement System (NSS) to

facilitate better liquidity management by banks. The concept paper on NSS explaining

settlement of clearing across the country at one location was prepared (RBI, 2006).

Further, the Reserve Bank of India has begun to frame guidelines and

standards which relate to common inter-bank requirements. During the year, the

Financial Sector Technology (FST) Vision Document, 2005-08 was released to all

banks in July 2005. The document outlines the approach to be followed by the

Reserve Bank of India as far as IT implementation for the immediate future is

concerned. The Vision Document has helped banks to formulate their IT policies in a

manner which are in line with the direction given by the Reserve Bank of India. At

the same time, it also facilitated banks overall movement in a unified manner towards

common inter-operable standards for IT systems and inter-bank messaging. In order

to follow-up the implementation of the tenets of the FST Vision Document, a

Conference of IT Chiefs of all categories of banks was organized by the Reserve Bank

of India in January 2006. Improvements in the software architecture of NDS have

resulted in better throughput and reduced processing time for member banks of the

system. A major enhancement made during the year was the migration towards front-

end validation by the member instead of validation being performed by the host. The

system functioned smoothly during the year. The process of converting the system

into a screen based trading system was completed. The first set of modules was made

operational at the Clearing Corporation of India Ltd (CCIL) from August 2005 (RBI,

2006).

45

In 2008, RBI issued new Payment and Settlement System report for better

implementation which these new regulations covered: (a) authorization of payment

systems including the form and manner of submission of application for authorization

of commencement/ continuation of a payment system and grant of authorization

certificate; (b) payment instructions and determination of standards; (c) furnishing of

returns, documents and other information; and (d) furnishing of accounts and balance

sheets. Board for Regulation and Supervision of Payment and Settlement Systems

(BPSS) which was earlier constituted under the RBI Act, 1934, has since been

reconstituted under the Payment and Settlement Systems Act, 2007 (RBI, 2008).

The BPSS Regulations 2008, cover: (a) composition of the Board; (b)

functions and powers of the Board; (c) powers to be exercised on behalf of the Board;

and (d) constitution of sub-committees and advisory committees. The BPSS meets

regularly and gives directions for bringing in efficiency, safety and customer

convenience in the payment and settlement systems. Some of the areas in which the

Board has provided direction include preparation of a framework for payments

through mobile phones, extension of the jurisdiction of Magnetic Ink Character

Recognition (MICR), clearing houses and computerisation of non-MICR clearing

houses, launching the Indo-Nepal remittance system, making use of electronic mode

of payment mandatory for large value transactions, making all RTGS branches NEFT-

enabled while upgrading the NEFT system into a round-the-clock type remittance

system, exploring the feasibility of developing a domestic card to inject competition

in the market in a non-discriminatory manner, facilitating optimum use of ATMs by

rationalizing cash withdrawal/balance enquiry charges and disseminating information

on major payment services offered by banks including the service charges and

quantum of compensation to be paid by banks for deficiency in those services. The

Cheque Truncation System (CTS) implemented in February 2008 in the National

Capital Region was another step taken for bringing in efficiency in paper-based

clearing system. The CTS, which started with the participation of ten banks, now had

all the members of the New Delhi Bankers‟ Clearing House as participants. The

physical movement of cheques to all payee bank branches has been truncated. The

choice of the point of truncation, whether at the collecting branch or at its service

branch, has been left to the individual banks to decide. Clearing takes place based on

the validation of cheque images (RBI, 2009).

46

The operational guidelines for Mobile Banking issued in October 2008 were

reviewed and relaxed in December 2009 by enhancing the limits for mobile banking

transactions up to Rs 50, 000 for both e-commerce and money transfer transactions,

and permitting the money transfer facility up to Rs 5, 000 from a bank account to

beneficiaries not having a bank account. India has been made a member of the

Committee on Payment and Settlement System (CPSS) of the Bank for International

Settlement (BIS). The Reserve Bank of India also represented on four

steering/working groups of CPSS, viz., (i) General Review of Standards; (ii) Repo

Market Infrastructure; (iii) Post Trade Services, and (iv) Retail Payment Systems. The

Reserve bank of India undertook important steps covering IT infrastructure and

implementation of new applications. A High Level Committee was constituted under

the Chairmanship of the Deputy Governor (Dr. K. C. Chakrabarty) and members from

IIT, IIM, IDRBT, Banks, and the Reserve Bank of India to prepare the IT Vision for

the Reserve Bank of India for the period 2011-2017, inter alia, to review the functions

of Department of Information Technology and suggest measures for the way forward

(RBI, 2010).

In 2011, computerization in Indian banking reached to all public sector bank

branches. At the end of March 2011, 98 per cent of the branches were fully

computerized and within which almost 90 per cent of the branches were on the core

banking platform. All branches of the SBI group were fully computerized. The

cumulative expenditure on „computerization and development of communication

networks‟ by public sector banks from September 1999 to March 2010 aggregated to

Rs 22,052 crore ( Table 2.2).

Table 2.1: Computerization in Public Sector Banks (as at end-march)

Category 2009

2010

1 2 3

Fully Computerized Branches (i+ii)

i)Branches under Core banking solution 79.4 90.0

ii) Branched already computerized 15.6 7.8

Partially Computerized Branches 50.0 2.2

Source: RBI, Trend and Progress in Indian Banks 2010-11

47

Table 2.2: Expenditure Incurred on Computerizations and Development of

Communication Networks by Public Sector Banks (crore)

Name of the Bank Expenditure incurred

during half

year ended March 2010

Expenditure incurred

between Sept 1999 and

March 2010

Public Sector Banks 1,370 22,052

Nationalized Banks 800 15,286

Source: RBI, Trend and Progress in Indian Banks 2010-11

2.5 Development of e-Banking in India

Indian Banking sector saw several transformations over the last decades. The

operating environment of banks has changed considerably in terms of regulation,

liberalization and increasing competition from both domestic and foreign players.

Meanwhile, implementation of IT began in right path in the banking sector. It started

from back office automation, which was aimed largely at processing of huge data and

automation of cheque clearing operations to the front desk in the form of total branch

automation. All together, development in communication technologies made

implementation of electronic banking more widespread and it became cost effective to

network bank branches and also helped to cut down operational costs of banking

drastically in India. The details of the development of e-banking services in India are

given as follows:

48

Table 2.3: Banking Development in India 1990-2011 (at the end of March)

Year Banks

(number)

Branches

(number)

Deposits

(crore)

Advances

(crore)

Investment

(crore)

1990 274 58914 172759 113592 64548

1991 276 60113

(2.03)

200036

(15.8)

132510

(16.7)

71886

(11.37)

1992 276 60690

(0.96)

283080

(41.6)

142211

(7.3)

86601

(20.47)

1993 274 61235

(0.9 )

274068

(-3.18)

165836

(16.7)

102857

(18.8)

1994 275 61852

(1.00)

317918

(15.9)

180017

(8.5)

135546

(31.8)

1995 282 62264

(0.67)

375864

(18.22)

222506

(23.6)

149254

(10.11)

1996 289 62849

(0.93)

426073

(13.35)

263533

(18.43)

164141

(9.98)

1997 296 63534

(1.08)

492227

(15.52)

282237

(7.1)

191091

(16.41)

1998 300 64552

(1.7)

644068

(30.9)

324166

(14.9)

271966

(42.32)

1999 301 68559

(6.2)

771145

(19.8)

369648

(14.03)

339633

(24.9)

2000 298 69864

(1.9)

889645

(15.37)

394586

(6.8)

359648

(5.9)

Annual

Average

Growth

Rate

- 1.73 18.31 13.39 19.19

Annual

Compound

Growth

Rate

- 2% 18% 13% 19%

Period

Growth Rate

- 18.58 414.97 247.38 457.17

2001 300 67937

851593

454069

367184

2002 297 68195

(0.38)

1131188

(32.9)

529271

(16.57)

438269

(19.36)

49

2003 292 68500

(0.44)

1311761

(15.97)

746432

(41.03)

547546

(24.93)

2004 291 69170

(0.98)

1504416

(14.69)

840785

(12.64)

677588

(23.74)

2005 288 70373

(1.73)

1700198

(13.01)

1100428

(30.89)

739154

(9.09)

2006 222 72072

(2.41)

2109049

(24.04)

1507077

(36.95)

717454

(-2.93)

2007 182 74653

(3.59)

2611934

(23.9)

1931190

(28.14)

791516

(10.32)

2008 173 78787

(5.53)

3196940

(22.39)

2361913

(22.3)

971715

(22.7)

2009 170 82897

(5.21)

3834110

(19.93)

2775549

(17.51)

1166410

(20.03)

2010 167 88203

(6.4)

4492826

(17.18)

3244788

(16.9)

1384752

(18.8)

2011 167

93080

(5.52)

5207969

(15.91)

3942082

(21.48)

1501619

(8.43)

Annual

Average

Growth

Rate

- 3.22 19.28 24.44 19.44

Annual

Compound

Growth Rate

- 3% 20% 24% 15%

Period

Growth

Rate

- 37.00 511.55 768.16 308.95

Note: Numbers in Parenthesis are Annual Growth Rates.

Source: RBI, Statistical Tables Relating to Banks in India, Various Issues.

To analyze the effect of e-banking on development of banks in India the time

period has been divided into two periods: Pre-Technology and Post Technology

Induction Era. The period from the years 1991 to 2000 has been taken as India‟s pre-

technology Induction era and post technology era started after implementation of

Information Technology Act in 2000.

50

From the table 2.3 it is clear that the number of banks in India shows

decreasing trends since 2005. This trend is because of defunct and merging of

different banks in last decade. There are many banks that have gone out of business or

have merged with other banks and since been renamed such as State Bank of Indore

and State Bank of Saurashtra which merged with State Bank of India, amalgamation

of Global Trust Bank with Oriental Bank of Commerce, Bank of Madura with ICICI

bank and Times Bank with HDFC Bank.

Table 2.3 shows the increasing trend in branch number of Indian banks in

post technology induction era (e-banking era). Annual average growth rate of banking

branch increased from 1.73 per cent to 3.22 in the e - banking era. This trend shows 3

per cent annual compound growth rate in e-banking era as compared to 2 per cent in

pre e-banking era ( see table 2.3). Nationalization of commercial banks in India was a

new step towards accessibility of banking services to the vast number of rural

population. This was an important endeavor towards financial inclusion, which led to

the spread of bank branches in unbanked rural and semi-urban areas. In order to

expand accessibility of poor people to financial services multiple steps have been

taken by RBI over the years. It encouraged expansion of bank branches, especially in

rural areas, resulting in a multifold increase in the branch network from around 8,000

in 1969 to 93,080 in 2011. Despite of all these efforts, a significant percentage of the

households, especially in rural areas, still remained outside the coverage of the formal

banking system. It is estimated that about 40% of Indians lack access even to the

simplest kind of formal financial services (Chakrabarty, 2011). In 2005, RBI, urged

banks to review their existing practices to align them with the objective of financial

inclusion. In order to address this issue, the branch authorization policy was

liberalized in December 2009 giving freedom to domestic scheduled commercial

banks to open branches at Tier 3 to 6 centers (with a population of up to 49,999 as per

the Population Census of 2001) without having the need to take permission from RBI

in each case. The banks have also been advised to make effective use of information

and communications technology (ICT) to provide doorstep banking services. Reserve

Bank of India‟s vision for 2020 is to open nearly 600 million new customers' accounts

and service them through a variety of channels by leveraging on IT (Rao, 2012).

51

Growth of banking branches in India shows an increasing trend from 16

percent in pre e-banking era to 37 per cent during 2001-2011. The number of

branches that was 67937 in the year 2001 have been grown up to 93080 in the year

2011, and are constantly growing over e-banking era. This fact shows that, despite of

introduction and spread of many e-banking services by banks in India, banking

system still needs to increase their banking branches according to financial inclusion

policy. The population per bank branch improved in India from 14000 in 2009-10 to

12921 in 2012.

According to the table the trend of banking deposit in India is upward. The E-

banking by retaining or attracting of customers to different banking services will

affect the amount of banking deposits. As can be seen from table, deposit of the

Banks was 172759 crore in the year 1990. It increased to 889645 crore in the year

2000. This was yet in the pre e-banking era. During pre e-banking era deposit shows

344 per cent growth but this growth increased to 511 per cent in e-banking era since

the government of India enacted the IT act in 2000. Total deposits of banks that were

851593 in the year 2001 has grown to 5207969 crore in the year 2011. Since 2001-02

the total deposit of banking has grown at the rate of 20 per cent per annum in the total

Indian banking industry.

The table also depicts the increasing trend of advances and investment in the

Indian banking system. Advances of banking system shows, 197 and 768 per cent

growths before and after IT act induction in India. The total amount of banking

advances which was 113592 crore in the year 1990 has grown to 394586 crore in the

year 2000. In the e-banking era the advance amount reached to 3942082 crore in

2011-12 from 454069 crore in 2001. There is almost 9 times growth during the period

under consideration. This expansion shows 24 per cent compound annual growth rate

in e-banking era for the total banking industry. Investment of banks as well shows 308

per cent growth in the e - banking era. Amount of investment which was 367184 crore

in the year 2001 has grown to 1501619 crore in the year 2011. The annual growth rate

of banking advances in e-banking era shows 15 per cent growth rate which is less than

pre e-banking era (19 per cent). The period growth rate also shows it decreased from

454 to 308 per cent in e-banking era.

52

Table 2.4: Financial Indicators of Schedule Commercial Banks (crore)

Year Operating Profit Operating

Expenditure

Net Interest

Income

2001-02 29837 33679 2492

2002-03 40682

(36.34)

38085

(13.09)

7663

(207.5)

2003-04 52671

(29.48)

43530

(14.3)

56461

(636.9)

2004-05 51684

(-1.9)

50048

(14.98)

66901

(18.5)

2005-06 56560

(9.43)

58725

(17.33)

78226

(16.92)

2006-07 65917

(16.54)

66319

(12.93)

89255

(14.1)

2007-08 83590

(26.9)

77220

(16.43)

100481

(12.58)

2008-09 111349

(33.2)

89208

(15.52)

125596

(24.99)

2009-10 122335

(9.87)

100028

(12.12)

143096

(13.93)

2010-11 149210

(21.98)

123129

(23.1)

192776

(34.8)

2011-12 173200

(16.08)

137100

(11.34)

224500

(16.45)

Annual Average

Growth Rate

19.8 15.11 99.7

Annual Compound

Growth Rate

19% 15% 56%

Period Growth

Rate

480.48 307.08 8908.9

Note: Numbers in Parenthesis Are Annual Growth Rates.

Source: RBI, Report on Trend and Progress of Banking in India, Various Issues.

53

Table 2.4 reveals important financial indicators of scheduled commercial

banks in post information technology induction (e-banking era) in India. Operating

profit of commercial banks increased from 29837 to 173200 crore in 2012 fiscal year

which shows 480 per cent growth. Compound growth rate shows 19 per cent annual

growth rate for e-banking era. Higher operating income in e-banking period reflects

higher impact of interest and non-interest income on profitability of banks in this

period. This indicator shows the profitability of banks is increasing as their business

expanded and e-banking has a positive impact on accessibility and expansion of the

banking system.

Operating expenditure in the e - banking era also shows an increasing trend of

rising from 33679 to 137100 crores in 2012 fiscal year. It has increased to fourfold

since 2001 but by lower growth (15 per cent) than operating profit during the same

period. Operating expenses are the expenses incurred in conducting

the bank's ongoing operations and with the increased investment in technology the

operating expenditures will change.

Net interest income is defined as the difference between interest income and

interest expenses. It is an important indicator of the efficiency of the intermediation

process. The lower net interest income in relation to assets is an indicator of higher

efficiency of banking. Net interest income shows a tremendous growth in the e -

banking era. It increased from only 2492 in 2001-02 to 224500 crore in 2011-12

which became ninety-fold since 2001 and shows 59 per cent annual compound growth

rate in e-banking era.

2.6 Role of Reserve Bank of India in Electronic Banking

The use of technology in expanding banking has been a key focus area of the

Reserve Bank of India. The RBI has taken several initiatives to popularize usage of

technology by banks in India. Periodically, almost once in five years since the early

1980s, the RBI appointed committees and working groups to deliberate on and

recommended the appropriate use of technology by banks given the circumstances

and the need. Technology was seen by RBI as a key business enabler in six vital areas

of banking viz. Augmenting profit pool, operational efficiency, customer

management, distribution and reach, production innovation and efficient payment and

settlement (Chakrabarty, 2009). The RBI is expected that these developments in the

54

areas of housekeeping and decision-making will improve the customer service levels

and productivity, ultimately resulting in better profitability for banking system

(Kamkodi and Khan, 2008)

Periodically, the Reserve Bank of India appointed committees and working

groups to deliberate on and recommend the appropriate use of technology by banks

give the circumstances and the need. Based on the recommendations of committees

and working groups, the Reserve Bank of India issued suitable guidelines for the

banks. In the 1980s, usage of technology for the back office operations won the

argument. It was in the form of accounting of transactions and management of

information system. In the inter-bank payment systems, it was in the form of clearing

and settlement using the Magnetic Ink Character Recognition technology (MICR).

There were two momentous decisions of the RBI in the 1990s that changed the

scenario. These were:

The prescription of compulsory usage of technology in full measure by the

new private sector banks as a precondition of the license and

The establishment of an exclusive research institute for banking technology

institute for development and research in banking technology.

In 1998, RBI availed the technical assistance project of the Department for

International Development (DFID) UK for upgrading its supervisory system and

adoption of its supervisory functions of the computerized environment (Uppal, 2007).

For mechanization of the banking industry as a whole RBI has made massive

investments in various tools and equipments of banking based IT. After following the

recommendations of the Saraf committee, the RBI initiated action on setting up of

VAST network to provide a reliable communication backbone for the exclusive use of

banking and financial sector (Shroff, 2007). Reserve Bank of India started this push

with the Rangarajan Committee Report I & II on Computerisation in Banks, followed

by Saraf and Vasudevan Committee Reports. Some of the significant developments

during this journey have been introduction of MICR-based cheque clearing,

automation of bank branches, computerisation of government business, setting up of

IDRBT, commissioning of INFINET, launching of IT-based delivery channels,

providing guidelines for internet banking, implementation of NFS, etc (Anand, 2011).

55

The Reserve Bank of India has adopted a two pronged approach to foster IT

implementation in banks as follows:

Provision of Products and Services: Providing basic common requirements for

IT use by the banks. This comprises the network such as the INFINET with the

certification authority services, and common critical applications / systems such

as ECS, EFT, PDO-NDS, CFMS, RTGS, PKI, SFMS, INFINET, and the

National Financial Switch.

Guidance and advisory role: Providing guidelines in the form of Best Practices,

Requirements for IS Audit, Standards for IT / IS systems, message formats, new

delivery channels, security requirements etc.

2.7 Products and Services of e-Banking in India

Banking industry becomes a technology-intensive industry next to the airline

industry. Technology has created a „paradigm shift‟ in the client services and has led

to reengineering of banking operation and process. The financial reforms that were

initiated in the early 1990s and opening up to the wider world of globalization and

liberalization have brought in a completely new operating environment to this sector

in India.

India is pre-dominantly a cash economy. Cash is the only form of transactions

for about 40% of population in India. But there is a growing number of middle-class

and their incomes are steadily rising. There are also sizeable fake notes circulating in

India which are around 3 to 6 per cent. The opportunity for non-cash payment

methods is considerable. Indian banking system, therefore, can spread its tentacles in

such areas by means of providing e-banking services. In the following sections of this

chapter we will explain how banks in India currently are offering innovative and

attractive technology-based services and products.

2.7.1 Internet Banking:

Internet banking or cyber banking has changed the way business is conducted.

By harnessing the information technology, banks have been providing varied financial

services to their customers. The proliferation of internet has changed the traditional

business paradigms and is increasingly playing a significant role in improving the

56

services in the banking industry. Consequently, it offers new possibilities for growth

in the banking sector (Gopta and Vidya, 2008).

2.7.1.1 Types of Services in Internet Banking

Through Internet banking, customers can not only get account balance and see

statements of account online but they can also transfer funds, order demand drafts,

pay utility bills, etc (Kumar et al, 2007). Following types transactions or operations

can be performed through Internet banking:

1. Account information.

2. Bill presentment and premium payment.

3. Online payment for shopping done on Internet.

4. Loan applications.

5. Standing instructions.

6. Request and intimations.

7. Financial advice.

8. Credit and debit cards.

9. Investment transactions.

10. Customer correspondence.

11. Opening accounts.

12. Insurance.

13. Other value added/premium service etc.

2.7.1.2 Types of Internet Banking: currently, there are three basic kinds of website

facilitating Internet banking in the marketplace:

1. Information Websites. This is the most basic level of Internet banking. The

bank has marketing information about its products and services on a stand-

alone server. This level of Internet banking service can be provided by the

bank itself or by sourcing it out. Since the server or website may be vulnerable

to alteration, appropriate controls must therefore be in place to prevent

unauthorized alterations of data in the server or the website (Kumar et al,

2007).

2. Communication Websites. This type of Internet banking allows interaction

between the bank‟s systems and the customer. It may be limited to electronic

mail, account inquiry, loan applications, or static file updates. The risk is

57

higher with this configuration than with the earlier system and therefore

appropriate controls need to be in place to prevent, monitor and alert

management of any unauthorized attempt to access bank‟s internal network

and computer systems. Under this system the client makes a request to which

the bank subsequently responds. It works on the same principle as the e-mail

(Persumal and Shamugam, 2004).

3. Transactions Websites. Under this system of Internet banking customers are

allowed to execute transactions. Relative to the information and

communication types of Internet banking, this system possesses the highest

level of risk architecture and must have the strongest controls. Customers‟

transactions can include accessing accounts, paying bills, transferring funds

etc. These possibilities demand very stringent security (Persumal and

Shamugam, 2004).

ICICI bank is the first that introduced Internet banking for a limited range of

services such as access to account information, correspondence and funds transfer

between its branches in 1997 under the brand name of Infinity which followed by

other private banks such as Citibank, HDFC bank, Federal Bank and Centurion Bank

etc. Further, HDFC bank has started allowing their Internet banking customers to

make online and real-time payments through its „payment gateway‟ feature for their

purchases. In another landmark development of Internet banking, Centurion Bank

acquired an equity stake in the teauction.com portal. This brought together buyers,

sellers, suppliers, registered brokers and associations in the tea market and thus

eliminated the need of their physical presence at various auctions (Venu, 2008).

However, because of Internet banking potential, many nationalized banks followed

private banks in adoption and offer Internet banking in India.

On the recommendation of the committee on technology upgrading in banking

sector headed by M. R Srinivasan, the RBI has issued a guideline in June 2001 on

three major areas of Internet banking, i.e., (i) technology and security issues, (ii) legal

issues and (iii) regulatory and supervisory issues. These areas are selected in such a

manner that the problems faced by banks and their customers can be minimized to the

maximum possible extent. The group recommended certain guidelines for the smooth

and proper working of Internet banking. According to this guideline virtual banks that

58

have no offices and function only on line are not permitted to offer e-banking services

in India. Only banks that can acquire license under the Banking Regulation Act are

those banks that have a physical presence. These banks are then allowed to offer such

services. Besides, banks are required to report to the RBI about every breach or failure

of security systems and procedures in Internet banking -while the RBI discretion may

decide to commission special audit/inspection of such banks (RBI, 2001). The main

recommendations of the working group are explained below:

I. Issue Related to Technology and Security Standards:

a. Banks should designate a network and database administrator with clearly

defined roles as indicated in the group‟s report.

b. Banks should have a security policy duly approved by the board of directors.

c. Banks should introduce logical access controls to data, systems, application

software, utilities, telecommunication lines, libraries, system software, etc.

d. At the minimum, banks should use the proxy server type of firewall so that

there should not be any direct connection between the internet and the bank‟s

system.

e. All the systems supporting dial up services through modem on the same LAN

as the application server should be isolated to prevent intrusions into the

network as this may bypass the proxy server.

f. PKI (Public Key Infrastructure) is the most favored technology for secure

Internet banking services. It is also recommended that all unnecessary services

on the application server such as FTP (File Transfer Protocol), telnet should be

disabled. The application server should be isolated from the e-mail server.

g. All computer accesses, including messages received, should be logged.

Security violations (suspected or attempted) should be reported and follow up

action taken should be kept in mind while framing future policy.

h. Banks should have proper infrastructure and schedules for backing up data.

II. Legal Issues:

a. Considering the legal position prevalent, there is an obligation on the part of

banks not only to establish the identity but also to make inquiries about the

integrity and reputation of the prospective customers. Therefore, even though

request for opening of account can be accepted over internet, accounts should

59

be opened only after proper introduction and physical verification of the

identity of the customer.

b. From a legal perspective, security procedure adopted by banks for

authenticating users needs to be recognized by law as a substitute for

signature.

c. Under the present regime there is an obligation on banks to maintain secrecy

and confidentiality of customers‟ accounts. In the Internet banking scenario,

the risk of banks not meeting the above obligations is high on account of

several factors. Despite all reasonable precautions, banks may be exposed to

enhanced risk of liability to customers on account of breach of secrecy, denial

of service etc., because of hacking/ other technological failures. The banks

should, therefore, institute adequate risk control measures to manage such

risks.

d. The Consumer Protection Act, 1986 defines the rights of consumers in India

and is applicable to banking services as well. Currently, the rights and

liabilities of customers availing of Internet banking services are being

determined by bilateral agreements between the banks and customers.

Considering the banking practice and rights enjoyed by customers in

traditional banking, banks‟ liability to the customers on account of

unauthorized transfer through hacking, denial of service on account of

technological failure etc. needs to be assessed and banks providing Internet

banking should insure themselves against such risks.

III. Regulatory and Supervisory Issues:

a. Only such banks which are licensed and supervised in India and have a

physical presence in India will be permitted to offer Internet banking products

to residents of India. Thus, both banks and virtual banks incorporated outside

the country and having no physical presence in India will not, for the present,

be permitted to offer Internet banking services to Indian residents.

b. The services should only include local currency products.

c. The „in-out‟ scenario where customers in cross border jurisdictions are offered

banking services by Indian banks (or branches of foreign banks in India) and

the „out-in‟ scenario where Indian residents are offered banking services by

60

banks operating in cross-border jurisdictions are generally not permitted and

this approach will apply to Internet banking also.

d. All banks, who propose to offer transactional services on the internet, should

obtain prior approval from RBI.

e. Banks will have report to RBI about every breach or failure of security

systems and procedure and the latter, at its discretion, may decide to

commission special audit/ inspection of such banks.

f. With the increasing popularity of e-commerce, it has become necessary to set

up „Inter-Bank Payment Gateways‟ for settlement of such transactions. The

protocol for transactions among the customers, the banks and the portal and

the framework for setting up of payment gateways as recommended by the

Group should be adopted.

g. Only institutions who are members of the cheque clearing system in the

country will be permitted to participate in Inter-bank payment gateways for

Internet payment.

h. Banks must make mandatory disclosures of risks, responsibilities and

liabilities of the customers in doing business through internet through a

disclosure template. The banks should also provide their latest published

financial results over the net.

i. All banks offering Internet banking are advised to make a review of their

systems in the light of this circular and report to RBI the types of services

offered, the extent of their compliance with the recommendations, deviations

and their proposal indicating a time frame for compliance.

It is also stated in guideline that the earlier guidelines issued by the RBI on

„Risk and Controls in Computers and Telecommunications‟ (1998) would equally

apply to Internet banking as well.

In India, the number of banks which provides transaction website (Internet

Banking) have increased to almost all private and public banks from only a few

private banks in the 1990s .Table 2.5 provides the details about number of banks

providing Internet banking (transaction website) in India. The table shows that out of

the 47 banks, 26 banks are from the public sector and 21 are from the private sector.

The 2.5 table further make it clear that 45 banks are providing Internet banking

services which include 19 private banks and 26 public sector banks in India.

61

Table 2.5: Number of Internet Banks (e-banks)

Banks Number of banks Number of e-banks

Private Sector Bank

New

Old

21

7

14

19

7

12

Public Sector Bank

SBI

Nationalized

26

6

20

26

6

20

All 47 45

Source: Completed by author

2.7.2 Telephone Banking, Mobile Banking and SMS Banking

The banks are aiming to be more accessible by introducing telephone banking.

Telephone banking refers to using a telephone to access the account, transfer funds,

request statements or cheque book simply by following recorded message and

touching the keys on your phone (Kapoor and Dhingra, 2007). Mostly telephone

banking use an Interactive Voice Response (IVR) which in this kind of facility

customer dials the tool free telephone number and is guided by a voice response for

each banking services namely:

1. Balance in the account

2. Transaction status, e.g. whether cheque deposited is cleared or not

3. Request for issue of cheque book

4. Request for issue of bank statement

Mobile banking is also a new and growing facility for banks‟ clients in recent

years. Most of banks are providing SMS alert facility to their customers these days. In

normal course all above activities would have involved customer visit to a branch.

This anywhere banking has improved banking services and enables remote banking

(Gupta and Khanna, 2007).

2.7.2.1 Advantages of Mobile Banking

Mobile banking through cell phone offers many advantages for customers as

well as banks. Some of them are as follows:

62

1. Mobile banking has an edge over Internet banking. In case of online banking,

there is a need to have an internet connection and a computer. In most of the

developing countries there is the problem of internet connection and

availability of computers. However, with mobile banking, connectivity is not a

big problem. People can find mobile connectivity even in distant areas.

2. It saves a lot of time with the help of mobile banking. The transaction can be

done and bills can be paid any time and everywhere.

3. Mobile banking thorough cell phone is user friendly. The interface is also very

simple.

4. Information such as mini-statement of your account, Insurance and mutual

fund statements, loan updates, credit card statements can be obtained on

mobile phone.

5. Various banking services like Account Balance Enquiry, Credit/Debit Alerts,

Bill Payment Alerts, Transaction History, Fund Transfer Facilities and

Minimum Balance Alerts can be accessed from mobile.

6. It enables to transfer of money instantly to another account in the same bank

using mobile banking is.

7. Always-on, 24×7 Access- Mobile networks will provide the ability to

customers to be transaction-ready.

8. Mobile banking made it possible for customers to keep themselves updated

with portfolio management services, real-time stock and other news on stock

market.

9. Cell phone banking is cost effective for clients. Banks provide this facility at a

lower cost as compared to other services to customers.

10. Banking through mobile, to a certain degree, reduces the risk of fraud.

Customers will get an SMS whenever there is an activity in their account. This

includes deposits, cash withdrawals, funds transfer etc. Customers will get a

notice as soon as any amount is deducted or deposited in their accounts.

63

11. Banking through cell phone benefits the banks through cutting down the cost

of tele-banking as compared to other channels and it is more economical.

12. Mobile banking through a cell phone is very advantageous for the banks as it

serves as a guide in order to help the banks improve the ease in which their

customers use the services provided by the banks.

13. Banks can be in touch with their clients in real time continuously with mobile

banking.

14. Banks can also promote and sell their products and services like credit cards,

loans etc.

15. In addition to an aforementioned smart card security, mobile banking

transactions can be protected by a private key stored on the SIM card.

With 800 million mobile connections and more than 200 million debit and

credit card holders in India, mobile handsets offer a far wider reach than other forms

of banking. The mobile device can be an important tool to cover the large unbanked

population in the country. Handsets offer convenience by providing the ability to

transact anytime, anywhere. For banks, it serves as a cost-efficient mechanism, with

the cost of transaction on a mobile estimated to be one-tenth of the transaction cost of

a bank branch and one-sixth the cost of a transaction through an ATM. Due to these

advantages over conventional forms of banking, Mobile banking has significant

potential and is likely to witness strong growth. Also, according to industry experts,

Mobile banking is the cheapest way to reach rural customers. While it costs $523 to

$837 to set up a micro-banking outlet, replacing this facility with Mobile banking

technologies costs only $209 (DOT, 2011).

The significance of this channel for the development of payment instruments

and as payment channel has been recognized by the RBI. Accordingly the Reserve

Bank of India issued the guidelines for Mobile Banking Transactions in October

2008. The guidelines permit banks to provide mobile banking transactions and

mandates that all transactions have to originate from one bank account and terminate

in another bank account. The guidelines also permit banks to extend this facility

64

through their business correspondents (Gopinath, 2010). The mobile banking

guidelines relaxed in 2009 and may be discussed as (RBI, 2008):

(a) Enhance the daily cap on both funds transfers and transactions involving the

purchase of goods and services up to Rs.50, 000;

(b) Requirement of end-to-end encryption relaxed for transactions up to Rs.1000/-

for small value transactions;

(c) Facilitate funds transfer from a bank account using a mobile phone with cash

payout at ATMs/BCs up to Rs 5000.

(d) Only banks which are licensed and supervised in India and have a physical

presence in India will be permitted to offer mobile banking services.

(e) The services shall be restricted only to customers of banks and holders of

debit/credit cards issued as per the guideline of Reserve Bank of India.

(f) Only Indian Rupee based domestic services shall be provided. Use of mobile

banking services for cross border transfers is strictly prohibited.

(g) Only banks who have implemented core banking solutions would be permitted

to provide mobile banking services.

(h) Banks shall put in place a system of document based registration with the

mandatory physical presence of their customers, before commencing mobile

banking service.

(i) Banks may also put in place monthly transaction limit depending on the

bank‟s own risk perception of the customers.

The RBI has permitted 50 banks to do mobile banking in 2011 and the

customer base availing of mobile banking facilities as on February 30, 2012 stands at

1960417.16 thousand as compared to 984664.03 at the end of June 2011. During

February, 2012, 2799554 (see table: 2.6) transactions were carried out using this

mode of payment both for transfer of funds and purchase of goods and services. The

key players in the mobile banking market in India are ICICI Bank, HDFC and SBI

Banks and other private and public banks are following these banks.

65

Table 2.6: Mobile Banking Transaction

Date of the Month Volume Value (Thousand rupees)

June-2011 1408396 984664.03

July-2011 1744691

(23.9)

1200103.67

(21.88)

August-2011 1981924

(13.6)

1364643.29

(13.8)

September-2011 2055003

(3.69)

1464598.57

(7.32)

October-2011 2245138

(9.25)

1606940.93

(9.8)

November-2011 2319145

(3.3)

1739171.89

(8.22)

January-2012 2844938

(22.68)

1909045.32

(9.8)

February-2012 2799554

(-1.6)

1960417.16

(2.7)

March-2012 3123105

(11.58)

2325320.68

(18.7)

April-2012 3178405

(1.77)

2345677.57

(0.88)

May-2012 3346743

(5.29)

2865454.43

(22.15)

June-2012 3437073

(2.7)

3067107.11

(7.03)

Monthly Average Growth

Rate

8.73 11.09

Monthly Compound

Growth Rate

8% 11%

Period Growth Rate 144.04 211.48

Note: Numbers in Parenthesis are Monthly Growth Rates.

Source: Reserve bank of India. www.rbi.org.in

66

The table 2.6 gives information about the volume and value of Mobile banking

transactions in India which shows a remarkable growth. Volume of Mobile banking

transactions has registered a growth of 144 per cent during the period of June 2011 to

June 2012. It was merely 1408396 and increased to 3437073 in June-2012. This

increase shows 8 per cent monthly growth rate. Value of Mobile banking transactions

has also registered a growth of 211 per cent during the same period with 11 per cent

monthly growth when it increased to 3067107.11 in June 2012.

Figure 2.2: Growth of Mobile Banking Transactions

Source: Table 2.6

4.7.3 POS (Point of Sale terminal)

POS is a device by which sales transaction can be directly debited to the

customer‟s bank account at the point of sale, through the use of cards (Sometimes the

same card used with Automated Teller Machines). The customer‟s card is swiped

through a card reader or inserted into chip reader and the merchant usually enters their

amount of the transaction before the customer enters their account and PIN. There is

usually a short delay while the POS terminal contacts the server (over a phone line or

mobile connection) before a message is accepted or declined is returned (Gupta and

Khanna, 2007).

0

500000

1000000

1500000

2000000

2500000

3000000

3500000

4000000

Volume

Value

67

4.7.3.1 Advantages of POS

POS has many advantages. Among these advantages there are:

1. Hurdles of cash management will be reduced / eliminated with money getting

credited directly to the respective current accounts of merchants thereby

facilitating better reconciliation.

2. Apart from increased sales, the merchants can avoid the risk of handling

soiled/counterfeit notes.

3. The response time for billing can be reduced.

4. The risk of fake currency totally will be eliminated.

5. Easier tax compilation and to convince tax authorities

6. Easy transfer facility of funds.

7. Credit risk can be minimized as the machines will instantly debit the customer

account.

India is moving to a cashless era and with the tremendous increase in the

growth of debit and credit cards. The POS deployment offers convenience to the

customer as well as merchants. The usage of cards by customers in India has been in

vogue since the mid-eighties although large scale usage has been witnessed only

during the last decade. The first entrant in the card sector was credit card, which has

witnessed large-scale acceptance as a medium of usage at many Point of Sales across

different merchant establishments (Shroff, 2007).

According to RBI (2009) a further step towards enhancing the customer

convenience in using the plastic money, it has been decided by RBI to permit cash

withdrawals at POS terminals up to Rs.1000/- per day for all debit cards issued in

India. Card transactions at POS, account for about 6% of retail sales in India. Thus,

with costs for printing banknotes being of the order of 2,800 crore annually, card

usage at POS leads to about 140 crore of savings in currency management. Every

additional 1% increase in the use of cards in retail sales, will lead to a 28 crore

savings in note printing cost (excluding the huge costs incurred for secured

transportation, counterfeit detection / prevention, etc.) (Das and Agarwal, 2010). For

further detail see Tables (2.7, 2.8) show the progress of POS terminal in India.

68

Table 2.7: Amount of Transactions on POS terminals (crore)

Year Amount of Transactions on POS

2005-06 5897

2006-07 8172

(38.58)

2007-08 12521

(53.21)

2008-09 18547

(48.12)

2009-10 26418

(42.43)

2010-11 38691

(46.45)

Annual Average Growth Rate 45.76

Annual Compound Growth Rate 46%

Period Growth Rate 146

Note: Numbers in Parenthesis are Annual Growth Rates.

Source: RBI Bulletin, Jan 2012.

Table 2.8: Number of POS terminals of Different Countries (Thousands, end of

year)

Country 2006 2007 2008 2009 2010

India 322.6 423.7

(31.33)

448.3

(5.8)

485.5

(8.29)

589.3

(21.38)

China 818 1181.2

(44.4)

1845.1

(56.2)

2273.4

(23.21)

2465.6

(8.45)

US 5183 5146.5

(-0.70)

5175

(0.55)

- -

UK 1053.2 1050.7

(0-.23)

1095

(4.21)

1179.2

(7.68)

1252.7

(6.23)

Japan 1549.9 1682.6

(8.56)

1706.1

(1.39)

1723.4

(1.01)

-

Russia 171.5 239.4

(39.59)

333.2

(39.18)

354.4

(6.36)

434.5

(22.6)

Turkey 1,282.7 1453.9

(13.34)

1632.6

(12.29)

1738.7

(6.49)

1823.5

(4.87)

Source: Bank for International Settlements, Comparative Tables, January 2012

69

Table 2.7 and figure 2.3 show progress of POS transactions in India. Table 4.5

shows banks have recorded 146 per cent growth since 2005. Amount of POS

transactions that was 38.58 crore in the year 2005 has grown to 46.45 crore in the

fiscal year 2011. Table further shows 46 per cent annual growth. Figure 4.2 is also

showing the trend and progress of POS transactions in India.

As can be seen from table 2.8, utilization of POS terminals has upward

trended from 322.6 thousand in 2006 to 589.3 thousand at the end of 2010. This

increase shows 82.67 per cent growth in India as compared to 201.4 per cent in China,

22.1 percent in Turkey and 153.3 per cent in Russia during the same period.

Figure 2.3: Growth of POS Transactions

Source: Table 2.7

2.7.4 Electronic Money

The emergence and expansion of different payment system manifest its trend in

specialization in different type of transaction. Electronic money is introduced as a cost

effective payment mechanism to cash for small value transactions and a convenient

exchange medium to pay over the internet.

E-money can be defined as an electronic store of monetary value on a technical

device used for making payments to undertaking other than the issuer without

0

5000

10000

15000

20000

25000

30000

35000

40000

45000

2005-06 2006-07 2007-08 2008-09 2009-10 2010-11

Point of Sale

70

necessarily involving bank account in the transaction, but acting as a prepaid bearer

instrument. These products can be classified into two broad categories, viz. (a) pre-

paid value card (sometimes called “electronic purse”) and (b) pre-paid software based

product that uses computer networks (sometimes referred to as “digital cash” or

“network money”). The stored value card could be of three types single-purpose card,

closed-system or limited-purpose card and general-purpose or multi-purpose card. A

formal definition of electronic money offered by the European Central bank as

follows: “an electronic store of monetary value on a technical device that may be

widely used for making payments to undertaking other than the issuer without

necessarily involving bank accounts in the transaction, but acting as a prepaid bearer

instruments (Uppal, 2007).

2.7.4.1 Advantages and Disadvantages of e-money

Like any other innovation, e-money will bring too many advantages to the

economy. But at the same time as it is not a neutral change and instrument it is also

accompanied with certain drawbacks. Some of these advantages and drawbacks are

discussed below.

1. Convenience.

2. Privacy.

3. Increased efficiency of transaction fees.

4. New business opportunities with the expansion of electronic activities on the

internet- there are many potential issues with the use of e-money.

5. Record transactions. Each and every transaction made with e-money will be

recorded in banks and these records have all the essential information about the

transaction, the name of the payer, the name of the receiver, the date and place.

6. Electronic money promises to be very cost efficient for banks in comparison to

paper-based payment system in case of paper cost, labor cost and etc.

2.7.4.2 Disadvantages: The transfer of digital currencies raises local issues that are

related to domestic economy and the specific location in which it is used as such:

1. How to levy taxes.

2. The possible ease of money laundering.

71

3. There are also potential micro-economic effects such as exchange rate

instability.

4. Shortage of money supplies (total amount of electronic money versus the total

amount of real money available, basically the possibility that digital cash could

exceed the real cash available).

5. Another issue is related to computer crime, in which computer criminals may

actually alter computer databases to steal electronic money or by reducing an

account‟s amount of electronic money.

Implementation of electronic money requires a certifying authority and trust

among customers. In January 2002, the RBI constituted a working group on electronic

money. The group identified certain areas of concern from the point of view of the

central bank in the context of more widespread use of e-money so that the conduct of

monetary policy is not impaired and at the same time, the integrity of the instrument is

also preserved.

The terms of references of the working group were the following (RBI, 2002):

1. To examine the various dimensions of e-money and the implications for

payment system.

2. To review the international experience on prudential practices governing the use

of e-money and their impact on the conduct of monetary policy.

3. To assess the current situation in India in the context of international best

practice, and

4. To study the extent of use of e-money and to suggest appropriate policies from

the point of view of the RBI in the wake of use of e-money.

Working Group report (RBI) that was published in 2002 has formulated a

number of recommendations about application of e-money in India. After considering

various issues, the group recommends that multi-purpose e-money may be permitted

to be issued only against payment of the full value of central bank money or against

credit only by the banks. The issuance of e-money on credit basis should, however, be

strictly regulated and closely monitored.

With regard to the status of issuers of e-money, it may be indicated that there

are five reasons which may warrant banks as the issuers of multi-purpose e-money.

72

These include attributes of e-money being closure to demand liabilities of the bank,

implications of e-money on the velocity of circulation of money and its corresponding

impact on monetary statistics, the option to impose reserve requirements on e-money,

the need for closer monitoring of e-money when these would be issued as credit and

the technical security of e-money. For all these reasons, the group recommends that

only banks should be allowed to issue multi-purpose e-money. However, single-

purpose and limited-purpose e-money should be allowed to be issued by any entity

including banks. As for non-bank financial institutions, they should not be permitted

to issue multi-purpose e-money. If they are permitted, they along with banks must

conform to seven minimum prudential requirements as laid down by European

Central Bank (ECB) in 1998.

E-money could have a profound impact on compilation of monetary statistics

and money supply unless regulated prudently. E-money could be issued against cash

(i.e., 100 per cent backed by the central bank money paid upfront). Since e-money are

close substitutes of central bank money, there should be explicitly accounted for in

monetary statistics. If e-money is allowed to be issued only by banks, then currency

would be substituted with demand/time liabilities through e-money. In that eventually,

issuance of e-money would be money stock neutral and no change would be required

in the definition of money stock. However, if e-money is issued by entities other than

depository institutions (i.e., bank), the money creating sector as embedded in the

complication of monetary statistics would need to be broadened.

The RBI need also periodically review issues relating to the legal framework,

if any, technical security and the clearing and settlement arrangements of different e-

money schemes and the practices of various e-money schemes, both in India and

abroad, for preserving integrity of the financial market.

2.7.5 TV banking

TV banking enables you to get information regarding loans, accounts, deposits

and lot more while you are watching your favorite TV program. In television banking

you have full access to all your account related tools and services. It is similar to

Internet banking where you have full access to your account services.

73

TV banking comes along with numbers of benefits. TV banking saves a lot of

time. It makes easy for customers to access banking services while you are at home

watching your TV programs. The benefits of TV banking:

1. It does not require an internet connection

2. It‟s available 24×7

3. Zero charge

4. You can obtain all the information you need about the available banking

products and services on the TV screen itself.

ICICI Bank in association with Dish TV has introduced television banking in

2009, for the first time in India. With ICICI Bank, customers can get a quick look at

new offers and updates from ICICI Bank, savings and deposits, loans and credit cards,

investments, insurance and other additional services like financial counseling,

interactive features like calculators for loans and premiums, and lots more, directly

are available on TV.

2.7.6 ATM (Automated Teller Machine)

An automated teller machine, also known as a cash machine and by several

other names, is a computerized telecommunication device that provides the clients of

a financial institution with access to financial transactions in a public space without

the need for a cashier, human clerk or bank teller. The idea of self-service in retail

banking developed through independent and simultaneous efforts in Japan, Sweden,

the United States and the United Kingdom (Maymand, 2005).

It can be said, ATM is an electronic machine, which is operated by the

customer himself to make deposits, withdrawals, and other financial transactions.

ATM is a step in improvement in customer service (Kapoor and Dhingra, 2007). The

ATMs which are situated on the premises of the bank are known as on-site ATMs and

the one that are located at some busy places are known as offset ATMs like food

worlds, railway station, bus stops, shopping malls, petrol pumps etc.

2.7.6.1 Functions of ATMs

74

Application of Automated Teller Machines is spreading rapidly with every

passing day. As they are performing many functions in banking system there is

reasonable ground to assume that their application will grow even much more rapidly

in the future. Not just that the machines also will become much more sophisticated

and will carry out a greater number of functions (Kapoor and Dhingra, 2007). Some

of these functions are as follows:

1. Withdrawal of cash up to a particular limit

2. Deposit of cash, cheques or drafts

3. Updated balance of customer is appeared on the screen and will also be printed

on a transaction slip

4. Transfer of money from one account to another can be done

5. A customer through ATM can obtain a mini account statement

6. A customer can ask for cheque book / detailed account statement through ATM.

These are mailed to customers later on by the employee.

7. A customer can maintain a joint for which he can get an additional card on the

name of the other joint account holder

8. All the branches of the bank are provided with an on-site, online ATM.

2.7.6.2 Types of ATMs

There are two types of ATMs in the market. These are multifunctional ATMs

and dispenser ATMs. The former kind, despite money payment and conventional

functions of ATMs is able to scan and receipt cash and documents from customers.

The latter type of ATMs is not like multifunctional one and commonly is used for

payment of cash and cheques (Moasese Pooli va Mali, 2005).

2.7.6.3 Advantages of ATM

Automated Teller Machine (ATM) was introduced in the 1960s to reduce the

need for bank tellers and to provide convenience for bank‟s customers. Therefore

ATMs have become a competitive weapon to banks for multiple reasons:

75

Table 2.9: Advantages of ATMs

Customer’s perspective Banks perspective

No queue standing Capital expenditure is lower as compared

to branch

Convenience of shopping – no need to

carry cash

Banks‟ staff gets more time to do

marketing

No need to visit branches for the

transaction

Lower transaction cost

Good currency notes Fast and efficient service

24*7 availability of ATM Less space required

Multiple services available besides to

cash withdrawal

Fewer burdens on staff for cash

withdrawal

Automated Teller Machine (ATM) is the most popular device in India, which

enables the customers to withdraw their money 24 hours a day 7 days a week. It is a

device that allows a customer who has an ATM card to perform routine banking

transactions without interacting with a human teller. In addition to cash withdrawal,

ATMs can be used for payment of utility bills, funds transfer between accounts,

deposit of checks and cash into accounts, balance inquiry.

The first bank to introduce ATM concept in India was the Hong Kong and

Shanghai Banking Corporation (HSBC) in the year 1987. Now, almost every

commercial bank gives ATM facilities to its customers. Since April 2009 access in

any ATM machine is free of charge in India (Kumbhar, 2009).

The Reserve Bank of India promoted Institute for Development and Research

in Banking Technology (IDRBT) to set up a national switch for ATMs to hook-up

ATM networks of all banks across the country. The switch is part of the Indian

Financial Network (INFINET), a Close User Group (CUG) communication backbone

for the banking and financial sector (Shroff, 2007).

76

Table 2.10: Number of ATMs of SCBs (As at end-March 2011)

Bank group On-site ATMs Off-site ATMs Total number

of ATMs

Off-site ATMs as

per cent of total

ATMs

1.Public sector banks

i)Nationalized

ii) SBI group

29,795

15,691

14,104

19,692

9,145

10,547

49,487

24,836

24,651

39.8

36.8

42.8

2.Private sector banks

i) Old private

ii) New private

10,648

2,641

8,007

13,003

1,485

11,518

23,651

4,126

19,525

55.0

36.0

59.0

3. Foreign banks 286 1,081 1,367 79.1

4.All SCBs 40,729 33,776 74,505 45.3

Source: RBI, Report on Trend and Progress of Banking in India 2010-11

The above table contains of the On-site and Off-site ATMs of banks in India.

Onsite ATMs are the public sector banks (nationalized and SBI group banks) have

shown 73.15 per cent of total On-site ATMs in India which followed by private sector

banks 26.14 per cent and foreign banks by 0.71 per cent. The table also shares same

ranking in case of Off-site ATMs in the country. Table further shows, foreign banks

have a greater share in case of Off-site ATMs as per cent of total ATMs as compare to

other sectors which means these banks have more ATMs in relation to their total

ATMs in busy places like food worlds, railway station, bus stops, shopping malls,

petrol pumps etc and use this strategy to increase their market access through

substituting ATMs for banking branches.

Table 2.11: Percentage of ATMs to Banking Branches

Year Branches ATMs Per cent

2006-07 57042 27088 47.5

2007-08 61132 34789 56.9

2008-09 64608 43651 67.6

2009-10 69160 60153 87

2010-11 74130 74505 100.5

Source: RBI, Report on Trend and Progress of Banking in India, Various Issues

77

Table 2.11 reveals that number of ATMs in India is increasing along with the

number of branches. The table shows with an increase in the number of branches of

banks, the share of ATMs to branches has also been increasing. This number was 47.5

per cent in 2006-07 and increased up to 100.5 per cent in 2010-11 over the period.

The result shows that Indian banks increased branches by 17088 but at the same time

number of ATMs increased by 47417. Therefore, it can be concluded that Indian

banks focused more on new channels of electronic banking rather than opening more

branches.

Table2.12: Number of ATMs of SCBs Located at Various Locations (March

2011)

Bank Rural Semi-

urban

Urban Metropolitan Total

Public

sector

5,872

(11.9)

13,278

(26.8)

16,186

(32.7)

14,151

(28.6)

49,487

(100.0)

Private

sector

1,262

(5.3)

4,784

(20.2)

7,576

(32.0)

10,029

(42.4)

23,651

(100.0)

Foreign

banks

21

(1.5)

20

(1.5)

300

(21.9)

1,026

(75.1)

1,367

(100.0)

Source: RBI, Report on Trend and Progress of Banking in India, 2010-11

While there is a greater concentration of ATMs in urban areas than in rural

areas, the number and percentage of ATMs in rural areas are on a steady rise in the

recent years in India. The percentage of ATMs located in rural areas accounted for

32.7 per cent of the total ATMs in the country at end-March 2010, which increased to

37.7 per cent at end-March 2011. As can be seen from the above table, most of the

ATM terminals in India are located in metropolitan and urban areas and all banks

focused mainly on these two areas. Table further shows, foreign banks with 97 per

cent and private sector banks with 74.4 per cent have the greatest share in

metropolitan and urban areas while public sector banks have more shares in rural and

semi-urban areas as compared to other sectors.

78

Table 2.13: Number of ATM terminals (Thousands, end of year)

Country 2006 2007 2008 2009 2010

India 27.1 34.8

(28.41)

43.7

(25.57)

60.2

(37.25)

74.5

(23.75)

China 101.3 127.6

(25.96)

167.5

(31.26)

214.9

(28.29)

271.1

(26.15)

USA 395 415.3

(5.13)

406.1

(-2.21)

425

(1.44)

-

UK 60.5 63.4

(4.79)

63.9

(0.78)

62.2

(-2.66)

63.1

(1.44)

Japan 138.3 138.4

(0.07)

139.2

(0.97)

138.6

(-0.43)

-

Russia 39.5 54.8

(38.73)

75.0

(36.86)

88.1

(17.46)

116.2

(31.89)

Turkey 16.5 18.8

(13.53)

22.0

(17.02)

24.0

(9.02)

27.6

(0.15)

Source: Bank for International Settlement, Comparative Tables, January 2012

Table 2.14: Number of Terminals per Million Inhabitants

Country 2006 2007 2008 2009 2010

India 24 31 38 51 63

China 77 97 126 161 202

USA 1321 1375 1333 1382 -

UK 998 1040 1041 1006 -

Japan 1082 1083 1090 1087 -

Russia 277 386 528 619 813

Turkey nap 266 307 330 375

Source: Bank for International Settlement, Comparative Table, January 2012

Tables (2.13 and 2.14) show the data in terms of number of ATM terminals at

the end of the year 2006, 2007, 2008, 2009, and 2010 for the selected countries. The

tables reveal that in terms of number of ATMs India has had 175 % growth during

this period while China, Russia, and Turkey had 176, 194, and 67.27 per cent growth

79

respectively. Table further demonstrates ATMs progress which shows 23 per cent

annual growth rate since the year 2006 but from table 2.14, it is also clear that India

has the lowest rank among selected countries regarding to the number of terminals per

million inhabitants which is only 63 terminal per million.

2.7.7 Plastic Cards

Historically, credit cards originated in the US in the 1920, where hotel chains

and oil companies began issuing them to customers. The invention of the bank credit

card is attributed to John Biggins of the Flatbush National Bank of Brooklyn who

invented the “charge-It” scheme between the bank‟s customer and local merchants in

1946. However, it was not until more recently that credit card usage has expended

significantly outside North America and until the late 1970s the level of penetration in

most of Europe was quite limited. Debit cards have been introduced more recently

and together they represent the most rapidly growing method of payments (Rambure

and Nacamuli, 2008).

Credit cards are familiar to many customers, as are various other kinds of

charge cards. The usual distinction between a credit card and a charge card is that the

balance on a charge card must be paid in full each month, whereas a credit card may

carry a balance month to month, albeit with interest accrued. Cards from VISA and

Master Card are usually credit cards, whereas cards from American Express are

usually charge cards. On the other hand, a Debit card is a plastic card that provides an

alternative payment method to cash when making purchases. Functionally, it can be

called an electronic check, as the funds are withdrawn directly from either the bank

account or from the remaining balance on the cash. One of main advantages of debit

card is a customer who is not credit worthy and may find it difficult or impossible to

obtain a credit card can more easily obtain a Debit card and like credit cards, Debit

cards are accepted by merchants with less identification and personal checks, thereby

making transaction quicker and less intrusive (Maymand, 2005).

Payment by credit card has the advantages of being simple and fast, and

enabling sellers to receive confirmation of payment before the goods are shipped or

the services provided and Credit cards also provide more fraud protection than Debit

cards.

80

However, the plastic cards (credit, debit and smart cards) have gained greater

acceptance and momentum as a medium of financial transactions. Plastic money or

plastic cards made its appearance in India in the form of credit card in the year 1981.

Credit cards became very popular with the introduction of foreign banks in India and

its usage has been steadily picking up since then.

Credit card: In India most of the credit cards issued by banks are in the nature of

charge cards. The issue of credit cards by banks is subject to their own internal

prudential norms such as income recognition and asset classification. The

Reserve Bank of India has introduced various liberalization measures such as

permission for banks to international credit cards to resident Indians. While

impressing upon banks to take appropriate remedial measures to guard against

the accumulation of non-performing loans, the Reserve Bank of India has

suggested that banks should observe the “Code of Ethics” formulated by the

Indian Banks Association (IBA) for engaging recovery agents to collect credit

card overdue (Shroff, 2007).

It has been observed that during the year 2011, the growth of credit card

issuance and usage have gained greater momentum. As at the end of March 2011,

banks in India have issued 265.14 million cards (see table 2.15).

Debit and Smart cards: debit card is a plastic card which provides an

alternative payment method to cash when making purchases. There are currently

two ways that debit card transactions are processed: online debit cards and offline

debit cards. Online debit cards require electronic authorization of every

transaction and the debits are reflected in the user‟s account immediately. Offline

debit cards have the logos of major credit cards (e.g. Visa or Master card) or

major debit cards (e.g. Maestro) and are used at point of sale like a credit card.

This type of debit card may be subject to a daily limit, as well as a maximum

limit equal to the amount currently deposited in the current/checking account

from which it draws (Umbhar, 2009). Almost all banks in India are issuing debit

cards, when the largest shares being accounted for ICICI bank, Citibank and

State Bank of India. The smart card is a relatively new concept. The smart card is

a stored value card such as the pre-paid telephone cards used by MTNL in

Mumbai and Delhi.

81

During 2009-10, Reserve Bank of India mandated the following steps to

enhance the quality of customer service in banks and mitigate risks arising out of

usage of credit/debit cards over internet: (i) additional authentication on usage of

credit cards over internet, based on the information not available on the card; (ii)

online alert to be sent to the cardholder for „card not present‟ (CNP) transactions of

value for `5,000 and above; (iii) additional authentication and online alert to be

implemented for transactions carried out over telephone (IVRS); (iv) reimbursement

to the customers the amount wrongfully debited by banks on account of failed ATM

transactions within 12 days and automatically pay compensation of `100 per day for

delays in such disbursement to them; (v) to place a standardized ATM complaint

template at all ATMs and banks‟ websites; and (vi) permitted banks to allow their

customers cash withdrawal up to `1,000 per day using debit cards at POS terminals.

Over 99% of the total cards issued in India are magnetic stripe cards.

Currently, few large issuing banks like Citibank, ICICI Bank, HDFC Bank and SBI

are issuing EMV chip cards. These banks are issuing chip cards typically to customers

who frequently travel internationally and to customers who have high credit limits.

All these cards are used as Chip and Signature. None of the issuing banks have started

issuing Chip and Pin Cards in India.

Table 2.15: Number and Amount of Credit and Debit Cards (Number in Million

and Amount in Billion Rupees)

Year

Credit Debit

Number of

outstanding

cards

Number Amount Number of

outstanding

cards

Number Amount

2003-04 - 100.18 176.63 - 37.76 48.74

2004-05 - 129.47

(20.23)

256.86

(45.42)

- 41.53

(9.98)

53.61

(9.99)

2005-06 17.33 156.09

(20.57)

338.86

(31.92)

40.76

45.69

(10.01)

58.97

(9.99)

2006-07 23.12

(33.41)

169.54

(8.61)

413.61

(22.05)

74.98

(83.95)

60.18

(31.71)

81.72

(38.57)

2007-08 27.55

(19.16)

228.20

(34.6)

579.85

(40.19)

102.44

(36.62)

88.31

(46.74)

125.21

(53.21)

2008-09 24.70

(-10.34)

259.56

(13.74)

653.56

(12.71)

137.43

(34.15)

127.65

(44.54)

185.47

(48.12)

82

2009-10 18.33

(-25.78)

234.24

(-9.75)

618.24

(5.4)

181.97

(32.4)

170.17

(33.30)

264.18

(42.43)

2010-11 18.04

(-1.6)

265.14

(13.2)

755.16

(22.14)

227.84

(25.2)

237.06

(39.30)

386.91

(46.45)

2011-12 17.05

(-5.48)

319.96

(20.68)

966.13

(27.93)

278.28

(22.31)

327.54

(38.18)

534.32

(38.09)

Annual

Average

Growth

Rate

-1.69 10.18 15.05 39.08 29.24 33.38

Annual

Compound

Growth

Rate

0 15% 23% 90% 31% 34%

Period

Growth

Rate

-0.016 219 446.97 582.72 767.42 556.26

Note: Outstanding cards: Cards issued by banks (excluding those withdrawn/blocked) and

Numbers in Parenthesis are Annual Growth Rates.

Source: RBI Bulletin, June 2012.

Figure 2.4: Number of Credit and Debit Card Outstanding (Number in Millions)

Source: Table 2.15

0

50

100

150

200

250

300

2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12

Credit

Debit

83

Above table and figure show trends and progress of Debit and Credit card

transactions in India. Indian people employ a credit card for an average payment

amount of about Rs 55,000 in a year which is nearly 30 times the money spent

through debit cards. However, the number of debit cards in India is more than 15

times than that of credit cards. Table 2.15 shows that in 2011-12, there were a total of

17.5 million outstanding credit cards in India. On the other hand, the number of debit

cards stood at over 278 million as on march 2012. During 2011-12, the total amount

spent through credit cards was Rs 966.13 billion giving an average transaction size of

Rs 54,738 per card in a year. In comparison, the debit cards were used for transactions

worth Rs 534.32 billion in 2011-12, leading to an average transaction size of Rs 1,920

on every card in a year. Table also reveals that number of debit card is increasing

tremendously from 2005-06 to 2011-12. It shows a considerable growth rate of 83, 36,

34, 32, 25 and 22 per cent for 2006, 2007, 2008, 2009, 2010 and 2011 respectively.

Further, the figure shows a decrease in the number of credit cards since 2007 in India.

The number of credit cards always has been more than debit card till 2003 in India but

recently this trend changed and number of debit card is more and increasing by a

higher percentage.

Table 2.16: Card Issued in the Country with a Cash Function: Number of Cards

per Inhabitant

Country 2006 2007 2008 2009 2010

India 0.09 0.11 0.14 0.17 0.21

China 0.86 1.14 1.36 1.55 1.80

USA 3.14 3.25 3.12 2.78 2.58

UK 2.17 2.70 2.74 2.63 -

Japan 3.57 3.63 3.70 2.72 -

Russia 0.52 0.73 0.84 0.88 1.01

Turkey - 0.48 0.53 0.53 0.56

Source: Bank for International Settlement, Comparative Tables, 2012.

Table 2.16 shows number of cards per inhabitant of some developed and

developing country. According to table India ranked the lowest among these countries

and USA ranked the first.

84

4.8 Electronic Payment Systems in India

Payment and settlement systems constitute the backbone of any economy. In

India, payment systems are characterized by the presence of a large number of paper

based transactions. Payment systems in India have a chequered history with the

earliest system being coin based which dates back to many centuries. Paper based

systems entered the fray with the loan deeds (or hundis as commonly referred to),

which were complemented in the eighteenth century by paper based currency. With

banking becoming a dominant economic facilitator in the mid nineteenth century,

cheques also came into the scene. The passage of the Negotiable Instruments (NI)

Act, 1881 paved the way for large scale usage of cheques in the country (RBI, 2007).

The Reserve Bank of India has been, since the late eighties, spear heading

reforms in the payment and settlement systems of the country using the benefits

derived from technological developments. The most important set of initiatives taken

by the RBI from the nineties of the twentieth century was the introduction of

electronic funds transfer systems. While the initial set of systems provided facilities

for small value and repetitive transactions, the retail sector, the introduction of the

Real Time Gross Settlement (RTGS) System in 2004 witnessed the step toward

providing facilities for large value transactions by RBI (RBI, 2007).

4.8.1 Electronic Fund Transfer (EFT) and Special EFT

Electronic Funds Transfer (EFT) is a system whereby anyone who wants to

make payment to another person / company etc. can approach his bank and makes

cash payment or give instructions / authorization to transfer funds directly from his

own account to the bank account of the receiver / beneficiary. Complete details such

as the receiver‟s name, bank account number, account type (savings or current

account), bank name, city, branch name etc should be furnished to the bank at the

time of requesting for such transfers so that the amount reaches the beneficiary‟s

account correctly and faster. EFT system hosted and operated by RBI.

To provide for the transfer of funds electronically across a large number of

bank branches as a forerunner to the nation-wide funds transfer system (NEFT), the

SEFT system was introduced from 1st April 2003. It provides for transfer of funds in

the electronic mode on the same day basis with multiple daily settlements. While

85

ECS-Credit and ESC-Debit systems are for bulk payments and are akin to the

automated clearing house (ACH) elsewhere, the EFT and SEFT systems are for

individual one-to-one credit transfer based transactions (Shroff, 2007).

2.8.2 National Electronic Fund Transfer (NEFT) system

The centralized version of EFT termed National Electronic Funds Transfer

(NEFT) introduced in 2005 enables the funds to be transferred electronically

irrespective of location. Viewing the system successfully handling significant

volumes the following measures were initiated to strengthen the NEFT system by

RBI: (i) mandated creation of Customer Facilitation Centre (CFC) at the service

centre of the NEFT member bank for prompt resolution of customer complaints. A

directory of the CFCs has been placed at the RBI website for the benefit of the public;

(ii) return discipline for NEFT transactions tightened by mandating the returns within

two hours of completion of a batch against the earlier T+1; (iii) increased the number

of settlements from six to eleven on week days and from three to five settlements on

Saturdays to achieve a near real time settlement of transactions; (iv) introduced the

system of providing „Positive Confirmation‟ to the remitters of funds through NEFT

for a successful credit to beneficiary‟s account which is a unique initiative (RBI,

2010).

Table 2.17: NEFT growth

Year Banks Branches

2005-06 42 11000

2006-07 72 27000

2007-08 89 45000

2008-09 92 60000

2009-2010 95 69000

2010-11 100 75000

Source: IDRBT, Annual Report, Various Issues

86

Table 2.18: Electronic Funds Transfer EFT/NEFT

(Number in Million and Amount in Billion Rupees)

Year Number Amount

2003-2004 0.82 171.25

2004-2005 2.56

(212.19)

546.01

(218.9)

2005-2006 3.07

(19.92)

612.88

(12.24)

2006-2007 4.78

(55.8)

774.46

(26.37)

2007-2008 13.32

(178.7)

1403.26

(81.19)

2008-2009 32.16

(141.44)

2519.56

(79.55)

2009-2010 66.34

(106.29)

4095.07

(62.53)

2010-2011 132.34

(99.49)

9391.49

(129.33)

2011-12 226.11

(70.9)

17903.50

(90.7)

Annual Average Growth

Rate

110.57 87.59

Annual Compound Growth

Rate

102% 79%

Period Growth Rate 27474.4 10354.6

Note: Numbers in Parenthesis are Annual Growth Rates.

Source: RBI bulletin Feb, 2012

Tables (2.17 and 2.18) show progress of NEFT and EFT during 2003-2011 in

India. The number of branches which providing NEFT facility increased from 11000

to 75000 branches which shows 581.81 % growth since 2005. The rising trend of

NEFT and EFT both indicate the growth of banking system toward paperless banking

in India. Both amount and number depict upward trends from 171.25 and 0.82 to

17903.50 and 226.11 respectively and these growth show 102 per cent annual growth

in number and 79 percent in the amount of transactions in India.

87

2.8.3 Real Time Gross Settlement System (RTGS)

Real Time Gross Settlement (RTGS) system, introduced in India since March

2004, is a system through which electronic instructions can be given by banks to

transfer funds from their account to the account of another bank. The RTGS system is

maintained and operated by the RBI and provides a means of efficient and faster

funds transfer among banks facilitating their financial operations. As the name

suggests, funds transfer between banks takes place on a „Real Time‟ basis. Therefore,

money can reach the beneficiary instantaneously and the beneficiary‟s bank has the

responsibility to credit the beneficiary‟s account within two hours. RTGS system is

used only for large value transactions the minimum amount to be remitted through

RTGS is 2 lakh. There is no upper ceiling for RTGS transactions and retail

transactions take an alternate channel of electronic funds transfer. As on March, 2011

there were more than 72,000 RTGS enabled bank branches. Table 2.19, shows the

total amount and number of RTGS during 2003-04 to 2011-12.

Table 2.19: Real Time Gross Settlement System (Number in Million and Amount in

Billion Rupees)

Year Number Amount

2004-05 0.46 40661.84

2005-06 1.77

(284.79)

115408.36

(183.9)

2006-07 3.88

(119.2)

246191.80

(113.32)

2007-08 5.85

(50.8)

482945.59

(96.17)

2008-09 13.38

(128.8)

611399.12

(26.6)

2009-10 33.25

(148.5)

1011699.31

(65.48)

2010-11 49.27

(48.18)

941039.34

(-6.99)

2011-12 55.04

(11.8)

1079790.59

(14.8)

Annual Average Growth

Rate

113.12 70.44

Annual Compound Growth

Rate

98% 60%

Period Growth Rate 11865.22 2555.53 Note: Numbers in Parenthesis are Annual Growth Rates.

Source: RBI Monthly Bulletin, October 2012

88

Figure 2.5: Progress in amount of RTGS

Source: Table 2.19

Above table and figure show the progress of RTGS in India. As can be seen, both

number and amount show tremendous growth. The amount of RTGS reached

1079790.59 billion rupees from 40661.84 billion since 2004.The number of

transactions on the RTGS system had increased almost tenfold, from 5.85 million

units in 2007-08 to 55.05 million units in 2011-12. The progress of RTGS shows 98

and 60 per cent annual growth in number and amount in the same period.

2.8.4 Electronic Clearing Service (ECS) / National Electronic Clearing Service

(NECS):

ECS scheme operated by RBI since 1996-97, it helps to make payment from a

single account at a bank branch to any number of accounts maintained with the branch

of the same or other banks. This is the most useful mode of payment of dividend /

interest / pension / refund etc.

ECS has two variants – ECS Credit clearing and ECS Debit clearing. While

the Credit clearing operates on the principle of “single debit-multiple credits” and is

used for making payment of salary, pension, dividend and interest, etc., the Debit

clearing functions on the principle of “single credit-multiple debits” and is used for

0

200000

400000

600000

800000

1000000

1200000

2004 2005 2006 2007 2008 2009 2010 2011

RTGS

89

collecting payments by utility service providers like electricity, telephone bills as well

by banks for receiving principal/interest repayments for housing and personal loans

from the borrowers.

The National Electronic Clearing Service (NECS) was introduced in

September 2008. A near twofold increase in volumes and value of transactions

processed through NECS credit was seen during the year which could be attributed to

more banks, branches and increased number of companies participating in the system

and also to facilitate State Governments to operate from a single location in the State

(the capital city). Concept of Regional ECS (RECS Credit) was introduced in

Bangalore in May 2009.

Table 2.20: Electronic Clearing Services (Number in Million and Amount in Billion)

Year/Period Electronic Clearing Services (ECS)

NECS/ECS (Credit) ECS (Debit)

Number Amount Number Amount

2003-04 20.32 102.28 7.87 22.54

2004-05 40.05

(97.09)

201.80

(97.3)

15.30

(94.4)

29.21

(29.59)

2005-06 44.22

(10.41)

323.24

(60.17)

35.96

(135.03)

129.86

(344.57)

2006-07 69.02

(56.09)

823.73

(154.83)

75.20

(109.12)

254.41

(95.91)

2007-08 78.37

(13.54)

7822.22

(849.60)

127.12

(69.04)

489.37

(92.35)

2008-09 88.39

(12.8)

974.87

(-87.53)

160.05

(25.9)

669.76

(36.86)

2009-10 98.13

(11.01)

1176.13

(20.64)

149.28

(-6.72)

695.24

(3.8)

2010-11 117.30

(19.53)

1816.86

(54.47)

156.74

(4.99)

736.46

(5.92)

2011-12 121.50

(3.59)

1837.84

(1.15)

164.74

(5.1)

833.55

(13.18)

Average

Annual Growth

Rate

28.00 143.83 54.61 77.77

Annual

Compound

Growth Rate

25% 43% 46% 57%

Period Growth

Rate

497.93 1696.87 1993.26 3598.09

Note: Numbers in Parenthesis are Annual Growth Rates.

Source: RBI, Monthly Bulletin, October 2012

90

Table 2.20 shows growth of electronic clearing system in India during 2003-

04 to 2011-12. As it can be seen from the above table, both number and amount of

ECS (Credit) and ECS (Debit) are increasing on a stable growth. The table illustrates

within nine years, the volume of transactions on the ECS (Credit) system had

increased almost sixfold while the volume of ECS (Debit) has increased almost

twenty-one fold since 2003 to 2011. The table also shows 1696.87 percentage

variation in amount of ECS (Credit) and 3598.09 percentage variation for the ECS

(Debit) during fiscal years of 2004 to 2012. Volume and value of ECS (Credit)

showed 25 and 43 percentage annual variations and ECS (Debit) showed 46 and 57

percentage during 2003-2012.

2.8.5 E-cheque System in India

Cheque is the most widely accepted negotiable instruments to settle

transactions in the world. Paper cheques provide consumers and businesses critical

alternative payment mechanism. Today billions of cheques are written and processed

each year, and consumers and businesses remain confident and satisfied with writing

cheques. However, cheque processing is experiencing a radical change as financial

institutions and their customers now have new, more efficient ways to process and

clear cheques.

Electronic cheques are another form of electronic tokens. They are designed to

accommodate the many individuals and entities that might prefer to pay with credit or

through some mechanism other than cash. Once registered, a buyer can then contact

sellers of goods and services. To complete a transaction, the buyer sends a check to

the seller for a certain amount of money. These checks may be sent using email or

other transport methods. When deposited, the cheque authorizes the transfer of

account balances from the account against which the cheque was drawn to the account

to which the cheque was deposited. The electronic cheques are modeled on paper

checks, except that they are initiated electronically. They use digital signatures for

signing and endorsing and require the use of digital certificates to authenticate the

payer, the payer‟s bank and bank account. They are delivered either by direct

transmission using telephone lines or by public networks such as the internet.

91

Table 2.21: E-cheque System: Advantages and Disadvantages

Advantages Disadvantages

Buyer does not need to know

where the merchant wants the

money.

Payments can be made to a

merchant who is not yet a member

of the same payment system as

the buyer.

The buyer is not required to trust

the merchant.

They are much faster than paper

based traditional cheque.

they are less expensive than credit

cards

More complex for the merchant.

Merchant is not sure that the

check is valid until he tries to cash

it.

High fixed cost

Limited use only in virtual world

The entire processing of cheques and their payment in India are all governed

under the covenants of the Negotiable Instruments Act, 1881, which necessitate that

these instruments are in writing and have to be physically presented for payment in

due course. The attendant delays on account of not being able to exploit technological

alternatives available have been engaging the attention of the Reserve Bank of India

for some time. After the passage of amendments to the Negotiable Instruments Act

1881 and the IT Act 2000 in the last quarter of 2002 to provide a legal framework for

the implementation of cheque truncation and e-cheques in India, the Governor of the

Reserve Bank of India, in the midterm review of the Monetary and Credit Policy

Statement of October, 2002 had suggested that a working group on cheque truncation

be constituted to suggest an appropriate model suitable to Indian conditions, in view

of various models of truncation available the world over (RBI, 2003).

The

deliberations of the working group focused on the following issues in the context of

its terms of reference:

1. Point of truncation of the cheque.

92

2. Cheque issuance or generation process.

3. Security features required in e-cheques and e-cheque clearing and settlement

process.

4. Defining Inter-bank Clearing and Settlement Process for e-cheques.

5. Conduct of e-cheque clearing with normal paper clearing with the data for the

two consolidated or altogether a separate clearing.

6. Frequency of clearing per day.

7. Centralized Clearing House for the entire country for e-cheques or e-cheque

clearing to be the part of the local Clearing House Jurisdiction.

8. Cost Benefit Analysis for putting in place the infrastructure

I. At the customer and bank interface levels

II. Within Banks: at the branches and service branches

III. Between the Banks and the Clearing Houses

IV. Between the Clearing House and the Settlement Banks

Settlement of cheques in India is on the basis of physical presentation of

paper-based cheques/instruments to the clearing houses for transmission of drawee

banks and for payment thereafter. This is mandated under section 64 of the Negotiable

Instruments Act. Because of this, the time involved in the physical movement of

cheques to the drawee banks and the processing involved in various intermediary

levels results in longer time span for realization of cheques (Shroff, 2007).

To obviate these problems the Cheque Truncation System (CTS) has been

envisaged by the RBI in 2003. The process involves that instead of sending the

physical cheques deposited by bank customers to the clearing house, electronic

records of their contents are obtained/ generated through digital image process (called

Truncated Cheques) and the collecting banks or the clearing house will thus capture

the electronic information. These truncated cheques along with the MICR data

available at the bottom of these cheques will be transmitted and presented to the

drawee banks by electronic transmission for verification, viz., and secure, broadband

data communication network as a digitally signed data packet.

Electronic payment systems have become increasingly popular in India. In

2011-12, electronic payments grew 26.8% to 1.21 billion transactions from 0.96

billion transactions in 2010-11, while the amount of cheque clearance slid from 1.39

93

billion units to 1.34 billion units over the same period. In terms of total transaction

value, 98% of all electronic payments consist of large value payments through Real

Time Gross Settlement (RTGS) systems, and the remaining 2% comes from retail

electronic payments, including credit cards, debit cards, electronic clearing services

(ECS) credit and debit payments, and electronic funds transfers (EFTs). The picture

was just the opposite in terms of total transaction volume only 4.5% of transactions

came from payments through RTGS systems, while retail electronic payment

transactions accounted for the other 95.5% in India. In India, cheques still continue to

play a dominant role in the payment system. As indicated in figures (2.6 and 2.7),

there is much more variation in the average value of checks than electronic payments.

Figure 2.6: Value Breakup- Cheque and Electronic

Source: Reserve Bank of India. www.rbi.org.in

0%

10%

20%

30%

40%

50%

60%

70%

80%

2006-07 2007-08 2008-09 2009-10

Cheque

Electronic

94

Figure 2.7: Volume Breakup-Cheque and Electronic

Source: Reserve Bank of India. www.Rbi.org.in

Above figures illustrates how paper-based payments in terms of transaction

value and volume have fared vis-à-vis electronic payments in the recent past. While

paper based payments, which are essentially payments made through cheques, still

have a big share in terms of volume, electronic payments passed cheque payments in

terms of value in 2006–07 and show a larger share of the total payments till now. The

percentage of electronic transactions in terms of volume have also been increasing

since 2006–07 in India.

Figure 2.7: Average Daily Value of Paper and Electronic Transactions (INR

Billion)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

2006-07 2007-08 2008-09 2009-10

Cheque

Electronic

0

10

20

30

40

50

60

70

80

90

100

All Banks Large Bank Small Banks

Cheque

Electronic

95

Source: Reserve Bank of India, www.rbi.org.in

If we consider the value of the paper-based transactions and the average daily

value of electronic transactions, we can obviously observe that the electronic

transactions have been doing better than the traditional payment systems. Activities of

large banks and private banks are in the favor of electronic transactions space and are

playing greater role in promoting e-services to public.

Table2.22: Total Electronic Payments (Number in Million and Amount in Billion

Rupees)

Year Number Amount

2003-04 166.94 521.43

2004-05 228.90

(37.11)

1087.50

(108.56)

2005-06 285.01

(24.51)

1463.83

(34.6)

2006-07 378.71

(32.87)

2356.93

(61.01)

2007-08 535.31

(41.35)

10419.95

(342.09)

2008-09 667.82

(41.35)

5003.22

(-51.98)

2009-10 718.16

(7.53)

6848.86

(36.88)

2010-11 908.59

(26.51)

13086.87

(91.08)

2011-12 1159.24

(27.58)

22075.33

(68.68)

Annual Average Growth

Rate

27.78 86.37

Annual Compound Growth 27% 60%

Period Growth Rate 594.40 4133.61

Note: Numbers in Parenthesis are Annual Growth Rates.

96

Source: RBI, Monthly Bulletin, October 2012.

Figure 2.9: Presentation of Electronic Transaction Volume in Total

Source: RBI bulletin, October 2012

Table 2.22 and figure 2.9 are showing a trend of overall electronic payments

in India. From both Table and Figure it is obvious that electronic payments are

becoming more applicable and people in India are using different kinds of e-banking

services more day by day. As can be seen from Table 2.22, a constant increase can be

observed in both number and amount of electronic payments. The amount of

electronic banking transactions shows tremendous growth. This increase shows 4133

growth rate and increased by 60 per cent annually from 2003 to 2012. The table also

shows 27 per cent annual growth for the number of transactions in India.

As the technology develops due to the competition and demand from the

customer for the electronic banking, every bank in India is more concentrating on the

increase of modern delivery channel to provide better services and increase efficiency

of banking by better management, reducing human errors and better customer

relationship. E-banking provides numerous opportunities for banking sector in India

to reach out to millions of customers not in their geographical area of operations and

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12

electronic

non electronic

97

it is necessary for the greater acceptance of e-banking, banks have to assure customers

that e-banking is secure and they are providing qualitative e-banking services.

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