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Internet Banking in India with reference to SME

CHAPTER - 1 INTRODUCTION

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CONTENT

SR. NO.
1.1 1.2 1.3 1.4

PARTICULARS
INTERNET BANKING IN SHORT OBJECTIVES OF PROJECT RESEARCH METHODOLOGY LIMITATIONS OF PROJECT

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1.1 Internet Banking In Short: Internet banking means any user with a personal computer and a browser can get connected to his banks website to perform any of the virtual banking functions: Balance enquiry. Transfer of funds. Online payment of bills. Accrued interest, fees and taxes. Transaction details of each account. Accounts, credit card & home loan balances. Transfer funds to third party accounts you nominate. Open a deposit right from the terminal you are sitting at.

1.2 Objectives of Project:1- The primary objective of the project is to study the awareness of internet banking
in India. 2- To know what facilities peoples use in internet banking. 3- To know the purpose to use internet banking. 4- To know what is the reason behind not using internet banking.

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1.3- Research Methodology :Sources of Data: Collection of data :Sample size :Analysis method :Primary data with the help of questionnaire, Survey through questionnaire 125 Charts and graphs

1.4 Limitation Of Project:1- The survey is conducted in the Textile Market area in the city.
2- The age group is considering for the survey is between 30-50 years old. 3- banks were considered only those which are located in the survey area.

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CHAPTER - 2 BANKING INDUSTRY IN INDIA

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CONTENT

SR. NO.
2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 2.9

PARTICULARS
INTRODUCTION COLONIAL ERA POST INDEPENDENCE NATIONALISED IN 1960S LIBERALISATION IN 1990S CURRENT PERIOD BANKS IN INDIA RESERVE BANK OF INDIA FUNCTION OF RBI

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2.1 Introduction :Banking in India in the modern sense originated in the last decades of the 18th century. The first banks were Bank of Hindustan (1770-1829) and The General Bank of India, established 1786 and since defunct. The largest bank, and the oldest still in existence, is the State Bank of India, which originated in 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 of which were established under charters from the British East India Company. The three banks merged in 1921 to form the Imperial Bank of India, which, upon India's independence, became the State Bank of India in 1955. For many years the presidency banks acted as quasi-central banks, as did their successors, until the Reserve Bank of India was established in 1935. In 1969 the Indian government nationalised all the major banks that it did not already own and these have remained under government ownership. They are run under a structure know as 'profit-making public sector undertaking' (PSU) and are allowed to compete and operate as commercial banks. The Indian banking sector is made up of four types of banks, as well as the PSUs and the state banks, they have been joined since the 1990s by new private commercial banks and a number of foreign banks. Banking in India was generally fairly mature in terms of supply, product range and reach-even though reach in rural India and to the poor still remains a challenge. The government has developed initiatives to address this through the State bank of India expanding its branch network and through the National Bank for Agriculture and Rural Development with things like microfinance.

2.2Colonial era:During the period of British rule merchants established the Union Bank of Calcutta in 1829, first as a private joint stock association, then partnership. Its proprietors were the owners of the earlier Commercial Bank and the Calcutta Bank, who by mutual consent created Union Bank to replace these two banks. In 1840 it established an agency at Singapore, and closed the one at Mirzapore that it had opened in the previous year. Also in 1840 the Bank revealed that it had been the subject of a fraud by the bank's accountant. Union Bank was incorporated in 1845 but failed in 1848, having been insolvent for some time and having used new money from depositors to pay its dividends. The Allahabad Bank, established in 1865 and still functioning today, is the oldest Joint Stock bank in India, it was not the first though. That honour belongs to the Bank of
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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 Shimla. Foreign banks too started to appear, particularly in Calcutta, in the 1860s. The Comptoird 'Escompte de Paris opened a branch in Calcutta in 1860, and another in Bombay in 1862; branches in Madras and Pondicherry, then a French possession, followed. HSBC established itself in Bengal in 1869. Calcutta was the most active trading port in India, mainly due to the trade of the British Empire, and so became a banking centre. 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. Around the turn of the 20th Century, the Indian economy was passing through a relative period of stability. Around five decades had elapsed since the Indian Mutiny, and the social, industrial and other infrastructure had improved. Indians had established small banks, most of which served particular ethnic and religious communities. The presidency banks dominated banking in India but there were also some exchange banks and a number of Indian joint stock banks. All these banks operated in different segments of the economy. The exchange banks, mostly owned by Europeans, concentrated on financing foreign trade. Indian joint stock banks were generally under capitalised and lacked the experience and maturity to compete with the presidency and exchange banks. This segmentation let Lord Curzon to observe, "In respect of banking it seems we are behind the times. We are like some old fashioned sailing ship, divided by solid wooden bulkheads into separate and cumbersome compartments." 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 fervor 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. Four nationalised banks started in this district and also a leading private sector bank. Hence undivided Dakshina Kannada district is known as "Cradle of Indian Banking". During the First World War (19141918) through the end of the Second World War (19391945), and two years thereafter until the independence of India were challenging for Indian banking. The years of the First World War were turbulent, and it
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took its toll with banks simply collapsing despite the Indian economy gaining indirect boost due to war-related economic activities. At least 94 banks in India failed between 1913 and 1918.

2.3 Post-Independence:The partition of India in 1947 adversely impacted the economies of Punjab and West Bengal, paralysing banking activities for months. India's independence marked the end of a regime of the Laissez-faire for the Indian banking. The Government of India initiated measures to play an active role in the economic life of the nation, and the Industrial Policy Resolution adopted by the government in 1948 envisaged a mixed economy. This resulted into greater involvement of the state in different segments of the economy including banking and finance. The major steps to regulate banking included:

The Reserve Bank of India, India's central banking authority, was established in April 1935, but was nationalised on 1 January 1949 under the terms of the Reserve Bank of India (Transfer to Public Ownership) Act, 1948 (RBI, 2005b). In 1949, the Banking Regulation Act was enacted which empowered the Reserve Bank of India (RBI) "to regulate, control, and inspect the banks in India". The Banking Regulation Act also provided that no new bank or branch of an existing bank could be opened without a license from the RBI, and no two banks could have common directors.

2.4 Nationalization in the 1960s:Despite the provisions, control and regulations of the Reserve Bank of India, banks in India except the State Bank of India or SBI, continued to be owned and operated by private persons. By the 1960s, the Indian banking industry had become an important tool to facilitate the development of the Indian economy. At the same time, it had emerged as a large employer, and a debate had ensued about the nationalization of the banking industry. Indira Gandhi, the then Prime Minister of India, expressed the intention of the Government of India in the annual conference of the All India Congress Meeting in a paper entitled "Stray thoughts on Bank Nationalization." The meeting received the paper with enthusiasm. Thereafter, her move was swift and sudden. The Government of India issued an ordinance ('Banking Companies (Acquisition and Transfer of Undertakings) Ordinance, 1969') and nationalised the 14 largest commercial banks with effect from the midnight of 19 July 1969. These banks contained 85 percent of bank deposits in the country. Jayaprakash Narayan, a national leader of India, described the step as a "masterstroke
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of political sagacity." Within two weeks of the issue of the ordinance, the Parliament passed the Banking Companies (Acquisition and Transfer of Undertaking) Bill, and it received the presidential approval on 9 August 1969. A second dose of nationalization of 6 more commercial banks followed in 1980. The stated reason for the nationalization was to give the government more control of credit delivery. With the second dose of nationalization, the Government of India controlled around 91% of the banking business of India. Later on, in the year 1993, the government merged New Bank of India with Punjab National Bank. It was the only merger between nationalised banks and resulted in the reduction of the number of nationalised banks from 20 to 19. After this, until the 1990s, the nationalised banks grew at a pace of around 4%, closer to the average growth rate of the Indian economy.

2.5 Liberalization in the 1990s:In the early 1990s, the then government embarked on a policy of liberalization, licensing a small number of private banks. These came to be known as New Generation techsavvy banks, and included Global Trust Bank (the first of such new generation banks to be set up), which later amalgamated with Oriental Bank of Commerce, UTI Bank (since renamed Axis Bank), ICICI Bank and HDFC Bank. This move, along with the rapid growth in the economy of India, revitalized the banking sector in India, which has seen rapid growth with strong contribution from all the three sectors of banks, namely, government banks, private banks and foreign banks. The next stage for the Indian banking has been set up with the proposed relaxation in the norms for Foreign Direct Investment, where all Foreign Investors in banks may be given voting rights which could exceed the present cap of 10% at present it has gone up to 74% with some restrictions. The new policy shook the Banking sector in India completely. Bankers, till this time, were used to the 464 method (Borrow at 4%; Lend at 6%; Go home at 4) of functioning. The new wave ushered in a modern outlook and tech-savvy methods of working for traditional banks. All this led to the retail boom in India. People not just demanded more from their banks but also received more.

2.6 Current period:By 2010, banking in India was generally fairly mature in terms of supply, product range and reach-even though reach in rural India still remains a challenge for the private sector and foreign banks. In terms of quality of assets and capital adequacy, Indian banks are considered to have clean, strong and transparent balance sheets relative to other banks in comparable economies in its region. The Reserve Bank of India is an autonomous body, with minimal pressure from the government.
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With the growth in the Indian economy expected to be strong for quite some timeespecially in its services sector-the demand for banking services, especially retail banking, mortgages and investment services are expected to be strong. One may also expect M&As, takeovers, and asset sales. In March 2006, the Reserve Bank of India allowed Warburg Pincus to increase its stake in Kotak Mahindra Bank (a private sector bank) to 10%. This is the first time an investor has been allowed to hold more than 5% in a private sector bank since the RBI announced norms in 2005 that any stake exceeding 5% in the private sector banks would need to be vetted by them. In recent years critics have charged that the non-government owned banks are too aggressive in their loan recovery efforts in connexion with housing, vehicle and personal loans. There are press reports that the banks' loan recovery efforts have driven defaulting borrowers to suicide.

2.7 Banks in India:In India, banks are segregated in different groups. Each group has its own benefits and limitations in operations. Each has its own dedicated target market. A few of them work in the rural sector only while others in both rural as well as urban. Many banks are catering in cities only. Some banks are of Indian origin and some are foreign players.Banks in India can be classified into:

Public Sector Banks Private Sector Banks Cooperative Banks Regional Rural Banks Foreign Banks

One aspect to be noted is the increasing number of foreign banks in India. The RBI has shown certain interest to involve more foreign banks. This step has paved the way for a few more foreign banks to start business in India.

2.8 Reserve Bank of India (RBI):The central bank of the country is the Reserve Bank of India (RBI). It was established in April 1935 with a share capital of Rs 5 crore on the basis of the recommendations of the Hilton Young Commission. The share capital was divided into fully paid shares of Rs 100 each, which was entirely owned by private shareholders in the beginning. The government held shares of nominal value of Rs 220,000.
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The RBI commenced operation on April 1, 1935, under the Reserve Bank of India Act, 1934. The Act (II of 1934) provides the statutory basis of the functioning of the Bank. The Bank was constituted to meet the following requirements:

Regulate the issue of currency notes Maintain reserves with a view to securing monetary stability Operate the credit and currency system of the country to its advantage

2.9Functions of the RBI:The Reserve Bank of India Act of 1934 entrusts all the important functions of a central bank with the Reserve Bank of India. Bank of Issue Banker to the Government Bankers' Bank and Lender of the Last Resort Controller of Credit Custodian of Foreign Reserves Supervisory Functions

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CHAPTER 3
INTERNET BANKING AN OVERVIEW

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CONTENT

SR.NO.
3.1 3.2 3.3 3.4 3.5 3.6 3.7

PARTICULARS
INTRODUCTION EVOLUTION OF INTERNET BANKING INTERNET BANKING SECURITY ADVANTAGES OF INTERNET BANKING DISADVANTAGES OF INTERNET BANKING FEATURES OF INTERNET BANKING TYPES OF RISKS

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3.1 Introduction:As commercialization of the internet evolved in the early 1990s, traditional bricks and mortar banks began to investigate ways of delivering limited online services to reduce operating costs. The success of these early efforts led many banks to expand their internet presence with improved websites that featured the ability to open new accounts, download forms and process loan applications. The next stage of development was the arrival of internet-only banks that offered online banking and other financial products and services without a network of branch offices. These so-called virtual or direct banks were able to pass savings in labor and overhead costs on to their customers by offering higher interest rates on deposit accounts, lower loan costs and reduce service fees. The first fully-functional direct bank, in U.S.A., insured by the FDIC was the Security First Network Bank. Based in Atlanta, it began operations on October 18, 1995. While it was not very profitable before it was bought out three years later, it proved the feasibility of the virtual bank concept. Online banking solutions have many features and capabilities in common but traditionally also have some features that are application specific. The common features fall broadly into the following categories: Transactional (e.g., performing a financial transaction such as an account to account transfer, paying a bill, wire transfer, apply for a loan, new account, etc.): Payments to third parties, including bill payments and telegraphic/wire transfers. Funds transfer between a customer's own transactional account and savings accounts. Investments purchase or sale. Loan applications and transactions such as repayments of enrolments. Non-transactional (e.g., online statements, cheque links, co browsing, chat): Viewing recent transactions. Downloading bank statements, for example in PDF format. Viewing images of paying checks. Financial Institution Administration. Management of multiple users having varying levels of authority. Transaction approval services. Features commonly unique to internet banking include personal financial management support, such as importing data into personal accounting software. Some online banking platforms support account aggregation to allow the customers to monitor all of

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their accounts in one place whether they are with their main bank or with other institutions. However, this paper presents a short review of the advantages and disadvantages of internet banking in order to withdraw some main points based on which a reader or future online banking customer can understand and thus, have a clearer insight of the overall financial and otherwise benefits that the internet banking can offer.

3.2 The evolution of Internet Banking :The ancestor for the contemporary home online banking products and services were the distance banking products and services over electronic media from early 1980s. The term online became popular in the beginning of 1990s and referred to the use of a terminal, keyboard and TV (or monitor) to access the banking system using a phone line. Online services started in New York in 1981 when four of the city's major banks (Citibank, Chase Manhattan, Chemical and Manufacturers Hanover) offered home banking services using the videotext system (Cronin, 1997). Because of the commercial failure of videotext these banking services never became popular except in France where the use of videotext (Minitel) was subsidized by the telecom provider and the UK, where the Prestel system was used. Today, many banks are internet only banks. Unlike their predecessors, these internet only banks do not maintain brick and mortar bank branches. Instead, they typically differentiate themselves by offering better interest rates and online banking features. In Europe, adoption rates of internet banking usage decreases from north to south and from rich to poor. According to a research report from Deutsche Bank, GDP per capita and latitude explain statistically around 80 per cent of the variation in Europe, as suggested by linear regression analysis, and the European average (EU-25, 36%) is below the USA average (44%) (February, 2006). Internet banking grows usually, but not always at the expense of branch visits. Bank customers in Europe increased their use of internet banking while Europeans do not discriminate between internet banking and e-commerce. By saying this, there is a tendency that those who shop online are also more willing to bank online with Nordic countries to be more responsive to internet banking than their share of online shoppers would suggest while Germans and British exhibit a more reserved and constant attitude towards online banking (Deutsche Bank Research Report, 2006). Moreover, the same research report from Deutsche Bank states that the share of internet bankers does not decrease with age. In the opposite, internet usage declines with age but relative to internet users as a whole, the share of internet bankers in the EU is constant for those over 24 years, e.g., out of those who use the internet, around
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40 percent also use internet banking, irrelevant of age. In doing so, one of the most difficulties in people approaching the internet is their reluctance which is further an obstacle to proliferation of online banking between older customers. In addition, Europeans with higher education are more likely to use the internet and do financial transactions online because better educated people have fewer reservations about technology adoption and therefore, are early adopters of it. However, following Rousseau et al. (1998), customers trust in e -banking is defined as willingness of customers to perform on-line banking transactions, expecting that the bank will fulfill its obligations, irrespective of their ability to monitor or control banks' actions. Security of online financial transactions is a main concern for customers' trust in e-banking services and specifically, in internet banking products and services. In doing so, even if security incidents have been on the fall, customers do not have trust in online banking services, partly, of their concern of losing their money. In the following section, a withdraw on security issues is raised in order for security to be better understood.

3.3 Internet Banking Security :Internet banking is a new specific banking area, part of e-banking industry, which allows people to interact with their banking accounts virtually from anywhere in the world. Internet banking addresses few emerging trends such as customer demand for anytime, anywhere services, product time to market essentials, and increasingly complex backoffice integration challenges. One such challenge is the security of online financial transactions. In order for the industry to develop further, secure transactions with the trust of the customers are necessary aspects. Many banks advertise secure online services, and allow their customers to do a wide range of banking activities. Some of the security features in internet banking usage include:

Security token devices ;- Protection through single password authentication, as


its the case in most secure internet shopping sites, it is not considered secure enough for personal online banking applications in some countries. Specifically, here are two different methods for internet banking: The PIN/TAN system where the PIN represents a password, used for the login and TANs representing one-time passwords to authenticate transactions. TANs can be distributed in different ways, the most popular one is to send a list of TANs to the internet banking user by postal letter. The most secure way of using TANs is to generate them by using a security token. These token generated TANs depend on the time and a unique secret, stored in the security token.
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Usually, internet banking with PIN/TAN is done via a web browser using SSL secured connections, so that there is no additional encryption needed. Another way to provide TANs to an internet banking user is to send the TAN of the current bank transaction to the user's (GSM) mobile phone via SMS. The SMS text usually quotes the transaction amount and details, the TAN is only valid for a short period of time. Signature based internet banking where all transactions are signed and encrypted digitally. The Keys for the signature generation and encryption can be stored on smartcards or any memory medium, depending on the concrete implementation.

Attacks:- Most of attacks in internet banking are based on deceiving the user to steal
login data and valid TANs. Two well known examples for those attacks are phishing and pharming. Cross-site scripting and keylogger/trojan horses can also be used to steal login information. A method to attack signature based internet banking methods is to manipulate the used software in a way, that correct transactions are shown on the screen and faked transactions are signed in the background. A recent FDIC Technology Incident Report, generated form security risk activities reports that banks record quarterly, lists 536 cases of computer intrusion with an average loss per incident of $30,000. That adds up to nearly $16 million loss in the second quarter of 2007.

Countermeasures:- There exist few countermeasures which try to avoid attacks.


For instance, digital certificates are used against phishing and pharming, the use of class 3 card readers is also a measure to avoid manipulation of transactions by the software in signature based internet banking variants. To secure their systems against viruses, trojan horses and worms, customers must use virus scanners and be careful with downloaded software or e-mail attachments. However, in order to provide secure and effective internet banking transactions, there are four main technology issues that need to be resolved. These issues are: Security :- Security of the transactions is a main concern for banks while the lack of security may result in serious actual loss. Examples of potential hazards of internet banking include online transactions, minting electronic currency, etc. Anonymity:- The privacy issue is a subset of the security issues banks face. By strengthening the sececy of the sender's personal information and enhance the security of the transactions. Examples of private information relating to the internet banking industry include the amount of transactions, the date and time of a transaction as well as the name of the merchant where the transaction is taking place.
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Authentication :- Encryption may help make the transactions more secure but there is also a need to quarantine that no one can change data at either end of the transaction. In doing so, there are two possible ways that someone can verify the integrity of the message. One form of verification is the secure Hash algorithm which protects data from any possible modification (Pfleeger, 1997). In practice, the sender sends the Hash algorithm generated data. The recipient performs the same calculation and compares the two to make sure everything arrived correctly. If the two results are different, a change in the message has occurred. The other form of verification is through a third party called Certification Authority (CA) with the trust of both sender and the receiver to verify that the electronic currency or the digital signature that they received is real. Divisibility:- Electronic funds may be divisible into different units of currency similar to real money value. For example, electronic money needs to account for pennies and nickels. Internet banking, at least to some degree, has become the norm for many simple bank transactions. And thats not a bad thing - the easier and more secure it is for consumers to check their accounts, pay their bills and transfer money from one account to another, the more likely they are to actually do these things and maintain a more organized financial life. However, it's important to consider that just because internet banking is a good addition to the world of consumer banking, doesn't necessarily mean that direct internet banks are a substitute for their brick-and-mortar peers in all cases. That is why in the following we'll take a look at what internet banks have to offer - and where they may fall short

3.4 Advantages of Internet Banking:Many banks have begun to offer customers the option of online-internet banking, a practice that has advantages for both all parties involved. The convenience of being able to access accounts at any time as well as the ability to perform transactions without visiting a local branch, draw many people to be involved. Some of these advantages of internet banking but are not limited to, include:

Customers convenience :- Direct banks are open for business anywhere there is
an internet connection. They are also 24 hours a day, 365 days a year open while if internet service is not available, customer services is normally provided around the clock via telephone. Real-time account balances and information are available at the touch of a few buttons thus, making banking faster, easier and more efficient. In addition, updating and maintaining a direct account is easy since it takes only a few minutes to change the mailing address, order additional checks and be informed for market interest rates.

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Services:- Direct banks typically have more robust websites that offer a
comprehensive set of features that may not be found on the websites of traditional banks. These include functional budgeting and forecasting tools, financial planning capabilities, investment analysis tools, loan calculators and equity trading platforms. In addition, they offer free online bill payments, online tax forms and tax preparation.

Mobility:- Internet banking also includes mobile capabilities. New applications are
continually being created to expand and improve this capability or smart-phones and other mobile devices.

Transfers:- Accounts can be automatically funded from a traditional bank account via
electronic transfer. Most direct banks offer unlimited transfers at no cost, including those destined for outside financial institutions. They will also accept direct deposits and withdrawals that the customer authorizes such as payroll deposits and automatic bill payment.

Ease of use:- Online accounts are easy to set up and require no more information
than a traditional bank account. Many offer the option of inputting the customer's data online or downloading the forms and mailing them in. If the customer runs into a problem, he has the option of calling or e-mailing the bank directly.

Environment friendly:- Internet banking is also environmentally friendly. Electronic


transmissions require no paper, reduce vehicle traffic and are virtually pollution-free. They also eliminate the need for buildings and office equipment.

3.5 Disadvantages of Internet Banking:Internet banking seems like an obvious choice to leave the hassles of traditional money management behind in exchange for it. However, there are potential problems associated with banking over the internet of which customers may not be aware. Consumers need to weigh the advantages as well as the disadvantages of internet banking before signing up. Some of the disadvantages of internet banking include:

Bank relationship:- A traditional bank provides the opportunity to develop a


personal relationship with that bank. Getting to know the people at your local branch can be an advantage when a customer needs a loan or a special service that is not normally offered to the public. A bank manager usually has some discretion in changing the terms of customer's account if the customer's personal circumstances change. They can help customers solve problems such as reversing an undeserved fee. The banker also will get to know the customer and his unique needs. If the customer has a business
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account, this personal relationship may help if the customer needs capital to expand. Its easier to get the banks support if there is someone who understands customer's business and vouch for his operating plan.

Transaction issues:- Sometimes a face-to-face meeting is required to complete


complex transactions and address complicated problems. A traditional bank can host meetings and call in experts to solve a specific issue. Moreover, international transactions may be more difficult (or impossible) with some direct banks. If a customer deposits cash on a regular basis, a traditional bank with a drive-through window may be more practical and efficient.

Service issues:- Some direct banks may not offer all the comprehensive financial
services such as insurance and brokerage accounts that traditional banks offer. Traditional banks sometimes offer special services to loyal customers such as preferred rates and investment advice at no extra charge. In addition, routine services such as notarization and bank signature guarantee are not available online. These services are required for many financial and legal transactions.

Security:- Direct banks are subject to the same laws and regulations as traditional
banks and accounts are protected by the FDIC. Sophisticated encryption software is designed to protect your account information but no system is perfect. Accounts may be subject to phishing, hacker attacks, malware and other unauthorised activity. Most banks now make scanned copies of cleared checks available online which helps to avoid and identify check fraud. It enables verification that all checks are signed by the customer and that dollar or euro amounts have not been changed. The timely discovery of discrepancies can be reported and investigated immediately.

3.6 Features of Internet Banking :The common features fall broadly into several categories

A bank customer can perform non-transactional tasks through online banking, including viewing account balances viewing recent transactions downloading bank statements, for example in PDF format viewing images of paid cheques ordering cheque books download periodic account statements Downloading applications for M-banking, E-banking etc.
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Bank customers can transact banking tasks through online banking, including Funds transfers between the customer's linked accounts Paying third parties, including bill payments (see, e.g., BPAY) and telegraphic/wire transfers Investment purchase or sale Loan applications and transactions, such as repayments of enrollments Register utility billers and make bill payments Financial institution administration Management of multiple users having varying levels of authority Transaction approval process the process of banking has become much faster

3.7 Types of risks associated with Internet banking :A major driving force behind the rapid spread of i-banking all over the world is its acceptance as an extremely cost effective delivery channel of banking services as compared to other existing channels. However, Internet is not an unmixed blessing to the banking sector. Along with reduction in cost of transactions, it has also brought about a new orientation to risks and even new forms of risks to which banks conducting i-banking expose themselves. Regulators and supervisors all over the world are concerned that while banks should remain efficient and cost effective, they must be conscious of different types of risks this form of banking entails and have systems in place to manage the same. An important and distinctive feature is that technology plays a significant part both as source and tool for control of risks. Because of rapid changes in information technology, there is no finality either in the types of risks or their control measures. Both evolve continuously. The thrust of regulatory action in risk control has been to identify risks in broad terms and to ensure that banks have minimum systems in place to address the same and that such systems are reviewed on a continuous basis in keeping with changes in technology. In the following paragraphs a generic set of risks are discussed as the basis for formulating general risk control guidelines, which this Group will address.

Operational risk: -Operational risk, also referred to as transactional risk is the most
common form of risk associated with i-banking. It takes the form of inaccurate processing of transactions, non enforceability of contracts, compromises in data integrity, data privacy and confidentiality, unauthorized access / intrusion to banks systems and transactions etc. Such risks can arise out of weaknesses in design, implementation and monitoring of banks information system. Besides inadequacies in technology, human factors like negligence by customers and employees, fraudulent activity of employees and crackers / hackers etc. can become potential source of

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operational risk. Often there is thin line of difference between operational risk and security risk and both terminologies are used interchangeably.

Security risk:- Internet is a public network of computers which facilitates flow of data
/ information and to which there is unrestricted access. Banks using this medium for financial transactions must, therefore, have proper technology and systems in place to build a secured environment for such transactions. Security risk arises on account of unauthorized access to a banks critical information stores like accounting system, risk management system, portfolio management system, etc. A breach of security could result in direct financial loss to the bank. For example, hackers operating via the Internet, could access, retrieve and use confidential customer information and also can implant virus. This may result in loss of data, theft of or tampering with customer information, disabling of a significant portion of banks internal computer system thus denying service, cost of repairing these etc. Other related risks are loss of reputation, infringing customers privacy and its legal implica tions etc. Thus, access control is of paramount importance. Controlling access to banks system has become more complex in the Internet environment which is a public domain and attempts at unauthorized access could emanate from any source and from anywhere in the world with or without criminal intent. Attackers could be hackers, unscrupulous vendors, disgruntled employees or even pure thrill seekers. Also, in a networked environment the security is limited to its weakest link. It is therefore, necessary that banks critically assess all interrelated systems and have access control measures in place in each of them. In addition to external attacks banks are exposed to security risk from internal sources e.g. employee fraud. Employees being familiar with different systems and their weaknesses become potential security threats in a loosely controlled environment. They can manage to acquire the authentication data in order to access the customer accounts causing losses to the bank. Unless specifically protected, all data / information transfer over the Internet can be monitored or read by unauthorized persons. There are programs such as sniffers which can be set up at web servers or other critical locations to collect data like account numbers, passwords, account and credit card numbers. Data privacy and confidentiality issues are relevant even when data is not being transferred over the net. Data residing in web servers or even banks internal systems are susceptible to corruption if not properly isolated through firewalls from Internet. The risk of data alteration, intentionally or unintentionally, but unauthorized is real in a networked environment, both when data is being transmitted or stored. Proper access control and technological tools to ensure data integrity is of utmost importance to banks. Another important aspect is whether the systems are in place to quickly detect any such alteration and set the alert.

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Identity of the person making a request for a service or a transaction as a customer is crucial to legal validity of a transaction and is a source of risk to a bank. A computer connected to Internet is identified by its IP (Internet Protocol) address. There are methods available to masquerade one computer as another, commonly known as IP Spoofing. Likewise user identity can be misrepresented. Hence, authentication control is an essential security step in any e-banking system. Non-repudiation involves creating a proof of communication between two parties, say the bank and its customer, which neither can deny later. Banks system must be technologically equipped to handle these aspects which are potential sources of risk.

System architecture and design :- Appropriate system architecture and control


is an important factor in managing various kinds of operational and security risks. Banks face the risk of wrong choice of technology, improper system design and inadequate control processes. For example, if access to a system is based on only an IP address, any user can gain access by masquerading as a legitimate user by spoofing IP address of a genuine user. Numerous protocols are used for communication across Internet. Each protocol is designed for specific types of data transfer. A system allowing communication with all protocols, say HTTP (Hyper Text Transfer Protocol), FTP (File Transfer Protocol), telnet etc. is more prone to attack than one designed to permit say, only HTTP. Choice of appropriate technology is a potential risk banks face. Technology which is outdated, not scalable or not proven could land the bank in investment loss, a vulnerable system and inefficient service with attendant operational and security risks and also risk of loss of business. Many banks rely on outside service providers to implement, operate and maintain their e-banking systems. Although this may be necessary when banks do not have the requisite expertise, it adds to the operational risk. The service provider gains access to all critical business information and technical systems of the bank, thus making the system vulnerable. In such a scenario, the choice of vendor, the contractual arrangement for providing the service etc., become critical components of banks security. Bank should educate its own staff and over dependencies on these vendors should be avoided as far as possible. Not updating banks system in keeping with the rapidly changing technology, increases operational risk because it leaves holes in the security system of the bank. Also, staff may fail to understand fully the nature of new technology employed. Further, if updating is left entirely at customers end, it may not be updated as required by the bank. Thus education of the staff as well as users plays an important role to avoid operational risk. Approaches to reduce security related operational risk are discussed in detail in Chapter-6. These include access control, use of firewalls, cryptographic techniques, public key encryption, digital signature etc.

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Reputational risk:- Reputational risk is the risk of getting significant negative public
opinion, which may result in a critical loss of funding or customers. Such risks arise from actions which cause major loss of the public confidence in the banks' ability to perform critical functions or impair bank-customer relationship. It may be due to banks own action or due to third party action. The main reasons for this risk may be system or product not working to the expectations of the customers, significant system deficiencies, significant security breach (both due to internal and external attack), inadequate information to customers about product use and problem resolution procedures, significant problems with communication networks that impair customers access to their funds or account information especially if there are no alternative means of account access. Such situation may cause customerdiscontinuing use of product or the service. Directly affected customers may leave the bank and others may follow if the problem is publicized. Other reasons include losses to similar institution offering same type of services causing customer to view other banks also with suspicion, targeted attacks on a bank like hacker spreading inaccurate information about bank products, a virus disturbing banks system causing system and data integrity problems etc. Possible measures to avoid this risk are to test the system before implementation, backup facilities, contingency plans including plans to address customer problems during system disruptions, deploying virus checking, deployment of ethical hackers for plugging the loopholes and other security measures. It is significant not only for a single bank but also for the system as a whole. Under extreme circumstances, such a situation might lead to systemic disruptions in the banking system as a whole. Thus the role of the regulator becomes even more important as not even a single bank can be allowed to fail.

Legal risk:- Legal risk arises from violation of, or non-conformance with laws, rules,
regulations, or prescribed practices, or when the legal rights and obligations of parties to a transaction are not well established. Given the relatively new nature of Internet banking, rights and obligations in some cases are uncertain and applicability of laws and rules is uncertain or ambiguous, thus causing legal risk. Other reasons for legal risks are uncertainty about the validity of some agreements formed via electronic media and law regarding customer disclosures and privacy protection. A customer, inadequately informed about his rights and obligations, may not take proper precautions in using Internet banking products or services, leading to disputed transactions, unwanted suits against the bank or other regulatory sanctions.

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In the enthusiasm of enhancing customer service, bank may link their Internet site to other sites also. This may cause legal risk. Further, a hacker may use the linked site to defraud a bank customer. If banks are allowed to play a role in authentication of systems such as acting as a Certification Authority, it will bring additional risks. A digital certificate is intended to ensure that a given signature is, in fact, generated by a given signer. Because of this, the certifying bank may become liable for the financial losses incurred by the party relying on the digital certificate.

Money laundering risk:- As Internet banking transactions are conducted remotely


banks may find it difficult to apply traditional method for detecting and preventing undesirable criminal activities. Application of money laundering rules may also be inappropriate for some forms of electronic payments. Thus banks expose themselves to the money laundering risk. This may result in legal sanctions for non-compliance with 'know your customer' laws. To avoid this, banks need to design proper customer identification and screening techniques, develop audit trails, conduct periodic compliance reviews, frame policies and procedures to spot and report suspicious activities in Internet transactions.

Cross border risks:- Internet banking is based on technology that, by its very
nature, is designed to extend the geographic reach of banks and customers. Such market expansion can extend beyond national borders. This causes various risks. It includes legal and regulatory risks, as there may be uncertainty about legal requirements in some countries and jurisdiction ambiguities with respect to the responsibilities of different national authorities. Such considerations may expose banks to legal risks associated with non-compliance of different national laws and regulations, including consumer protection laws, record-keeping and reporting requirements, privacy rules and money laundering laws. If a bank uses a service provider located in another country, it will be more difficult to monitor it thus, causing operational risk. Also, the foreign-based service provider or foreign participants in Internet banking are sources of country risk to the extent that foreign parties become unable to fulfil their obligations due to economic, social or political factors. Cross border transaction accentuates credit risk, since it is difficult to appraise an application for a loan from a customer in another country compared to a customer from a familiar customer base. Banks accepting foreign currencies in payment for electronic money may be subjected to market risk because of movements in foreign exchange rates.

Strategic Risk:- This risk is associated with the introduction of a new product or
service. Degree of this risk depends upon how well the institution has addressed the
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various issues related to development of a business plan, availability of sufficient resources to support this plan, credibility of the vendor (if outsourced) and level of the technology used in comparison to the available technology etc. For reducing such risk, banks need to conduct proper survey, consult experts from various fields, establish achievable goals and monitor performance. Also they need to analyse the availability and cost of additional resources, provision of adequate supporting staff, proper training of staff and adequate insurance coverage. Due diligence needs to be observed in selection of vendors, audit of their performance and establishing alternative arrangements for possible inability of a vendor to fulfil its obligation . Besides this, periodic evaluations of new technologies and appropriate consideration for the costs of technological upgradation are required.

Credit risk:- is the risk that a counter party will not settle an obligation for full value,
either when due or at any time thereafter. Banks may not be able to properly evaluate the credit worthiness of the customer while extending credit through remote banking procedures, which could enhance the credit risk. Presently, banks generally deal with more familiar customer base. Facility of electronic bill payment in Internet banking may cause credit risk if a third party intermediary fails to carry out its obligations with respect to payment. Proper evaluation of the creditworthiness of a customer and audit of lending process are a must to avoid such risk. Another facility of Internet banking is electronic money. It brings various types of risks associated with it. If a bank purchases e-money from an issuer in order to resell it to a customer, it exposes itself to credit risk in the event of the issuer defaulting on its obligation to redeem electronic money,.

Liquidity Risk :- arises out of a banks inability to meet its obligations when they
become due without incurring unacceptable losses, even though the bank may ultimately be able to meet its obligations. It is important for a bank engaged in electronic money transfer activities that it ensures that funds are adequate to cover redemption and settlement demands at any particular time. Failure to do so, besides exposing the bank to liquidity risk, may even give rise to legal action and reputational risk. Similarly banks dealing in electronic money face interest rate risk because of adverse movements in interest rates causing decrease in the value of assets relative to outstanding electronic money liabilities. Banks also face market risk because of losses in on-and-off balance sheet positions arising out of movements in market prices including foreign exchange rates. Banks accepting foreign currency in payment for electronic money are subject to this type of risk. Thus one can find that along with the benefits, Internet banking carries various risks for bank itself as well as banking system as a whole. The rapid pace of technological innovation is likely to keep changing the nature and scope of risks banks face. These risks must be balanced against the benefits. Supervisory and regulatory authorities are required to develop methods for identifying new risks, assessing risks, managing risks
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and controlling risk exposure. But authorities need to keep in consideration that the development and use of Internet banking are still in their early stages, and policies that hamper useful innovation and experimentation should be avoided. Thus authorities need to encourage banks to develop a risk management process rigorous and comprehensive enough to deal with known risks and flexible enough to accommodate changes in the type and intensity of the risks.

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CHAPTER - 4 ANALYSIS & INTERPRETATION

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Q.1 Do you have bank account ?


Result Yes No Total

Respondent
Percentage

90
87.2%

13
12.4%

103
100%

Sales

Interpretation: 87 percent peoples have bank account.

YES

NO

Q.2 In which bank you have account?


RESULTS ICICI IDBI CENTRAL BANK SBI HDFC PNB STAN.CHAR OTHER S

RESPON DENT

15

18

10

2 RESULTS

44

ICICI IDBI

Interpretation: 49percent peoples have bank account in others.

CENT. SBI HDFC PNB SC. OTHERS

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Q.3 Are you aware about internet banking ?


Result Yes No Total
90

Respondent
Percentage

77
85.6%

13
14.4%

100%

RESULTS

Interpretation: 86 percent peoples are aware about internet banking.

yes no

Q.4 Since when you are aware about e-banking ?


RESULTS RESPONDENTS % <1 MTH 4 5.2% 2-6 MTH 5 6.5% 6-12 MTH 20 26% >12 MTH 48 62.3% TOTAL 77 100%

RESULTS

Interpretation: 62 percent peoples are aware about internet banking more than 12 month.

<1 mth 2-6 mth

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Q.5 Have you ever accessed your account through the internet?
Result Yes No Total
77

Respondent
Percentage

29
37.7%

48
62.3%

100%

RESULTS

Interpretation: only 37 percent peoples are access their account through internet.

yes no

Q. 6 For which of the following purpose you use internet banking? (5 = always and 1= never)
Account information

Weightage average= =45/28 =1.61


Interpretation: Mostly peoples fairly use of account information.

xi 21 3 1 0 3

wi 1 2 3 4 5

Wixi 21 6 3 0 15

28

45

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Q. 6 For which of the following purpose you use internet banking? (5 = always and 1= never)
E-cheque

Weightage average= =112/30 =3.7


Interpretation: Mostly peoples sometimes use of echeque.

Xi 4 6 1 2 17

wi 1 2 3 4 5

Wixi 4 12 3 8 85

30

112

Q. 6 For which of the following purpose you use internet banking? (5 = always and 1= never)
Bill payment

Weightage average= =73/28 =2.6


Interpretation: Mostly peoples often use of bill payment.

Xi 9 10 0 1 8

wi 1 2 3 4 5

Wixi 9 20 0 4 40

28

73

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Q. 6 For which of the following purpose you use internet banking? (5 = always and 1= never)
Demate share trading

Weightage average= =117/29 =4.03


Interpretation: Mostly peoples sometimes use of demate share trading

Xi 4 3 1 1 20

wi 1 2 3 4 5

Wixi 4 6 3 4 100

29

117

Q.7 How many transaction per month you have done with the help of e-banking ?
RESULTS % <2 20.7% 2-5 7 24.1% 5-10 6 20.7% >10 10 34.5% TOTAL 29 100% RESPONDENTS 6

RESULTS

Interpretation: 34 percent peoples are do more than 10 transaction through e-banking.

<2 2 to 5

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Q. 8 Which kind of electronic medium you use? (5 = always and 1= never)


Internet banking

Weightage average= =46/29 =1.6


Interpretation: Mostly peoples fairly use internet banking.

Xi 21 4 1 1 2

wi 1 2 3 4 5

Wixi 21 8 3 4 10

29

46

Q. 8 Which kind of electronic medium you use? (5 = always and 1= never)


ATM card

Weightage average= =145/29 =5


Interpretation: Mostly peoples fairly use ATM card.

Xi 0 0 0 0 29

wi 1 2 3 4 5

Wixi 0 0 0 0 145

29

145

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Q. 8 Which kind of electronic medium you use? (5 = always and 1= never)


Credit card

Weightage average= =118/29 =4.1


Interpretation: Mostly peoples always use credit card.

Xi 4 3 1 0 21

wi 1 2 3 4 5

Wixi 4 6 3 0 105

29

118

Q. 8 Which kind of electronic medium you use? (5 = always and 1= never)


Mobile banking

Weightage average= =102/29 =3.5


Interpretation: Mostly peoples sometimes use mobile banking.

Xi 10 1 0 0 18

wi 1 2 3 4 5

Wixi 10 2 0 0 90

29

102

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Q.9 Do you use ATM ?


Result Yes No
0

Total
29

Respondent
Percentage

29
100%

100%

RESULTS

Interpretation: 100 percent peoples using ATM.

YES NO

Q. 10 Why you have not using internet banking ? (5 = always and 1= never)
Lack of awareness

Weightage average= =64/47 =1.4


Interpretation: Mostly peoples fairly not using internet banking due to lack of awareness.

Xi 41 2 0 1 3

wi 1 2 3 4 5

Wixi 41 4 0 4 15

47

64

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Q. 10 Why you have not using internet banking ? (5 = always and 1= never)
Cost efficiency

Weightage average= =134/47 =2.9


Interpretation: Mostly peoples often not using internet banking due to cost efficiency.

Xi 12 12 6 5 12

wi 1 2 3 4 5

Wixi 12 24 18 20 60

47

134

Q. 10 Why you have not using internet banking ? (5 = always and 1= never)
Lack of infrastructure

Weightage average= =119/47 =2.5


Interpretation: Mostly peoples often not using internet banking due to Lack of infrastructure

Xi 14 15 5 5 8

wi 1 2 3 4 5

Wixi 14 30 15 20 40

47

119

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Q. 10 Why you have not using internet banking ? (5 = always and 1= never)
Poor service

Weightage average= =95/47 =2.02


Interpretation: Mostly peoples gairly not using internet banking due to poor service.

Xi 22 16 1 2 6

wi 1 2 3 4 5

Wixi 22 32 3 8 30

47

95

Q. 10 Why you have not using internet banking ? (5 = always and 1= never)
Threat of security

Weightage average= =54/46 =1.2


Interpretation: Mostly peoples fairly not using internet banking due to threat of security.

Xi 44 0 0 0 2

wi 1 2 3 4 5

Wixi 44 0 0 0 10

46

54

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CHAPTER 5 FINDINGS & CONCLUSION

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FINDINGS
Majority of the sample surveyed are not aware about Internet banking. Some of the people access their account through internet. People use internet banking only for account information. Peoples are not using internet banking due to threat of security.

RECOMMENDATIONS
Required more security and safety measures in online banking transactions. High level security and safety should be provided. At a certain level it is very risky. Whatever peoples are not aware about e-banking spread awareness among them about it.

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CONCLUSION Internet banking in India with reference to SME, peoples does not want to use
such media of banking to do transaction. Customers require to do the transaction going into bank. Internet banking requires more steps towards the awareness of using online banking transaction among the customers. High level of security require in Internet banking.

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BIBLIOGRAPHIES
Websites: http://rbi.org.in/Scripts/PublicationReportDetails.aspx?UrlPage=&ID= 243#ch1 http://en.wikipedia.org/wiki/Banking_in_India http://www.ibef.org/industry/banking-india.aspx

Books: Iyengar, G. Vijayaragavan (2008). Introduction to banking. Excel Books. Reprint 2008. Beri, G.C. (2006). Marketing Research . Tata McGraw Hill. Reprint 2008

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ANNEXURE

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Questionnaire Q.1 Do you have bank account ? Yes No

If Yes, then continue otherwise stop. Q.2 In which bank you have account? Results ICICI IDBI CBI SBI HDFC SBI PNB Stan. Others Char. Respondent

Q.3 Are you aware about internet banking ? Yes No

If Yes, then continue otherwise go to question No 10. Q.4 Since when you are aware about Internet banking ? Results Respondent <1 month 1-6 month 6-12 month >12 month

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Q.5 Have you ever accessed your account through the internet? Yes No

Q. 6 For which of the following purpose you use internet banking? (5 = always and 1= never) Results Account information E-cheque Bill payment Demate share trading. 1 2 3 4 5

Q.7 How many transaction per month you have done with the help of Internet banking ? Results Respondent <2 2-5 5-10 >10

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Q. 8 Which kind of electronic medium you use? (5 = always and 1= never) Results Internet banking ATM Card Credit card Mobile banking 1 2 3 4 5

Q.9 Do you use ATM ? Yes No

Q. 10 Why you have not using internet banking ?(5 = always and 1= never) Results Lack of awareness Cost efficiency Lack of infrastructure Poor service Threat security 1 2 3 4 5

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