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What is bank?



Chapter:- 1
A bank is a financial institution that provides banking and other financial services to their
customers. A bank is generally understood as an institution which provides fundamental banking
services such as accepting deposits and providing loans. There are also nonbanking institutions
that provide certain banking services without meeting the legal definition of a bank. Banks are a
subset of the financial services industry. A banking system also referred as a system provided by
the bank which offers cash management services for customers, reporting the transactions of
their accounts and portfolios, throughout the day. The banking system in India should not only be
hassle free but it should be able to meet the new challenges posed by the technology and any
other external and internal factors. For the past three decades, India’s banking system has several
outstanding achievements to its credit. The Banks are the main participants of the financial
system in India. The Banking sector offers several facilities and opportunities to their customers.
All the banks safeguards the money and valuables and provide loans, credit, and payment
services, such as checking accounts, money orders, and cashier’s cheques. The banks also offer
investment and insurance products. As a variety of models for cooperation and integration among
finance industries have emerged, some of the traditional distinctions between banks, insurance
companies, and securities firms have diminished. In spite of these changes, banks continue to
maintain and perform their primary role—accepting deposits and lending funds from these



Definition of banks
According to Walter Leaf
“A bank is a person or corporation which holds it out to receive from the public, deposits payable
on demand by cheque.” Horace White has defined a bank, “as a manufacture of credit and a
machine for facilitating exchange.”

According to Prof. Kinley
“A bank is an establishment which makes to individuals such advances of money as may be
required and safely made, and to which individuals entrust money when not required by them for

In simple words
“Bank is what bank does”


2. The essential characteristics of commercial banking are as follows: . .Repayable on demand or lending or investment. It functions as the controller of credit. The Reserve Bank of India (RBI) is such a bank within an India.Withdrawal by means of an instrument. Central Bank A central bank functions as the apex controlling institution in the banking and financial system of the country.INDIAN BANKING SYSTEM Types of banks 1. 4 . by the government of a country.Acceptance of deposits from public . It accepts deposits from the general public and extends loans to the households. banker’s bank and also enjoys the monopoly of issuing currency on behalf of the government. the firms and the government. Commercial Banks It operates for profit.For the purpose of lending or investment . A central bank is usually control and quite often owned. whether a cheque or otherwise.

In India ‘Industrial Development Bank on India’ (IDBI) is the unique example of development bank. The co-operative banks play a useful role in providing cheap exit facilities to the farmers. financial and managerial assistance for the implementation of project.INDIAN BANKING SYSTEM Another distinguish feature of commercial bank is that a large part of their deposits are demand deposits withdraw able and transferable by cheque. In 1990 a special bank named small industries 5 . One of the major bank is ‘National Bank for Agricultural and Rural development’ (NABARD) established in 1982. as an apex institution in the field of agricultural and other economic activities in rural areas. Development Banks It is considered as a hybrid institution which combines in itself the functions of a finance corporation and a development corporation. They also act as a catalytic agent in promoting balanced and viable development by assuming promotional role of discovering project ideas. The former has a three tier structure consisting of state 5. They aim at developing a system of credit. Agriculture finance is a special field. Co-operative Banks The main business of co-operative banks is to provide finance to agriculture. Medium-term. Specialized Banks These banks are established and controlled under the special act of parliament. 3. Long term credit. These banks have got the special status. 4. It has been designated as the principal institution of the country for co-coordinating the working of the institutions engaged in financing. undertaking feasibility studies and also provide technical. promoting or development of industry. In India there are three wings of co-operative credit system namely – (i) (ii) (iii) Short term.

discounting and rediscounting of bills.Import Bank These banks have been established for the purpose of financing foreign trade. Their main function is to discount. the policy of financing of these banks has been designed in such a way so that these institution can play catalyst role in the process of rural development. medium term and short term loan at the higher interest rate are known as indigenous bankers. long term. mandis and villages. Export . 9. Over a dozen foreign exchange banks branches are working in India have their head offices in foreign countries. Saving Banks These banks perform the useful services of collecting small savings commercial banks also run “saving bank” to mobilize the savings of men of small means. It was the subsidiary of Industrial development Bank of India. 10. 6 . towns. The Export-Import Bank of India (EXIM Bank) was established on January 1. This bank was established for providing loan facilities. 8. direct assistance and leasing facility.INDIAN BANKING SYSTEM development Bank of India (SIDBI) was established. They also buy and self-foreign currencies and help businessmen to convert their money into any foreign currency they need. 6. Mutual savings bank. Rural Banking A set of financial institution engaged in financing of rural sector is termed as ‘Rural Banking’. accept and collect foreign bulls of exchange. Foreign Exchange Banks These banks finance mostly to the foreign trade of a country. These banks can be found everywhere in cities. unproductive. They concentrate their working on medium and long-term financing. commercial saving banks etc. 1982 as a statutory corporation wholly owned by the central government. Indigenous Bankers That unorganized unit which provides productive. 7. Post office saving. Different countries have different types of savings bank viz.


11. International Banks
The basic list of those International Banks within India which help the banking sector of India to
develop in International market.

Types of banking
Banking is described as the business carried on by an individual at a bank. Today, several forms
of banking exist, giving consumers a choice in the way they manage their money most people do
a combination of at least two banking types. However, the type of banking a consumer uses
normally based on convenience. These are different types of banking through which consumer
can attach to it-

(A) Walk-in-Banking

It is still a popular type of banking. As, in the past, it still involves bank tellers and specialized
bank officers. Consumers must walk into a bank to use this service normally, in order to
withdraw money or deposit it; a person must fill out a slip of paper with the account and specific
monetary amount and show a form of identification to a bank letter. The advantage of walk in
Banking is the face to face connection between the banker and a letter. Also unlike drive thru and
ATM banking, a person can apply for a loan and invest money during a walk in.

(B) Drive thru Banking
It is probably the least popular form of banking today, but is still used enough by consumers to
create a need for it. It allows consumers to stay in their while and drive up to a machine equipped
with container, chute and intercom. This machine is connected to a bank and is run by one or two
bank letters. A person can withdraw or deposit money at a drive thru. He must fill out a slip with
his account and specific monetary amount and put it in the container. The container travels
through the chute to the bank letter, which will complete the banker’s request. This is where the
intercom comes into play. The bank teller and banker use it to communicate and discuss the
specific banking request.

(C) ATM Banking
It is very popular because it gives a person 24 hour access to his bank account. Walk in and drive
thru banking does not offer this perk. In order to use an ATM, a person must have an ATM card
with personal identification number (PIN) and access to an ATM machine. Any ATM machine
can be used, but charges apply if the ATM machine is not affiliated with the bank listed on the
ATM card. By sliding an ATM card into an ATM machine, it is activated and then through
touching buttons on the machine, a consumer is able to withdraw or deposit money.

(D)Online Banking
It allows a person to get on the internet and sign into their bank. This process is achieved with
the use of a PIN, different from the one used for the ATM card. By going website of a bank and
entering it, a consumer can get into his account, withdraw money, deposit money, pay bills,
request loans and invest money. Online banking is growing in popularity because of its

These different types of banking give a consumer the power of choice and also give them a
comfortable banking system that gives them a convenient choice.

Functions of banks


(ii) Current Deposits – This type of account are generally kept by businessmen and industrialists and those people who meet a large number of monetary 10 . The rate of interest allowed on saving bank deposits is less than that on fixed deposits. Accepting Deposits: The most important function of commercial banks is to accept deposits from public. Depositor is given a pass book and a cheque book. Withdrawals are allowed by cheques and withdrawal form. important deposit account generally kept by bank are (i) Saving Bank Deposits – This type of deposits suit to those who just want to keep their small savings in a bank and might need to withdraw them occasionally. This is the primary functions of a commercial bank. One or two withdrawals up to a certain limit of total deposits are allowed in a week.INDIAN BANKING SYSTEM I. A commercial bank accept deposit from public on various account. Banks receives the idle savings of people in the form of deposits and finances the temporary needs of commercial and industrial firms.

(iii) Fixed Deposits – These are also known as time deposits. ( iv ) Other Deposits – Banks also provide deposit facilities to different type of customers by opening different account. If it happens. Deposits are payable after the expiry of the stipulated period. They are payable demand without notice. ‘Home Safe Account’ for housewife or very small savers. In this account a fixed amount is deposited for a fixed period of time. ‘Recurring Deposit’ a/c’ ‘Retirement Scheme’ etc. These banks cannot lend money for long period because they must keep themselves ready to meet the short term deposits. These deposits are known as short term deposits or demand deposits. Normally the withdrawals are not allowed from fixed deposits before the stipulated date. They also open. Usually no interest is paid on these deposits because the bank cannot utilize these deposits and keep almost cent per cent reserve against them. The other accounts are ‘Indefinite Period Deposit a/c’. Money is lent to businessmen and trade for short period only. The rates depend upon the length of the period and state of money market. The banks pay higher interest on fixed deposits. Customers keep their money in fixed deposits with the bank in order of earn interest. Advancing of Loans: The second main function of the commercial bank is to advance loans. II.INDIAN BANKING SYSTEM transactions in their routine. Overdraft facilities are also available on current account. the depositor entails an interest penalty. The bank advances money in any one of the following forms 11 .

(ii) A bank collects dividend or interest on stock and shares. Government securities or shares of approved concerns. Banks usually charge little commission for doing these services. But they have to pay interest on the extra amount they have withdrawn. the loan is advanced. (iii) Cash Credit: It is an arrangement by which a bank allows his customers to borrow money up to a certain limit against certain tangible securities as Government securities or shares of approved concerns etc. III. Agency Services: Modern Banks render service to the individual or to the business institutions as an agent. The banks purchase bills and immediately pay case for these bills after deducting the discount (interest). After the maturity of the bills. These services are as follows(i) A bank collects cheques. 12 . When the bank has satisfied itself regarding the soundness of the party. so he opens the current account with the bank (and the loan amount) and thus a ‘deposit is created’ in the books of the name in the bank. (iv) Discounting Bills: It is another important way of giving loans.g. In this case interest in charged on the actual amount withdrawn by the customer and not on the limit allowed to him.INDIAN BANKING SYSTEM (i) Overdrafts: Customers of good standings are allowed to overdraw from their current account. the banks get back its full value. e. (ii) Loans: Loans are granted by the banks on securities which can be easily disposed-off in the market. bills and promissory notes and receives their payments. A borrower seldom wants the whole amount of his loan in cash. The banks allow ‘overdrafts’ to their customers just to provide temporary accommodation save the extra amount withdrawn is payable within a period. The amount allowed in ‘overdraft’ varies from customer to customer depending on this financial condition. Thus these bills are good liquid assets and moreover this investment is also very safe. It also collects subscriptions and insurance premium.

The bank acts as bailey of these goods or documents. Importance of banks Banks play an important role in the economic growth of a country. Other Services: A modern bank now a day serves its customers in many other ways: (i) A bank issues personal and commercial letters of credit. It undertakes the safe custody of valuables and important documents. (iv) A bank acts as trustee or an executor on behalf of its customers in the administration of a will or of settlement. The investment of these savings in productive channel results in capital formation. It also not charges anything from the customers for this but gets some commission from the stock broker. The importance of bank for a country’s economy can be explained in following ways Banks by playing attractive interest rate on deposits try to promote thrift and savings in an economy. (iii) A bank has ‘Safe Deposit Vaults’. 13 . banks are not to be considered dealers in money but as the leaders of development. Through these letters of credit customers are able to benefit themselves out of the superior credit of the bank.INDIAN BANKING SYSTEM (iii) A bank also buys and sells securities on behalf of its customers. (ii) A bank also helps in the transaction of foreign exchange business. (v) Lastly a bank helps in the transfer of funds from one bank or branch to another. IV. In the modern set up.

By their ability to create credit.INDIAN BANKING SYSTEM  The scattered small savings in the country can be put to optimum use by commercial banks. hundies enable traders to transfer large sums of money from one place  to another. the banks have placed at the disposal of the nation a large amount of money. The cheque. Money deposited in the bank and other precious items are now absolutely safe. By providing funds to the entrepreneurs. Now people are free from any type of risks. Chapter:. A high rate of saving and investment  promote capital formation. bank help in increasing  productivity of capital. Banks help in remitting money from one place to another. For keeping valuables.3 INDIAN BANKING SYSTEM 14 . The bank can increase the supply of money through credit  creation With the growth of banking activity. The banks help in capital formation in the country. Banks utilize this amount by giving loans to industrial houses and the government. letter of credit. bills. banks are providing locker facilities. bank draft. employment opportunity in the country has  increased to a considerable extent.

Industrial Development Bank of India is an apex body in the industrial sector. The chief regulator of banking system in our country is the Reserve bank of India. Apex institutions in the form of banking institutions are playing important role in the country. National Bank of Agriculture and Rural Development has been 15 . Separate institutions are functioning to meet the financial requirement of the different sectors of the economy. Banking system comprises of the banking institutions functioning in the country. housing etc. Development banks are meeting the business and industrial requirements. The Indian banking structure has a wide and comprehensive form.INDIAN BANKING SYSTEM The banking system of a country plays an important role in the economic development of any country. Indigenous bankers and moneylenders do dominant in the unorganized sector. directs and controls the banking institutions. we can say that the structure of Indian banking system has an international level banking system which can meet the economic requirements of globalized world. industries. short and long-term credit for agriculture sector. trade. Banking system comprises from the central bank to all banking institutions which are functioning and providing financial facilities to any developmental sector like agriculture. Under the Indian banking structure central bank in the name of the Reserve Bank of India which regulates. Thus. Regional Rural Banks are meeting the requirement of the rural population. Cooperatives are working to meet the requirement of medium.

2. 16 . 1934 and it started functioning as the central bank since 1st April 1935. The share capital was divided into shares of Rs.INDIAN BANKING SYSTEM working as an apex institution for the agriculture and rural development. The Reserve Bank of India (RBI) was established in April 1935 with a share capital of Rs.20. Apex Institutions in the form of banking institutions are playing important role in the country. . The Government held shares of nominal value of Rs. The Reserve Bank of India was set up as a private shareholder bank under the Reserve Bank of India Act. 5 Crore on the basis of the recommendations of the Hilton Young Commission.1 Reserve Bank of India (RBI) The Indian Banking structure has a wide and comprehensive form. The chief regulator of banking system in our country is the Reserve Bank of India. Import-Export Bank of India is an Apex body of international trade. 100 each fully paid which was entirely owned by private shareholders in the beginning. Thus these four apex institutions are accelerating the banking system by providing refinance facilities to commercial banks and other financial institutions along with other banking services.000. National Housing Bank is an apex institution in field of housing construction.

Represent India at the International Monetary Fund (IMF) 7. transfers the transaction. It acts as the central clearing 17 house. It carries on several functions as a central bank. Acts as the banker to the Government of India and the State governments. RBI regulates issue of bank notes above one rupee denomination 2. According to RBI Act. Formulates and administers the monetary policy 5.” As a central banking authority RBI carries on the following functions: 1. 1934. They have to submit weekly reports to RBI about their transactions. It clears. the RBI helps the member banks significantly. All scheduled banks come under the direct control of RBI. Commercial and Cooperative banks 4. currency and credit to maintain monetary stability in the general interest of the nation. “the principal function of RBI is to issue notes and maintain reserves. RBI acts as a banker for all the commercial banks. Undertakes distribution of all currency notes and coins on behalf of the government 3. It is the custodian of cash reserves of commercial banks. All commercial as well as schedule bank has to keep a minimum reserve with the RBI. They are given below such It acts as the lender of the last resort. By performing 3 functions. .INDIAN BANKING SYSTEM Objectives of RBI: The following were the objectives of RBI when it was set up: To manage adequate money and credit in the country To maintain the stability of rupee internally and externally Balanced and well managed banking development in the country To develop well organized money market To provide adequate agriculture credit Ti manage public debt To seek international monetary co-operation Centralization of cash reserves of commercial banks To set up Government banks To set up Government banks Publication of data Functions of RBI: RBI is an apex banking institution of the country. Maintain exchange value of rupee 6.

It also offers fee-based services in the area of merchant banking. equipment lease. core working capital and other short term requirements of industrial units.INDIAN BANKING SYSTEM 8. refinance for medium scale industries and bill finance. technology up gradation fund scheme. 1976 it was segregated from the RBI. foreign exchange services etc. Credit Control 2 Industrial Development Bank of India (IDBI) This is an apex institution providing long-term finance to industrial sector. through a variety of investor- 18 . capital market and trusteeship services. equipment finance. For meeting fund requirements thereof as well as towards its various other business operations. In response to the changing financial needs of industries. IDBI provides financial assistance to industrial concerns by way of variety of products and services which include project finance. In February. IDBI raises resources directly from the market (at market-related interest rates) from retail as well as institutional investors – both within India and abroad. corporate advisory services. asset credit. It was set us as a subsidiary of the RBI in 1964. IDBI has also set up subsidiaries and associates to offer banking products & services. At present its whole of the share capital is owned by the Government of India. Regulation of banking system 9. It provides as well as for expansion. IDBI has also designed other products to meet the short term funding. diversification and modernization of existing industrial enterprises. as also registrar and transfer services structured to meet customized client requirements.

The contribution of the SSI’s in term of production. the sector is assured of continued support. which is vibrant and dynamic sub-sector of the India’s industrial economy. IDBI’s resources raising efforts have brought it closer to all sections of society. National Bank for Agriculture and Rural Development (NABARD) 19 .INDIAN BANKING SYSTEM friendly instruments. In the liberalized era and emerging economic scenario. comprises the area of SIDBI’s business. employment and export earnings has been significant. 3 Small Industries Development Bank of India (SIDBI) Small Industries Development Bank of India (SIDBI) was established in April 1990 under an Indian Parliament wholly-owned subsidiary of Industrial Development Bank of India (IDBI) SIDBI’s stature provides that it should serve as the principal financial institution for:  Promotion  Financing  Development if industry in the small scale sector and  coordinating the functions of other institutions engaged in similar activities The Small Scale industry (SSI) sector. The objectives of Government policy have been to impart vitality and growth impetus to the sector by removing bottlenecks that affect the growth potential. 4.

Main Function of NABARD  Refinancing to Cooperative Banks  Financing to Rural Banks  Loan facilities for purchase of Shares  Refinance of Rural Development loans  Long term Loan Facilities  Technical Assistance and Advice 5.INDIAN BANKING SYSTEM In order to meet the credit requirement of agriculture and rural development the NABARD was set up in 1982 with the merger of ‘Agriculture Credit Department’ and Agriculture \Refinance and development Corporation’ of the RBI. artisans etc. Export-Import Bank of India (EXIM) 20 . and coordinate the activities. The bank provides short term and long term credit to agriculture and non-agriculture activities namely hand weaving. It provides refinance facilities on the loan given by commercial banks and cooperative for the agriculture and rural development.

discounting and negotiating of exports bills and thus encourages the exporters. financing joint ventures in foreign countries and financing the export and import of machinery and equipment on lease basis.INDIAN BANKING SYSTEM The Export-Import Bank of India (EXIM Bank) was set in January. 6. It also undertakes purchasing. 1982 with its headquarters in Mumbai. It Perform the normal banking functions connected with import and export of goods. and several other functions. These major functions include financing of exports from and imports to India. National Housing Bank (NHB) 21 .

1987 to function as a principal agency to promote Housing Finance Institutions and to provide financial and other support to such institutions. For many years the Presidency banks acted as quasi-central banks. The Act.4 Evolution of Indian banking Pre-independence & post-independence Banking in India originated in the last decades of the 18th century. inter alia. the other two being the Bank of Bombay and the Bank of Madras.INDIAN BANKING SYSTEM The National Housing Bank (NHB) was established on 9th July 1988 under an Act of the Parliament viz. all three of which were established under charters from the British East India Company. the National Housing Bank Act. which originated in the Bank of Calcutta in June 1806. The first banks were The General Bank of India which started in 1786. The oldest bank in existence in India is the State Bank of India. both of which are now defunct. This was one of the three presidency banks. as did their successors. empowers NHB to:  Issue Directions to housing finance institutions to ensure their growth on sound lines  Make a loan and advances and render any other form of financial assistance to scheduled banks and housing finance institutions or to any authority established be or under any Central. which almost immediately became the Bank of Bengal. and the Bank of Hindustan. The 22 . State of Provincial Act and engaged in slum improvement and  Formulate schemes for the purpose of mobilization of resource and extension of credit for housing Chapter:.

Foreign banks too started to arrive. with some of its assets and liabilities being transferred to the Alliance Bank of Shimla. promoters opened banks to finance trading in Indian cotton. The depositors lost money and lost interest in keeping deposits with banks. the Indian economy was passing through a relative period of stability. That honor belongs to the Bank of Upper India. HSBC established itself in Bengal in 1869. It failed in 1958. which was established in 1863. most of which served particular ethnic and religious communities. upon India's independence. and the social.(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. mostly owned by Europeans. The Compote d'Escompte de Paris opened a branch in Calcutta in 1860.INDIAN BANKING SYSTEM three banks merged in 1921 to form the Imperial Bank of India. branches in Madras and Pondicherry. Calcutta was the most active trading port in India. Indians had established small banks. established in Lahore in 1895. followed. established in 1881 in Faizabad. is the oldest Joint Stock bank in India. All these banks operated in different segments of the economy. then a French colony. became the State Bank of India. The Bank of Bengal. which. in the 1860s. With large exposure to speculative ventures. The Allahabad Bank. concentrated on financing foreign 23 . When the American Civil War stopped the supply of cotton to Lancashire from the Confederate States. industrial and other infrastructure had improved. mainly due to the trade of the British Empire. when it failed. The exchange banks. and another in Bombay in 1862. Indian merchants in Calcutta established the Union Bank in 1839. established in 1865 and still functioning today. which later merged with the Bank of Bombay and the Bank of Madras to form the Imperial Bank of India in 1921. Around five decades had elapsed since the Indian Mutiny. The first entirely Indian joint stock bank was the Oudh Commercial Bank. Around the turn of the 20th Century. banking in India remained the exclusive domain of Europeans for next several decades until the beginning of the 20th century. particularly in Calcutta. The presidency banks dominated banking in India but there were also some exchange banks and a number of Indian joint stock banks. and which survived until 1913. but it failed in 1848 as a consequence of the economic crisis of 1848-49. most of the banks opened in India during that period failed. The next was the Punjab National Bank. Subsequently. and so became a banking center. which has survived to the present and is now one of the largest banks in India.

INDIAN BANKING SYSTEM trade. At least 94 banks in India failed between 1913 and 1918 Post-independence The partition of India in 1947 adversely impacted the economies of Punjab and West Bengal. "In respect of banking it seems we are behind the times. saw the establishment of banks inspired by the Swadeshi movement. We are like some old fashioned sailing ship. 24 . and it took its toll with banks simply collapsing despite the Indian economy gaining indirect boost due to war-related economic activities. 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 Canara ) district. was nationalized. This segmentation let Lord Curzon to observe. The Government of India initiated measures to play an active role in the economic life of the nation. and two years thereafter until the independence of India were challenging for Indian banking. This resulted into greater involvement of the state in different segments of the economy including banking and finance. The years of the First World War were turbulent. During the First World War (1914-1918) through the end of the Second World War (1939-1945). Hence undivided Dakshina Kannada district is known as "Cradle of Indian Banking". Canara Bank and Central Bank of India. the Reserve Bank of India. Bank of Baroda. Indian joint stock banks were generally undercapitalized and lacked the experience and maturity to compete with the presidency and exchange banks. Four nationalized banks started in this district and also a leading private sector bank. Indian Bank. A number of banks established then have survived to the present such as Bank of India. divided by solid wooden bulkheads into separate and cumbersome compartments. The major steps to regulate banking included:  in 1948. and the Industrial Policy Resolution adopted by the government in 1948 envisaged a mixed economy. India’s independence marked the end of a regime of the Laissez.faire for the Indian banking. and it became an institution owned by the Government of India." The period between 1906 and 1911. paralyzing banking activities for months. The Swadeshi movement inspired local businessmen and political figures to found banks of and for the Indian community. India's central banking authority. Corporation Bank.

thethen Prime Minister of India expressed the intention of the GOI in the annual conference of the All India Congress Meeting in a paper entitled "Stray thoughts on Bank Nationalization. However. a national leader of India.Jayaprakash Narayan. control and regulations. and the GOI issued an ordinance and nationalized the 14 largest commercial banks with effect from the midnight of July 19. and a debate had ensued about the possibility to nationalize the banking industry. her move was swift and sudden. 1969. and inspect the banks in India. continued to be owned and operated by private persons. This changed with the nationalization of major banks in India on 19 July 1969. Indira Gandhi. 1948 By the 1960s."  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. the Indian banking industry had become an important tool to facilitate the development of the Indian economy." The paper was received with positive enthusiasm. Thereafter. Nationalization The RBI was nationalized on January 1.INDIAN BANKING SYSTEM  in 1949. and no two banks could have common directors. despite these provisions. control. 1949 in terms of the Reserve Bank of India (Transfer to Public Ownership) Act. the Banking Regulation Act was enacted which empowered the Reserve Bank of India (RBI) "to regulate." Within two weeks of the issue of the ordinance. banks in India except the State Bank of India. At the same time. described the step as a "masterstroke of political sagacity. the 25 . it had emerged as a large employer.

Liberalization In the early 1990s. The new policy shook the Banking sector in India completely. which has seen rapid growth with strong contribution from all the three sectors of banks. This move. With the second dose of nationalization. government banks. All this led to the retail boom in India. In terms of quality of assets and capital adequacy. and it received the presidential approval on 9 August 1969. The next stage for the Indian banking has been set up with the proposed relaxation in the norms for Foreign Direct Investment. until the 1990s. After this. which later amalgamated with Oriental Bank of Commerce. Currently (2007). and included Global Trust Bank (the first of such new generation banks to be set up). closer to the average growth rate of the Indian economy. till this time. the then Narsimha Rao government embarked on a policy of liberalization. were used to the 4-6-4 method (Borrow at 4%. Bankers.Go home at 4) of functioning. These came to be known as New Generation techsavvy banks.INDIAN BANKING SYSTEM Parliament passed the Banking Companies (Acquisition and Transfer of Undertaking) Bill. the nationalized banks grew at a pace of around 4%. A second dose of nationalization of 6 more commercial banks followed in 1980. namely. in the year 1993. product range and reach-even though reach in rural India still remains a challenge for the private sector and foreign banks. where all Foreign Investors in banks may be given voting rights which could exceed the present cap of 10%. the government merged New Bank of India with Punjab National Bank. banking in India is generally fairly mature in terms of supply. along with the rapid growth in the economy of India. revitalized the banking sector in India. The new wave ushered in a modern outlook and tech-savvy methods of working for traditional banks. ICICI Bank and HDFC Bank. The stated reason for the nationalization was to give the government more control of credit delivery. It was the only merger between nationalized banks and resulted in the reduction of the number of nationalized banks from 20 to 19. People not just demanded more from their banks but also received more. private banks and foreign banks. licensing a small number of private banks. Later present it has gone up to 74% with some restrictions. Axis Bank(earlier as UTI Bank).Lend at 6%. the GOI controlled around 91% of the banking business of India. Indian banks are considered to 26 .

Head (IT). Chapter:. private banks hastened the adoption of technology.up disparate branches together to facilitate information sharing. the Reserve Bank of India allowed Warburg Pincus to increase its stake in Kodak Mahindra Bank (a private sector bank) to 10%. With the growth in the Indian economy expected to be strong for quite some time-especially in its services sector-the demand for banking services. Although titled 'Total Bank Automation. One may also expect . Given the huge IT budgets at their disposal and with almost no legacy IT equipment to worry about. Federal Bank. takeovers.N. vehicle and personal loans. strong and transparent balance sheets relative to other banks in comparable economies in its region. The philosophy for private banks was very clear: to provide a whole new range of financial products and services at minimal costs." The improved connectivity and falling 27 . It was only in the early 1990s that banks started thinking about tying. And technology made this possible.' TBA was in most cases confined to branch automation. especially retail banking. Nair. Banks started exploring the idea of 'Total Bank Automation (TBA)'.5 EVOLUTION of online banking The Rangarajan Committee report in early 1980s was the first step towards computerization of banks. mortgages and investment services are expected to be strong. “The new generation banks showed the way and others had no option but to follow the tech infusion to retain and attract profitable customers. In recent years critics have charged that the non-government owned banks are too aggressive in their loan recovery efforts in connection with housing. with minimal pressure from the government. private banks entered the banking arena with radically different strategies. The stated policy of the Bank on the Indian Rupee is to manage volatility but without any fixed exchange rate-and this has mostly been true. and asset sales. 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. Says K. There are press reports that the banks' loan recovery efforts have driven defaulting borrowers to suicide.INDIAN BANKING SYSTEM have clean. The Reserve Bank of India is an autonomous body. In March 2006.C. At the same time.

Since I have been doing all of my banking online with quite a few different online banks as I looked for the best solution. Others might be new to you if it isn’t something your current bank offers. credit union or building society. Online banking Online banking (or Internet banking) allows customers to conduct financial transactions on a secure website operated by their retail or virtual bank. mobile banking. banks started exploring multiple delivery channels like ATM. With these developments it became possible for operations such as MIS to be truly automated and centralized. Here is a checklist of things to look for in an online bank. Rich online banking services are much more important than a physical location. Cisco Systems (India)." With centralized infrastructure and numerous connectivity options. This gave banks an impetus to network all the branches and set up centralized databases. "With the improved services and lowered costs of service providers such as Dot and VSNL. 28 . I’ve had a chance to really experiment with what works and what doesn’t work for us. Net-banking. and Tele-banking thus driving down cost per transaction. Some items you may be familiar with. We need to be able to manage our finances from anywhere in the world. it became more feasible for banks to network their branches. Confirms Naresh Wadhwa.INDIAN BANKING SYSTEM costs offered by leased lines and VSATs provided a booster to inter-branch automation. Vice President-West.

How many bills are you allowed paying per month? B. which makes it really easy to balance your account if you can’t remember what a particular payment was for.INDIAN BANKING SYSTEM FEATURES OF ONLINE BANKING 1. Here are some things to think about: A. Bill Pay Service . What are the fees for going over the limit? C. 3. gas company. electric company.) 29 . the money doesn’t get taken out until the check is cashed. (Ideally. Can the bill payment send physical checks to merchants who aren’t set up to take electronic payments? D.) sends an electronic bill to your bank. if the checks actually come from your account. E. Electronic Bill Notification – With electronic bills. Can you set up reoccurring payments? 2. This can be particularly good for people who are on the road because it reduces the amount of physical mail you have to somehow get read or forwarded to you. Different banks handle bill payment different ways. etc. Online Check Images – Most banks will show you an image of the check. Do checks come from your account or from a third party service? For privacy reasons. On the other hand. You can set it up to pay automatically or notify you for approval. you should minimize the number of physical checks you write to reduce fraud. it might be better to be able to pay someone without giving them your bank account number on the check. your merchant (Credit Card Company.One of the biggest reasons for going with an online bank is to get really good bill payment services.

Online Deposit Slip Images – Most banks just record the total with no image. or do you have to have a separate login for each IRA to keep them on separate SSNs? These are small things that many banks don’t support. and if so. will the bank refund the ATM fees? Are there only certain ATMs that are free. Reporting Tools – Most banks offer basic reporting tools that will let you see how much you have spent in each category you’ve created. are they located 30 . Payroll can be set up on direct deposit. Linked Accounts – Can you link your bank account with a brokerage account? Can you add your minor children as custodial accounts and manage them all centrally? If you and your spouse both set them up IRAs. This may not be an issue if you use desktop money management software. 8. but there will be times when you need to deposit checks. make sure you understand how to deposit money. 6. 7. Does the bank provide postage paid envelopes and deposit slips? Some banks work with FedEx or UPS stores to allow you to send in a deposit overnight for free. Having the images available can be very helpful if you ever have to prove something for tax purposes or need to remember where that $2581 deposit came from. but it still can be handy if you are traveling and want to see how much you’ve paid on your mortgage over the past 12 months. but it starts getting really complicated when you have to manage a bunch of accounts instead of having a single place to manage all of your money. It will let you see an image of each deposit slip. Low ATM Fees and Convenient Locations – If you need to get cash. 5. Convenient Deposit Methods .INDIAN BANKING SYSTEM 4.Since you may not be anywhere near the physical location of your bank. is it easy to view them both alongside the rest of your finances.

You want to be able to easily open a CD to take advantage of a higher interest rate. Free Money Transfers – Be sure to consider how easy it is to move money in and out of the account.INDIAN BANKING SYSTEM near places you normally go? Are the ATMs available nationwide so you can use them on vacation? What are the fees for using the ATM internationally and how is the exchange rate handled? 9. IRAs. For example. it is more difficult to manage–especially if you are on the road. you’ll want to make sure your bank supports it. 11. In addition to your password. 31 . etc. Make sure you understand if downloading transactions require you to login and manually download a file. health savings accounts. You should be able to set up links with your accounts from other institutions to transfer money back and forth as necessary. easily open an IRA to help reduce your tax liability. you will need the number from that key in order to get access to your account. You want security but you don’t want it to get in the way of you doing your banking. Good banks should allow a certain number of transfers per month with no fee. make sure the bank is paying Quickens extortion fee so the files will work with Mac users. Many Account Types – Some banks only offer basic checking and savings accounts. Security Balanced with ConvenienceSome banks spend so much effort trying to keep things secure that you’ll find yourself automatically logged out of their website while you try to balance your account. Ideally you want a bank that makes it easy to open money market accounts. etc. Quicken or something similar. 10. If you have to go to another institution to open a different type of account. Make sure you understand what type of fees is associated with these transfers. 12. some banks will offer you an RSA keychain with a number that changes every 60 seconds. If you are using Quicken on a Mac. Also check into what type of additional security features are available. Integration with Desktop Software – If you use Microsoft Money. or if your money management software can directly connect and download new transactions.

Advantages of online banking: Convenience: Unlike your corner bank. from one secure site. including IRAs. At first I thought I was just more familiar with the bank where my personal accounts are. but I finally realize that it comes down to the ease of use. seven days a week and they're only a mouse click away. even securities. Transaction speed: Online bank sites generally execute and confirm transactions at or quicker than ATM processing speeds. Ease of Use – This is something that most banks seem to struggle with. I dread using the business accounts and I absolutely love using my personal account. Ubiquity: If you're out of state or even out of the country when a money problem arises. Right now I have my personal account with one online bank and my business accounts with another. 24/7. Effectiveness: Many online banking sites now offer sophisticated tools. online banking sites never close. rate alerts and portfolio managing programs to help you manage all of your assets more effectively. Most are also compatible with money managing programs such as Quicken and Microsoft Money. Efficiency: You can access and manage all of your bank accounts. 32 .INDIAN BANKING SYSTEM 13. you can log on instantly to your online bank and take care of business. they're available 24 hours a day. One is ok and the other is superb. including account aggregation. stock quotes. but it makes a big difference. CDs.

adding new features in unfamiliar places. If you and your spouse wish to view and manage your assets together online. Plan to invest some time and/or read the tutorials in order to become comfortable in your virtual lobby. In some cases. you may have to re-enter account information. Bank site changes: Even the largest banks periodically upgrade their online programs.INDIAN BANKING SYSTEM Disadvantages of online banking: Start-up may take time: In order to register for your bank's online program. the biggest hurdle to online banking is learning to trust it. Learning curve: Banking sites can be difficult to navigate at first. one of you may have to sign a durable power of attorney before the bank will display all of your holdings together. 33 . The trust thing: For many people. you will probably have to provide ID and sign a form at a bank branch. Did my transaction go through? Did I push the transfer button once or twice? Best bet: always print the transaction receipt and keep it with your bank records until it shows up on your personal site and/or your bank statement.

electronic tellers—the websites—are available virtually all day. whether via payroll deposits or funds transfers? 2. Online Banking Structure: Online banking mirrors traditional banking procedures in many instances. Most bill pay users opt for the bank-generated checks. online banking still allows: 1. every day—weekends and holidays. Deposits to the account. included. and in some. 34 . Bill payments via automatic payment schedules or individually ordered payments.INDIAN BANKING SYSTEM How Does Online Banking Work? Online banking provides many identical services that a traditional bank does with the biggest difference are in teller availability: Human tellers leave. most that prefer online banking choose the electronic statements for convenience and reduced paper use. In electronic form. Statement formats can be electronic or paper. actually improves security and reduces both banks’ and customer’s costs. but payments can be ordered in a one off situation or scheduled regularly. 3.

Online Actions All online banking transactions are initiated by creating an online account identity. such as: 1. look around the bank’s website and note important areas. It’s not recommended that security questions and answers be common or known by others. whether historically true or not. 35 . use a free email address that can last for as long as the user chooses. And any other area provided on the website. Instead. Account activity 2. “What is the name your first elementary school. Wire transfers to accounts within and without the bank’s structure. Statement delivery change areas 3. 5. Provide an email address that is not tied to an Internet Service Provider. Account login name and password creation is followed by choosing and answering security questions. Once the security aspects are in place and verified. Use instead the name of another school or anything else that is easily remembered. Differing services depending on the individual financial institute. Bill pay procedures. For example. if a user chooses a security question.INDIAN BANKING SYSTEM 4. though some banks charge additional transaction fees for wire transfers.” choose an answer that is not the actual name or the actual elementary school. if any 5. they should have unique answers. that email address will be lost. Customer Service options 4. If the user changes ISPs.

Customer Service Agents are available for longer during a calendar day than local branch personnel are. human interaction via a drive thru lane or at the counter is required. traveler checks. OPPORTUNITIES IN ONLINE BANKING: Is There a Future in Online Banking? 36 . tracking and accountability are easily provided. Online banking differs from traditional banking when physical checks or cash is deposited. and money orders cannot be purchased from the institution via online banking. but because all transactions allowed are electronic. Cashier checks.INDIAN BANKING SYSTEM Online banking often reduces funds availability delays and hastens resolution to disputes and inquiries. While some complaints and problems do require human intervention.

In addition to this buying and selling. receive. However. anyone with a web browser on their phone can access their bank’s online banking site to move and manage their money in more locations than ever before. no one can dismiss online banking as a fad. Encouraging 37 . and reducing the number of full-time employees on their payroll is an attractive option. consumers can now shop online and purchase software upgrades and augmentations through app stores. There will continue to be people who resist online banking in favor of offline transactions just as there are people who prefer to keep their money in mattresses instead of putting it in banks. The Rise of Mobile Banking As handheld mobile devices become more sophisticated. and invest their online funds. they will require new ways to send. Whether these people will exert serious influence on the movement towards online banking can be examined by looking at the needs of modern consumers. and the interests of the banks themselves. Moving beyond ringtone downloads.INDIAN BANKING SYSTEM By this point. combined with the fallout from the global financial crisis has encouraged a growing number of entrepreneurs to start their own businesses online. As an increasing number of people look to save themselves from unemployment or augment otherwise insufficient salaries by finding new ways to make money online. it is worth considering whether the trend towards online financial transactions is going to slow or reverse in the years to come. The Move to Online Business The global connectivity provided by the internet. Staffing Solutions As banks consolidate and grow larger. users are experimenting with more sophisticated transactions. they are looking for more ways to cut costs.

As an added bonus. However. In addition to saving the money that would normally be associated with operating and maintaining physical branches. and transactions that are grounded in the real world with no desire to change the way they do business. when discussing the internet it is dangerous to assume that everything is going to be moved online. industries. no longer having to print and mail paper statements to customers would be a huge savings for banks. banks have been able to take advantage of current pro-environment sentiment by marketing online banking as a “green” alternative. there will always be individuals. Physical Footprints Online banking is also more attractive to banks because a reduced physical footprint means reduced costs in other areas. online banking continues to be an attractive option for everyone involved. 38 . By appealing to more mobile customers and more cost-conscious financial service providers alike.INDIAN BANKING SYSTEM customers to do their banking online allows banks to close smaller branches in outlying locations and use economies of scale to develop customer assistance centers in locations where the labor market is more favorable.

INDIAN BANKING SYSTEM Growth of Internet The increase in the growth of internet usage will definitely help the cause of growth of online banking in India. The following chart shows the growth of internet in India during the past decade or so Why Banks Encourage Online Banking? 39 .

and actions performed under that IP address assigned to the ISP account holder. whether in bank teller wages and benefits to security costs to maintenance costs.INDIAN BANKING SYSTEM OVERVIEW Online banking has enjoyed increased popularity. and some banks actually require it. CUSTOMER ADVANTAGES:  Online security of financial data has evolved tremendously since the early days of online banking. both of which can be obtained “under the radar. online banking offers flexibility and convenience for all involved. and often transactions can be even more secure than those conducted in a drive thru lane. Whether a dynamic or changing IP address or a static or unchanging IP address is used. In-person transactions are based on account information and a photo ID. often through an Internet Service Provider who always notes activity. computer. 40 . “Online banking transactions also track the Internet Protocol (IP) address of the computer used in the transaction. BANK ADVANTAGES:  Each visit to a bank costs the institution money. Online banking reduces the need for the number of physical locations and services offered within each. asset sharing within those locations further reduce bank costs. From standard. the ISP always records what IP address is assigned to what ISP account at any time. The IP can be traced to the method or mode of Internet access.  Online banking transactions require not only a secure login but also require secured password entry. Online banking reduces those costs and increases  the bank’s profit margin. Because Customer Service Departments are united into fewer locations. brick-and-mortar institutions to cloud managed institutions.

While opinions of industry players differ on whether FY10 will indeed prove to be a tipping point. Ernst & Young. financial services. there seems to be consensus that the year would mark a critical phase in the evolution of the payments and settlement systems in India. Additional service enrollment or dis-enrollment. The growth has also been aided by banks' efforts to offer innovative services and tighten security measures. which enabled fund transfers among account holders of the same bank as well as inter-bank transfers. As and when India Pay. address updates. and unlocking a whole new world of opportunities for banks in tapping newer customer segments and in recording greater volume of transactions. "FY10 will certainly herald an important phase for electronic banking in India and an upsurge in internet and ATM transactions. more and more people are switching to electronic platforms for executing financial transactions. further reducing overhead costs for banking institutions. "At the same time. If latest RBI data on retail electronic payment systems is anything to go by.76 lakh transactions over the previous fiscal. The wider usage of cell phone and internet certainly seems to be playing a role in blurring physical boundaries. DEVELOPMENT: Increasingly. there will be huge changes. and account status and verification are all time saving activities for both the bank and the banking customer. setting up of the National Payments Corporation of India and passage of the Payments and Settlement Act too have given a positive thrust to the growth in electronic payments. In the regulatory space.  Online Bill Pay processes reduce stolen or counterfeit checks which cost banks billions of dollars every month. which will 41 . and the increase in awareness of services available. a rise of 234. traditional fund transfer will continue to hold its own.587. electronic banking is set to become the catalyst for change in the way money moves. Each online bill pay transaction allows for a grace period from the payment order date to the actual check delivery date." says Ashvin Parekh. The impact of all these measures is likely to be felt in the current fiscal. Provisional data show that in FY09 to January. which also allows the account holder additional time to preview activity and account status.INDIAN BANKING SYSTEM  Comprehensive Help sections on banks’ websites often reduce on-location inquiries. partner and national industry leader. This growth was facilitated by the introduction of real-time gross transfer (RTGS) and national electronic funds transfer (NEFT). a total of 5. We are going to witness a co-existence of these two systems. RBI outlining guidelines on mobile banking. which may well mean FY10 could become a watershed year for e-banking.85 lakh transactions were executed through the electronic channel.

and rather utilize the time and resources to function as selling outlets. Whether first-movers or latecomers. This means that branches need not spend time on processing transactions and other back office operations. we could witness a gradual shift away from Visa and MasterCard. wanting to take the first-mover advantage. Boston Consulting Group. "Now. but armed nevertheless just in the case the market takes up suddenly increases. like chicken ready to catch the early worm. Centralized operations benefit from economies of scale and help in reducing bank costs." The implementation of core banking solutions by all public sector banks has not only helped banks rationalize their costs. Banking executives interviewed by Business World Online have different ways of resolving the issue. has enabled banks to improve their efficiency. decisions can be taken remotely and the activities too can be undertaken in a centralized location. but has also allowed them to explore new ways of optimally utilizing their resources. or wait for the egg to hatch into a chick.INDIAN BANKING SYSTEM eventually settle credit card and ATM transactions." explains Janmejaya Sinha. comes into the picture. there is one partner in the e-banking game that is not waiting for the chicken to lay the egg. which facilitates linking up of a bank's branches across the country. Core banking. firms can go ahead and offer the products and services. Or. The same is true for new products and services that have emerged and continue to emerge in the world of electronic banking (e-banking). hoping that their customers will catch on soon. Opportunities in e-banking: ARE WE READY? It has always been a chicken-and-egg dilemma in business. managing director of India operations. Either firm waits for the market to mature until customers are ready for the products and services. Technology providers are always up on their toes. Some would go ahead with new ideas. Others would wait in the sidelines. 42 .

 Growing customer awareness and need of transparency.  Global players in the fray  Close integration of bank services with web based E-commerce or even disintermediation of services through direct electronic payments (E. MAIN CONCERNS IN BANKING: 43 INTERNET . recently reported that "financial institutions who don't offer home banking by the year 2000 will become marginalized.  Move from one stop shopping to 'Banking Portfolio' i.  Emergence of open standards for banking functionality.e.INDIAN BANKING SYSTEM Chapter:.6 CHALLENGES OF ONLINE BANKING Information technology analyst firm. a large sophisticated and highly competitive Internet Banking Market will develop which will be driven by  Demand side pressure due to increasing access to low cost electronic services.Cash)." By the year of 2002. the Meta Group.  More convenient international transactions due to the fact that the Internet along with general deregulation trends eliminates geographic boundaries. unbundled product purchases.

The most common method of phishing is sending emails claiming to be from your bank or other financial institutions which are dealing that already has your personal information and you will be asked to confirm the details by clicking a particular link (URL) provided in this fake email. Banking Securely: Online Banking via the World Wide Web provides an overview of Internet commerce and how one company handles secure banking for its financial institution. This URL will take you to a fake website which will be similar to your genuine website. which are later on used by scammers in unauthorized ways. Some basic information on the transmission of confidential data is presented in Security and Encryption on the Web. PC Magazine Online also offers a primer: How Encryption Works. There is a dual requirement to protect customers' privacy and protect against fraud. Phishing is an internet fraud. Of particular concern are threats of pharming and phishing. A multi-layered security architecture comprising firewalls. and the information provided by the customer in the forms provided in the fake website will be gathered 44 .INDIAN BANKING SYSTEM In a survey conducted by the Online Banking Association. member institutions rated security as the most important issue of online banking. filtering routers.  Digital certification procedures provide the assurance that the data you receive is from the Infinity system. through which innocent people are enticed to divulge their personal information like user ID and passwords. clients and their customers.  Encryption techniques used by the bank (including the sophisticated public key encryption) would ensure that privacy of data flowing between the browser and the Infinity system is protected. Security concerns: Security fears have served as deterrents to online growth. encryption and digital certification ensures that your account information is protected from unauthorized access:  Firewalls and filtering routers ensure that only the legitimate Internet users are allowed to access the system.

the information is captured by criminals. The bogus sites. IT practices. FURTHER PROBLEMS RELATING TO NET BANKING IN INDIA Given that India is the IT and tech services outsourcing hotspot of the world. will likely look the same as genuine site. Despite the advent of a very tech-savvy and vast consumer class in recent years. But when users enter their login name or password. it's surprising that Internet banking has not really taken off. and workplace constraints have affected widespread acceptance of Internet banking. certain cultural issues.INDIAN BANKING SYSTEM and used for committing fraud in their accounts or withdraw funds unauthorized from these accounts. industry lethargy. to which victims are redirected without their knowledge or consent. whereby as many as users as possible are redirected before they reach the legitimate online banking websites they intend to visit and they are lead to malicious ones. a mix of industry issues and unique challenges continue to thwart the expansion of net banking in India. Technology challenges. Pharming is another internet fraud. Low Broadband Penetration 45 Internet .

have resulted in poor acceptance levels of Internet banking by customers. Office workers take longer lunch breaks to finish banking activities and transactions at these branches rather than conduct them online. Korea and Singapore. Many 46 . Slow connectivity speeds often dampen the online banking experience for many customers eager to use such services. Banks' Ambivalent Commitment Levels Internet banking did take off in India at the turn of the millennium but soon faltered due to lack of takers. However. Chennai. as well as a lack of industry advocacy efforts. banks' ambivalent commitment levels and their reluctance to allocate huge budgets for net banking branding initiatives. state-owned and public sector banks have started doing likewise. multinational and domestic private banks started offering net banking services as a competitive differentiator. Taiwan. and Bangalore have relatively better broadband penetration rates. Most customers prefer the personal touch and customized service offered by staff in brick-and-mortar bank branches. Delhi. While the bigger cities such as Mumbai. In the middle of this decade.INDIAN BANKING SYSTEM India has one of the lowest broadband connectivity penetration rates in Asia as compared to Japan. Customers' Preference for Traditional Branches There are thousands of highly active traditional bank branches in India's crowded cities and major towns. Only recently. PC users in smaller cities and towns still use dial-up options to connect to the Internet.

These customers are also not sure about the efficacy of banks' websites and their commitment to allocate funds for reliable encryption mechanisms and robust back-end technologies and systems. RBI has accepted the recommendations of the Group to be implemented in a phased manner. (i) technology and security issues. stolen passwords.INDIAN BANKING SYSTEM Indians are also averse to calling call centers and banks' customer contact lines to address issues related to online bank accounts. resulting in poor customer service levels. viruses. Other Problems Workplace constraints and corporate policies about using external websites or pursing personal activities such as online banking have affected its expected fast-paced acceptance among the growing affluent class in India. Conservative Indian bank customers used to years of saving in an erstwhile mixed-socialist economy are always fearful of losing hard-earned savings in online scams.e. Cultural issues. identity theft. worms and spyware tend to make customers wary just like in any other country. Public sector banks with vast customer bases also don't tend to invest money in training personnel for e-banking initiatives. Accordingly. Fear of Online Threats/Scams Ubiquitous and prevalent online threats about hackers. i. such as parents giving priority use of the home PC to their children rather than using it themselves. Internet Banking in India – Guidelines Reserve Bank of India had set up a ‘Working Group on Internet Banking’ to examine different aspects of Internet Banking (I-banking). stifle the potential growth of home access to Internet banking services. (ii) legal issues and (iii) regulatory and supervisory issues. the following guidelines are issued for implementation by 47 . The Group had focused on three major areas of Ibanking.

etc. banks should use the following alternative system during the transition. Banks are also advised that they may be guided by the original report. These generally include a real time security alert. There should be a segregation of duty of Security Officer / Group dealing exclusively with information systems security and Information Technology Division which actually implements the computer systems. I. At the minimum. passwords. 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. banks should use the proxy server type of firewall so that there is no direct connection between the Internet and the bank’s system. libraries. application software. smart cards or other biometric technologies. However. telecommunication lines. Banks should introduce logical access controls to data. Further. Banks should have a security policy duly approved by the Board of Directors. c. until the PKI is put in place: 1. a state full inspection firewall is recommended which thoroughly inspects all packets of information. e. Information Systems Auditor will audit the information systems. Technology and Security Standards: a. Logical access control techniques may include user-ids. and past and present transactions are compared. which ensures server authentication and use of client side certificates issued by the banks themselves using a Certificate Server. It facilitates a high level of control and in-depth monitoring using logging and auditing tools. PKI (Public Key Infrastructure) is the most favored technology for secure Internet banking services. Usage of SSL (Secured Socket Layer). Banks should designate a network and database administrator with clearly defined roles as indicated in the Group’s report. For sensitive systems.INDIAN BANKING SYSTEM banks. utilities. systems. f. b. for a detailed guidance on different issues. d. 48 . system software. as it is not yet commonly available.

l. encryption of sensitive data like passwords in transit within the enterprise itself. in addition. both against internal and external threats. The information security officer and the information system auditor should undertake periodic penetration tests of the system. Search for back door traps in the programs. They should educate their security personnel and also the end-users on a continuous basis. The penetration testing may also be carried out by engaging outside experts (often called ‘Ethical Hackers’). The use of at least 128-bit SSL for securing browser to web server communications and.INDIAN BANKING SYSTEM 2. should be logged. 3. 4. (Para 6.4. including messages received. It is also recommended that all unnecessary services on the application server such as FTP (File Transfer Protocol). i. The application server should be isolated from the e-mail server. telnet should be disabled. Physical access controls should be strictly enforced.5) g. Security violations (suspected or attempted) should be reported and follow up action taken should be kept in mind while framing future policy. Banks should have proper infrastructure and schedules for backing up data. Physical security should cover all the information systems and sites where they are housed. All computer accesses. Business continuity should be 49 .6) h. These tools should be used regularly to avoid security breaches. which should include: 1. Attempting to guess passwords using password-cracking tools. Check if commonly known holes in the software. The backedup data should be periodically tested to ensure recovery without loss of transactions in a time frame as given out in the bank’s security policy. k. j.4. especially the browser and the e-mail software exist. (Para 6. Banks should acquire tools for monitoring systems and the networks against intrusions and attacks. 2. Attempt to overload the system using DDoS (Distributed Denial of Service) & DoS (Denial of Service) attacks. The banks should review their security infrastructure and security policies regularly and optimize them in the light of their own experiences and changing technologies.

and upgrade to newer versions which give better security and control. m. in Section 3(2) provides for a particular technology (viz. because of hacking/ other technological failures. banks should clearly notify to the customers the 50 . the asymmetric crypto system and hash function) as a means of authenticating electronic record. Legal Issues a. b. c. the risk of banks not meeting the above obligation is high on account of several factors. In India. security procedure adopted by banks for authenticating users’ needs to be recognized by law as a substitute for signature. Under the present regime there is an obligation on banks to maintain secrecy and confidentiality of customers ‘accounts. All applications of banks should have proper record keeping facilities for legal purposes. These facilities should also be tested periodically. there is an obligation on the part of banks not only to establish the identity but also to make enquiries about integrity and reputation of the prospective customer. In the Internet banking scenario. therefore. d. n. Considering the legal position prevalent.. the Information Technology Act. In Internet banking scenario there is very little scope for the banks to act on stop-payment instructions from the customers. institute adequate risk control measures to manage such risks. banks may be exposed to enhanced risk of liability to customers on account of breach of secrecy. Therefore. Security infrastructure should be properly tested before using the systems and applications for normal operations. II. The banks should. Banks should upgrade the systems by installing patches released by developers to remove bugs and loopholes.. Despite all reasonable precautions. Hence. Any other method used by banks for authentication should be recognized as a source of legal risk. accounts should be opened only after proper introduction and physical verification of the identity of the customer. even though request for opening account can be accepted over Internet. denial of service etc.INDIAN BANKING SYSTEM ensured by setting up disaster recovery sites. From a legal perspective. It may be necessary to keep all received and sent messages both in encrypted and decrypted form. 2000.

Regulatory and Supervisory Issues: As recommended by the Group. Considering the banking practice and rights enjoyed by customers in traditional banking. 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 banks operating in cross-border jurisdictions are generally not permitted and this approach will apply to Internet banking also. The Consumer Protection Act. 2. the rights and liabilities of customers availing of Internet banking services are being determined by bilateral agreements between the banks and customers. both banks and virtual banks incorporated outside the country and having no physical presence in India will not. In this regard. Currently. 1986 defines the rights of consumers in India and is applicable to banking services as well. where resident 51 . e. it is advised that: 1. The products should be restricted to account holders only and should not be offered in other jurisdictions. III. 4. denial of service on account of technological failure etc.INDIAN BANKING SYSTEM timeframe and the circumstances in which any stop-payment instructions could be accepted. 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. the existing regulatory framework over banks will be extended to Internet banking also. for the present. Thus.e. The existing exceptions for limited purposes under FEMA i. be permitted to offer Internet banking services to Indian residents. banks’ liability to the customers on account of unauthorized transfer through hacking. needs to be assessed and banks providing Internet banking should insure themselves against such risks. The services should only include local currency products. 3.

in addition to the host supervisor. will. the home supervisor. the bank and the portal and the framework for setting up of payment gateways as recommended by the Group should be adopted. business partners. banks are advised to follow the following instructions: a. analysis of cost and benefit. All banks. however.001/ 97-98 dated 4th February 1998 will equally apply to Internet banking. disruption in service. at its discretion. After the initial approval the banks will be obliged to inform RBI any material changes in the services / products offered by them. 10/ 31. who propose to offer transactional services on the Internet. it has become necessary to set up ‘Interbank Payment Gateways’ for settlement of such transactions. defective services and personnel of service providers gaining intimate knowledge of banks’ systems and mutualizing the same. 52 . third party service providers and systems and control procedures the bank proposes to adopt for managing risks..CO. Banks will report to RBI every breach or failure of security systems and procedure and the latter. operational arrangements like technology adopted. are permitted. Given the regulatory approach as above. The protocol for transactions between the customer. d. Bank’s application for such permission should indicate its business plan. may decide to commission special audit / inspection of such banks.BC.ITC. Banks should develop outsourcing guidelines to manage risks arising out of third party service providers. 5. should obtain prior approval from RBI. c. The RBI as supervisor will cover the entire risks associated with electronic banking as a part of its regular inspections of banks. effectively. etc. With the increasing popularity of e-commerce.09. e. The bank should also submit a security policy covering recommendations made in this circular and a certificate from an independent auditor that the minimum requirements prescribed have been met. such as. b. The guidelines issued by RBI on ‘Risks and Controls in Computers and Telecommunications’ vide circular DBS. Overseas branches of Indian banks will be permitted to offer Internet banking services to their overseas customers subject to their satisfying.INDIAN BANKING SYSTEM Indians have been permitted to continue to maintain their accounts with overseas banks etc.

transactions involving only one bank) should be excluded for settlement through an inter-bank payment gateway. Reserve Bank may get the security of the entire infrastructure both at the payment gateway’s end and the participating institutions’ end certified prior to making the facility available for customers use. i. Hyperlinks from banks’ websites often raise the issue of reputational risk.. the regulatory framework is in place. Banks must follow the minimum recommended security 53 . the participating banks and service provider and the banks themselves will form the legal basis for such transactions. Bilateral contracts between the payee and payee’s bank. Once. Hyperlinks from banks’ websites should be confined to only those portals with which they have a payment arrangement or sites of their subsidiaries or principals. in real time. h. Such links should not mislead the customers into believing that banks sponsor any particular product or any business unrelated to banking. Hyperlinks to banks’ websites from other portals are normally meant for passing on information relating to purchases made by banks’ customers in the portal. k.e. Banks must make mandatory disclosures of risks. Payments affected using credit cards. 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. All settlement should be intra-day and as far as possible. the transactions should be digitally certified by any licensed certifying agency. Inter-bank payment gateways must have capabilities for both net and gross settlement. The banks should also provide their latest published financial results over the net. Connectivity between the gateway and the computer system of the member bank should be achieved using a leased line network (not through Internet) with appropriate data encryption standard. Each gateway must nominate a bank as the clearing bank to settle all transactions. All transactions must be authenticated. responsibilities and liabilities of the customers in doing business through Internet through a disclosure template. j.INDIAN BANKING SYSTEM f. g. payments arising out of cross border e-commerce transactions and all intra-bank payments (i. SSL / 128 bit encryption must be used as minimum level of security. The rights and obligations of each party must be clearly defined and should be valid in a court of law.

in general. The number and password are then used to carry out transactions on their behalf without their knowledge. a simple ignorance or oversight can make a huge dent in your hard. Never reply to queries from bank online about account or personal details. Just memories it. Even though the recommendations have been made in the context of Internet banking. All banks offering Internet banking are advised to make a review of their systems in the light of this circular and report to Reserve Bank the types of services offered. who float a site similar to that of the person's bank. to all forms of electronic banking and banks offering any form of electronic banking should adopt the same to the extent relevant. these are applicable. deviations and their proposal indicating a time frame for compliance.INDIAN BANKING SYSTEM precautions while dealing with request received from other websites. The personal information should not be kept in a public computer or in emails. Do not even write it on a piece of paper on diary. The Reserve Bank of India has decided that the Group’s recommendations as detailed in these circulars should be adopted by all banks offering Internet banking services. Remember. extent of their compliance with the recommendations. with immediate effect. 3. It should be alphanumeric and change it frequently. Phishing involves using a form of spam to 54 . The first such report must reach us within one month from the date of this circular. 2. relating to customers’ purchases. Banks not offering any kind of I-banking may submit a ‘nil’ report SOLUTIONS: Here are some simple tips to prevent you from falling into the trap of cyber criminals. Never reveal password to anyone. They are asked to provide all personal information about themselves and their account to the bank on the pretext of database up gradation.earned savings.  Phishing: A person's personal details are obtained by fraudsters posing as bankers.  Securing your account: Avoid online banking on unsecured wife systems and operate only from PCs at home.

or processing capacity and secretly gives it to someone else. or they may attempt to trick you into divulging your bank account or credit card details. After installation the software detects when a person accesses online banking sites and records the username and password to transmit to the offender. are often susceptible to Trojans like malware or spyware. Typically. Spyware may take personal information.  Spam: Spam is an electronic 'junk mail' or unwanted messages sent to your email account or mobile phone.  Nigerian Scam: Nigerian or Frauds 409 or 419 are basically the lottery scam in which some overseas persons are involved to cheat innocent persons or organizations by promising to give a good amount of money at nominal fee charges. but are essentially commercial and often annoying in their sheer volume. 55 . business information. They may try to persuade you to buy a product or service. As well as targeting online banking customers. the victim downloads a program which captures his or her banking login details and sends them to a third party. Their intention is to steal money in the form of fee against the lottery prize. If the link is followed. bandwidth.INDIAN BANKING SYSTEM fraudulently gain access to people's online banking details. "Trojan Horse" scheme unfolds when malicious software (malware) embeds to a consumer's computer without the consumer being aware of it.  Spyware: Spyware such as Trojan horse is generally considered to be software that is secretly installed on a computer and takes things from it without the permission or knowledge of the user. in places like Internet cafes. Trojans often come in links or as attachments from unknown email senders. phishing emails may target online auction sites or other online payment facilities. People using public computers. These messages vary. a phishing email will ask an online banking customer to follow a link in order to update personal bank account details. or visit a website where you can make purchases.

kid's or spouse's name and telephone numbers. report the matter immediately to your bank and change your password right away. Make 56 . Also. one that combines alphabets and numbers. never use the same online banking password for all. This little amount of `finger exercise' will go a long way in safety. Most security updates are aimed at reducing risks to your computer. Never enter your user ID or password or such sensitive information without ascertaining that you are on the right website. always type it in. Close the browser to ensure that your secure session is terminated. Always type the Web address of your bank into the browser address space. it has to be fake. Always log out when you exit the online banking portal.INDIAN BANKING SYSTEM  Check sites URL: Always check the URL of your bank's web site. Fraudsters can lure you to enter your user ID and password at a fake website that resembles your bank. Never exit simply by closing the browser. If you see anything other than the bank's genuine URL. Never click on the link in the email. like first names. never paste your password. If your bank has it. As it can easily be cracked by cyber criminals. If you notice irregularities (like you are logging in after two days. Never select the option on browser that stores or retains user name and password. avoid easy-to-guess passwords. If you have several bank accounts.  Always check 'last logged': Most banks have a 'last logged in' panel on their websites. Also.  Keep your system up to date: Regularly check for security updates for your computer operating system. but the panel says you logged in that morning!). these may be data-related or otherwise. check the panel whenever you log in. birthdays.  Fool-proof password: Change your online banking password at regular intervals. Try to have an alpha-numeric password.

INDIAN BANKING SYSTEM sure that your operating system and browser have the latest security patches installed. Chapter:.  Follow Bank instructions: Banks say that appropriate up gradations are carried out from time to time by their IT departments for risk mitigation. and monitor your accounts to safeguard yourself from bank fraud committed through identity theft. Avoid accessing your bank online at cyber cafes or on a share or public computer. Also. and Adware.7 57 . where privacy and security are minimal. always install these only from trusted websites.  Protection: Learn the ways to protect yourself from online banking fraud schemes. And. spyware or malware through Antivirus Software.  Public access can be injurious: Don't leave the PC unattended after keying in information while transacting on the website. SMS alerts are also an important tool since any transaction carried out on account is reported to the account holder through an SMS. Install a personal firewall to prevent hackers from gaining unauthorized access to your computer. Also. especially if you connect to the Internet through a cable or a DSL modem. documents and passwords safe. Detect Trojans that appear on your PC in the form of viruses. They issue instructions to the customers to manage their accounts through virtual keyboards by way of which the characters typed by them are not identified by hackers. learn to keep your cards. avoid locations that offer online connections through wireless networks (Wi-Fi). anti-Spyware.

They prefer to use the services of both the online and traditional banking rather than a particular type. The analysis of this survey or data is as follows:- Q.INDIAN BANKING SYSTEM DATA ANALYSIS A survey was conducted on online banking in India for the primary data among 100 people. What kind of banking do you prefer? Poll result 15% 25% traditional online both 60% POLL out of 100: – traditional – 15 . Online – 60 . both – 25 FINDINGS: This shows us the preference of the people towards the type of banking. 58 .

22. While a few of the people are still not fully convinced.INDIAN BANKING SYSTEM Q. 59 . No . Do you think online banking is better than traditional banking? POLL YES 27% NO CAN'T SAY 18% 55% POLL out of 100: Yes .69. Can’t Say – 9 FINDINGS: The people understand that online banking is better than the traditional banking because of its nature.

Do you feel your account is secured in online banking? POLL 44 28 YES NO 28 CANT SAY Poll out of 100: Yes . 60 . Their security concern should be eradicated. but not all.INDIAN BANKING SYSTEM Q. Can’t Say – 28 FINDINGS: Majority of the people think that their Account is secured.44. This will attract customers.28. No .

regularly . Monthly .44.20. They may transact with the bank on monthly basis for most of the time.INDIAN BANKING SYSTEM Q.10. rarely – 28 FINDINGS: Most of the people do not need the services of banks regularly or maybe there is no need. 61 . How frequently do you use banking services? POLL OF 100 20 28 WEEKLY MONTHLY REGULARLY RARELY 8 44 POLL out of 100: Weekly .

How happy are you with services of online banking provided by your bank? POLL OF 100 12% 35% COMPLETELY PARTIALLY 19% FAIRLY 35% NOT AT ALL POLL out of 100: Completely . partially .20.INDIAN BANKING SYSTEM Q. fairly .36.12 62 . Not at all .36.

This may be due to multiple reasons.INDIAN BANKING SYSTEM FINDINGS: The satisfaction level of people with the online banking services of their banks has a mixed review. Q. What type of transaction do you make in online banking? 63 .

Payments .INDIAN BANKING SYSTEM Column1 CHECK BALANCES 20% PAYMENTS 44% 8% TRANSFER OF FUNDS OTHER 28% POLL out of 100: Check balances . ONLINE BANKING IN INDIA 64 . other -20 FINDINGS: The utility of the online banking is service is not used to the extent is should be and it is being majorly used for the purpose of checking the balance in the account. The reason for this is the low volume of transaction among the people.28.8. Transfer of fund .44.

2 – Online. 3 – Can’t Say) Q. 2 – Public sector bank. 2 – No.10 ARE YOU HAPPY WITH THE SERVICES OF ONLINE BANKING PROVIDED BY YOUR BANK? (1 – Completely. 2 – 3 to 8. 3 – Fairly.1 WHICH BANK DO YOU HAVE AN ACCOUNT? (1 – Private sector bank.yes. 2 – No .7 DO YOU FEEL ONLINE BANKING HAS A GROWTH POTENTIAL IN INDIA? (1 – Yes. 3 – Can’t Say) Q. 3 – Can’t say ) Q.3 DO YOU THINK ONLINE BANKING IS USEFUL? (1 – Yes.8 WHAT TYPE OF TRANSACTION DO YOU MAKE IN ONLINE BANKING? (1 – Check balances.4 HOW FREQUENTLY DO YOU USE BANKING SERVICES? (1 – Weekly.9 DO YOU FEEL YOUR ACCOUNT IS COMPLETELY SECURED IN ONLINE BANKING? (1 – Yes.6 DO YOU THINK ONLINE BANKING IS BETTER THAN TRADITIONAL BANKING? (1 – Yes. 3 – Both) Q. 4 – Other) Q. 3 – Can’t say) Q. 2 – No. 3 – Other) Q. 2 – Partially. 4 – Not at all) Q.11 DO YOU FEEL MOBILE BANKING IS BETTER THAN ONLINE BANKING? (1 . 2 – No. 2 – Monthly.INDIAN BANKING SYSTEM Q.5 HOW FREQUENTLY DO YOU VISIT YOUR BANK BRANCHE PER MONTH? (1 – 1 to 3. 2 – No. 3 – Regularly.12 FOR ME ONLINE BANK IS NAME: PHONE: EMAIL ID: CONCLUSION 65 . 3 – Can’t Say) Q. 4 – Rarely) Q. 3 – 8 to 12. 2 – Make payments.2 WHAT KIND OF BANKING DO YOU PREFER? (1 – Traditional. 3 – Transfer funds. 4 – More than 12) Q.

treasury management. we have a comparative advantage in almost all these areas.INDIAN BANKING SYSTEM The face of banking is changing rapidly. These are some of the issues that need to be addressed if banks are to succeed. It is time to harness these resources for development of Indian banking in the new century 66 . owing to changes in the global financial system. therefore. Taking the banking industry to the heights of international excellence will require a combination of new technologies. banks need to go beyond peripheral issues and tackle significant issues like improvements in profitability. while achieving economies of scale through consolidation and exploring available costeffective solutions. banks in India will have to benchmark themselves against the best in the world. in the changing milieu. It is now clear that a thriving and vibrant banking system requires a well-developed financial structure with multiple intermediaries operating in markets with different risk profiles. Our professionals are at the forefront of technological change and financial developments all over the world. Fortunately. efficiency and technology. For a strong and resilient banking and financial system. better processes of credit and risk appraisal. internal control and external regulations and not the least. Competition is going to be tough and with financial liberalization under the WTO. Over the last three decades the role of banking in the process of financial intermediation has been undergoing a profound transformation. product diversification. human resources. not just survive.

com 67 .INDIAN BANKING SYSTEM BIBLOGRAPHY of www. Indian banking system.problems of online www.