INSTITUTE OF MANAGMENT STUDIES, DAVV, INDORE

FINANCE AND ADMINISTRATION – SEMESTER IV

CREDIT MANAGEMENT AND RETAIL BANKING

ELECTRONIC BANKING
 When customer is not required to visit branch to do banking transaction but uses tele-banking or
remote banking facility is called electronic banking.

 Anytime Banking/ Anywhere Banking

 ATM and tele-banking – financial details can be accessed from remote locations and basic
transactions can be effected even outside the bank.
 Mutual arrangements between banks are made for allowing use of any other banks ATM
 With implementation of Rangarajan committee report, govt. is allowing to set up ATM at non branch
locations such airport, shopping mall, office complex etc.

 Internet Banking – with the popularity of PCs and easy access to Internet and World Wide Web
(www) banks are using the source for delivering products and services to customer through internet
banking.
 Levels of services provided are of three types
- Basic level service which disseminate information of different products and services to customer
and reply customer queries.
- In next level allows customer to submit their instructions, application for different services, query
of balance etc. but does not permit any fund based transaction of their account.
- Third level offers fully transactional type which allow customer to operate the account for
transfer of funds, payment of utility bill, transact purchase and sale of security etc.

 Home Banking (Corporate and Personal)

 Today bank customers are more technologically sophisticated than ever before, hence more and
more of them have become comfortable with idea of using machine for wide range of banking
service.

 Corporate Banking – banks are providing customer terminal at the office of corporate where he
require only computer, a telephone connection and modem. Some of the banking facilities provided
are – getting their current balance and statement of account, ordering cheque book, ordering intra
bank and interbank fund transfer, instructions for stop payment of cheque, international remittance
and opening LC. By obtaining special SWIFT authentication facility customer can prepare message
in SWIFT format by sitting in office and transfer template to banker which will directly authenticate
transaction, thereby entire transaction is completed across the globe in minutes.

 Personal Banking - by using tele-banking facility customer can dial up the branch and after
identification number will be able to get connectivity with branch computer and can have access to
his balance, can place order for statement of account or request for cheque book etc through
tele(phone) banking. If the customer has PC and modem at home he can have direct connectivity
with branch through telephone line and obtain all above service and additionally transfer of funds.
Number of services offered at present is however limited.

 Tele-banking – based on voice processing facility available with bank computer. In this system
software identifies the caller by keyword and provide services like balance in the account. Some
bank use a telephone answering machine which is not a telebanking facility but a telephone
answering machine.
 Mobile banking –
 Mobile banking comes with features like 128 bit encryption and open internet technology i.e. not
dependent on any specific service provider and handset company.
 Customer can check his bank balance, or order for DD, stop payment of cheque, request for cheque
book, look for current interest rate, last 3-5 transactions on his mobile screen.
 RBI approval is necessary for banks providing mobile banking.
 Only rupee based transactions are permitted through mobile banking, no cross border transactions
are allowed.
 KYC to be followed.
 Customer is required to register his mobile number to bank.
 Initially there was a cap for amount, now RBI has removed any restriction about amount to be
transacted through mobile banking, however bank should do it on own risk perception.
 Customer has to download bank’s App.

 Electronic commerce (e-commerce)

 It is a digital parlance.
 It is not limited to only business to business (B2B) transactions.
 Other developments are higher degree of personalization, round the clock, fast, immediate
customer reaction and reduction in operating cost.

 Signature storage and Retrieval system

 Signature card is scanned using scanner, which is device which takes image of signature and
converts it to a digital which is then stored on hard disk of computer. Along with signature other
details like account number name operating instructions are also input to computer. Data is then
verified, validated and authenticated. When the cheque is presented for payment the signature can
be retrieved.

 Cheque Truncation
 Section 6 of NI Act was amended in Sept. 2002 to include electronic and truncated cheques in
definition of cheque.
 Section 6b – a cheque which is truncated during the course of clearing cycle, either by the Clearing
House or by the bank, whether paying or receiving payment, immediately on generation of an
electronic image for transmission, substituting the further physical movement of cheque in writing.
 Characteristics of truncated cheque are –
- It is an electronic image of paper cheque
- Only the banks involved in clearing can truncate the cheque
- This image will substitute the physical cheque from now onwards
- To be done only during the course of clearing cycle
- Paper cheque after truncation to be kept in custody of bank

CORE BANKING SOLUTIONS

 Core banking has a centralized branch computerization model where branches are connected to
central host which incorporate branch automation module and online multiple delivery channel like
ATM, Debit card, tele-banking, mobile banking, internet banking etc. under one roof. There is a
central data base where transactions are done centrally online. It offers services to customers
round the clock.
 Various business modules like retail banking, deposit, loans, locker, clearing, forex, govt. module
etc. MIS, integrate with ATM, internet banking, kiosks and other delivery channels.
 Efficient and effective MIS, HRMS, ALM and risk management, BPR etc using central data pool.
Needs to be manned round the clock to offer 24 x 7 service to customers.

Payment Systems

 The Reserve Bank has taken many initiatives towards introducing and upgrading safe and efficient
modes of payment systems in the country to meet the requirements of the public at large. The
dominant features of large geographic spread of the country and the vast network of branches of
the Indian banking system require the logistics of collection and delivery of paper instruments.
These aspects of the banking structure in the country have always been kept in mind while
developing the payment systems.

Paper-based Payments

 Use of paper-based instruments (like cheques, drafts, etc.) accounts for nearly 60% of the volume
of total non-cash transactions in the country. This share has been steadily decreasing over a period
of time and electronic mode gaining popularity due to the concerted efforts of Reserve Bank of India
to popularize the electronic payment products in preference to cash and cheques.

 Since paper based payments occupied an important place in the country, Reserve Bank had
introduced Magnetic Ink Character Recognition (MICR) technology for speeding up and bringing in
efficiency in processing of cheques.

 Further development in paper-based instruments include launch of Speed Clearing (for local
clearance of outstation cheques drawn on core-banking enabled branches of banks),

 Recent development is introduction of Cheque Truncation System (to restrict physical movement of
cheques and enable use of images for payment processing), framing CTS-2010 Standards (for
enhancing the security features on cheque forms) and the like.

 While the overall thrust is to reduce the use of paper for transactions, given the fact that it would
take some time to completely move to the electronic mode, the intention is to reduce the movement
of paper – both for local and outstation clearance of cheques.

Electronic Payments

The initiatives taken by RBI in the mid-eighties and early-nineties focused on technology-based
solutions for the improvement of the payment and settlement system infrastructure, coupled with the
introduction of new payment products by taking advantage of the technological advancements in
banks. The continued increase in the volume of cheques added pressure on the existing set-up, thus
necessitating a cost-effective alternative system.

Electronic Clearing Service (ECS) Credit

The Bank introduced the ECS (Credit) scheme during the 1990s to handle bulk and repetitive payment
requirements (like salary, interest, dividend payments) of corporates and other institutions. ECS
(Credit) facilitates customer accounts to be credited on the specified value date and is presently
available at all major cities in the country.

Electronic Clearing Service (ECS) Debit

The ECS (Debit) Scheme was introduced by RBI to provide a faster method of effecting periodic and
repetitive collections of utility companies. ECS (Debit) facilitates consumers / subscribers of utility
companies to make routine and repetitive payments by ‘mandating’ bank branches to debit their
accounts and pass on the money to the companies. This tremendously minimises use of paper
 instruments apart from improving process efficiency and customer satisfaction. There is no limit as to
the minimum or maximum amount of payment. This is also available across major cities in the country.

Electronic Funds Transfer (EFT)

This retail funds transfer system introduced in the late 1990s enabled an account holder of a bank to
electronically transfer funds to another account holder with any other participating bank. For use by the
general public a feature-rich and more efficient system is now in place, which is the National Electronic
Funds Transfer (NEFT) system.

National Electronic Funds Transfer (NEFT) System

In November 2005, a more secure system was introduced for facilitating one-to-one funds transfer
requirements of individuals / corporates. Available across a longer time window, the NEFT system
provides for batch settlements at hourly intervals, thus enabling near real-time transfer of funds.

Real Time Gross Settlement (RTGS) System

RTGS is a funds transfer systems where transfer of money takes place from one bank to another on a
"real time" and on "gross" basis. Settlement in "real time" means payment transaction is not subjected to
any waiting period. "Gross settlement" means the transaction is settled on one to one basis without
bunching or netting with any other transaction. Once processed, payments are final and irrevocable.
This was introduced in in 2004 and settles all inter-bank payments and customer transactions above ` 2
lakh.

Clearing Corporation of India Limited (CCIL)

CCIL was set up in April 2001 by banks, financial institutions and primary dealers to function as an
industry service organisation for clearing and settlement of trade in money market, government
securities and foreign exchange market.

The Clearing corporation plays the crucial role of Central Counter Party in govt. securities, USD_INR
forex exchange and Collaterised Borrowing and Lending Obligations (CBLO) market.

Electronic modes of transmission/ Payment gateways (International)

 Transfer of funds from one bank to another in different countries and interbank payment and
receipts can be executed with the help of various payment gateways and telecommunication
systems.

 SWIFT – Society for Worldwide Interbank Financial Telecommunication is a co-operative society,

owned by member banks and FIs providing secured telecommunication spread over 209
countries, 24 hours a day and 365 days a year.

 CHIPS – Clearing House Interbank Payment System is a major payment system in USA since
1970, established by New York Clearing House for settlement of large part of US dollar
payments in USA. It is net settlement payment system done at the end of day through clearing
house, and net position is then debited or credited to each bank account with Federal Reserve
Bank. CHIPS is operative only in New York and as such is mainly used for foreign exchange
interbank settlement and Euro Dollar settlements.

 FEDWIRE – US payment system operated by Federal Reserve Bank, operated all over US
states since 1918, working on gross settlement basis. As compared to CHIPS this is a system
handling large number of payments across USA covering interbank transfer out of New York,
local borrowings and lending, commercial payments and also some securities transactions
related payments for domestic banks.
  CHAPS – Clearing House Automated Payment System is a British equivalent to CHIPS handling
receipts and payment in London. System works on same principles as CHIPS, working on net
payment settlement system

 TARGET – Trans-European Automated Real-Time Gross Settlement Express Transfer system is

a EURO payment system and works on RTGS system working in Europe.

Prepared by
Arvind Paranjape, M.Sc. CAIIB
9425067026
paranjape.arvind@yahoo.com