CHAPTER 1: INTRODUCTION

1.1 Bank Concept & Meaning

You know people earn money to meet their day-to-day expenses on food, clothing,
education of children, housing, etc. They also need money to meet future expenses on
marriage, higher education of children, house building and other social functions. These
are heavy expenses, which can be met if some money is saved out of the present income.
Saving of money is also necessary for old age and ill health when it may not be possible
for people to work and earn their living. The necessity of saving money was felt by people
even in olden days. They used to hoard money in their homes. With this practice, savings
were available for use whenever needed, but it also involved the risk of loss by theft,
robbery and other accidents. Thus, people were in need of a place where money could be
saved safely and would be available when required. Banks are such places where people
can deposit their savings with the assurance that they will be able to withdraw money from
the deposits whenever required. People who wish to borrow money for business and other
purposes can also get loans from the banks at reasonable rate of interest.
Bank is a lawful organisation, which accepts deposits that can be withdrawn on demand. It
also lends money to individuals and business houses that need it. Banks also render many
other useful services – like collection of bills, payment of foreign bills, safe-keeping of
jewellery and other valuable items, certifying the credit-worthiness of business, and so on.
Banks accept deposits from the general public as well as from the business community.
Anyone who saves money for future can deposit his savings in a bank. Businessmen have
income from sales out of which they have to make payment for expenses. They can keep
their earnings from sales safely deposited in banks to meet their expenses from time to
time. Banks give two assurances to the depositors –
a. Safety of Deposits and
b. Withdrawal of Deposits whenever needed
On deposits, banks give interest, which adds to the original amount of deposit. It is a great
incentive to the depositor. It promotes saving habits among the public. On the basis of
deposits banks also grant loans and advances to farmers, traders and businessmen for
productive purposes. Thereby banks contribute to the economic development of the
country and well being of the people in general. Banks also charge interest on loans. The
rate of interest is generally higher than the rate of interest allowed on deposits. Banks also

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 charge fees for the various other services, which they render to the business community
and public in general. Interest received on loans and fees charged for services which
exceed the interest allowed on deposits are the main sources of income for banks from
which they meet their administrative expenses.
The activities carried on by banks are called banking activity. ‘Banking’ as an activity
involves acceptance of deposits and lending or investment of money. It facilitates business
activities by providing money and certain services that help in exchange of goods and
services. Therefore, banking is an important auxiliary to trade. It not only provides money
for the production of goods and services but also facilitates their exchange between the
buyer and seller.
1.2 Banking Definitions
A banking company is defined a company which transacts the business of banking in
India. The Banking Regulation Act defines the business of banking by stating the essential
functions of a banker. It also states the various other businesses a banking company may
be engaged in and prohibits certain businesses to be performed by it.
The term ‘Banking’ is defined as “accepting, for the purpose of lending or investment, of
deposits of money from the public, repayable on demand or otherwise, and withdrawable
by cheque, draft, order of otherwise” (Section 5(b))
The salient features of this definition are as follows:
(i) A banking company must perform both of the essential functions, viz., (a) accepting of
deposits, and (b) lending or investing the same. If the purpose of accepting of deposits is
not to lend or invest, the business will not be called banking business. The explanation to
Section 5(c) makes it clear that any company which is engaged in the manufacture of
goods or carries on any trade and which accepts deposits of money from the public merely
for the purpose of financing its business, as such manufacturer or trader shall not be
deemed to transact the business of banking.
(ii) The phrase ‘deposit of money from the public’ is significant. The banker accepts
deposits of money and not a anything else. The word ‘public’ implies that a banker
accepts deposits from anyone who offers his/her money for such purpose. The banker
however, can refuse to open an account in the name of the person who is considered as an
undesirable person, e.g., a thief, robber, etc. Acceptance of deposits should be the known
business of a banker. The money-lenders and indigenous bakers depend on their own
resources and do not accept deposits from the public. If they ask for money from their

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friends or relatives in case of need, such money is not deemed as deposit accepted from
the public.
(iii) The definition also specifies the time and mode of withdrawal of the deposits. The
deposited money should be repayable to the depositor on demand made by the latter or
according to the agreement reached between the two parties. The essential feature of
banking business is that the banker does not refund the money on his own accord, even if
the period for which it was deposited expires. The depositor must make a demand for the
same. The Act also specified that the withdrawal should be effected through an order,
cheque, draft or otherwise. It implies that the demand should be made in a proper manner
and through an instrument in writing and not merely by verbal order or a telephonic
message.
It is thus clear that the underlying principle of the business is that the resources mobilized
through the acceptance of deposits must constitute the main stream of funds which are to
be utilized for lending or investment purposes. The banker is, thus, an intermediary and
deals with the money belonging to the public. A number of other institutions, which also
deal with money, are not designated as banking institutions, because they do not fulfill all
the above-mentioned pre-requisites. The specialized financial institutions, e.g., Industrial
Finance Corporation of India and State Finance Corporation, are not banks because they
do not accept the deposits in the prescribed manner. The essence of banking business lies
in the two essential functions. This is also evident from the definition given by Sir John
Paget, a noted authority on Banking.
Sir John Paget’s Definition: According to Sir John Paget, “No person or body corporate
or otherwise, can be a banker who does not (i) take deposit, accounts, (ii) take current
accounts, (iii) issue and pay cheques, and (iv) collect cheques, crossed and uncrossed, for
his customers.” This definitions points out the four essential functions of the banking
business. Sir John Paget also lays emphasis on the performance of the above functions in a
regular and recognized manner. According to his, “one claiming to be a banker must
profess himself to be one and the public must accept his as such, his main business must
be that of banking from which, generally, he should be able to earn his living.” The above-
mentioned functions are considered as the essential functions of a banker but this
definition does not include the other functions which are now being performed by modern
bankers.
Name must include the word ‘Bank’, ‘Banker’ or ‘Banking’. Section 7 makes it essential
for every company carrying on the business of banking in India to use as part of its name

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 at least one of the words-bank, banker, banker, banking or banking company. Besides, it
prohibits any other company of firm, individual or group of individuals, from using any of
these words as parts of its/his name. Section 7 has been amended in 1983 with the effect
that any of these words cannot be used by any such company event “in connection with its
business.”
1.3 Evolution of Banking
Origin of the word “Bank” – Opinion is divided in regards to this. According to some
authorities, the work “Bank” itself is derived from the words “bancus” or “banqee,” that
is, a bench. The early bankers, the Jews in Lombardy, transacted their business on benches
in the market place. When a banker failed his “banco” was broken up by the people, hence
the word “bankrupt.” This etymology is however, ridiculed by Macleod on the ground
Ages”. There are others, who are of the opinion that the word “bank” is originally derived
from the German word “back” meaning a joint stock fund, which was Italianised into
“banco” when the Germans were masters of a great part of Italy. This appears to be more
possible. But “whatever” be the origin of the word ‘bank’, “as Professor Ramchandra Rao
says (Present-Day Banking in India, 1st edition, p88) “It would trace the history of
banking in Europe from the Middle Ages.”
1.3.1 Early History of Banking
As early as 2000 B.C., the Babylonians had developed a banking system. There is
evidence to show that the temples of Babylon were used as banks and such great temples
as those of Ephesus and of Delbhi were the most powerful of the Greek banking
institutions. But the spread of irreligion soon destroyed the public sense of security in
depositing money and valuables in temples, and the priests were no longer acting as
financial agents. The Romans did not organize State Banks as did the Greeks, but their
minute regulations, as to the conduct of private banking, were calculated to create the
utmost confidence in it. With the end of the civilization of antiquity, and as a result of
administrative decentralization and demoralization of the Government authority, with its
inevitable counterpart of commercial insecurity, banking degenerated for a period of
some centuries into a system of financial makeshifts. But that was not the only cause. Old
prejudices die hard, and Aristotle’s dictum, that the charging of interest was unnatural
and consequently immoral was adhered to fanatically. Even now some Mohammedans, in
obedience to the commands contained in that behalf in their religious books, refuse to
accept interest on money loans. The followers of Aristotle’s dictum forgot that the
ancient world, the Hebrews included, although it had to system of banks that would be

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considered adequate from the modern point of view, and maintained moneylenders and
made no sin of interest, but only of usury. However, upon the revival of civilization,
growing necessity forced the issue in the middle of the 12th century, and banks were
established at Venice and Genoa, though in fact they did not become banks as we
understood them today, till long after. Again the origin of modern banking may be traced
to the money dealers in Florence, who received money on deposit, and were lenders of
money in the 14th century, and the names of the Bardi, Acciajuoli, Peruzzi, Pitti and
Medici soon became famous throughout Europe, as bankers. At one time, Florence is said
to have had eighty bankers, though it could boast of no public bank.
1.3.2 Development of British Banking
Royal Exchanger – in England, we find during the reign of Edward III, money
changing-an important function of the bankers of those days-was taken up by a Royal
Exchanger for the benefit of the Crown. He exchanged the various foreign coins, tendered
to his travelers and merchants entering the kingdom, into British money, and, on the other
hand, supplied persons going out of the country with the foreign money they required.
The Goldsmiths – It is probably true to say that the ground was prepared for modern
banking in England, by the influx of gold from America in the Elizabethan Age and the
simultaneous growth of foreign trade. Land ceased to be the only form of wealth, and the
country gentlemen and the town merchants, began to hold part of their “capital” in cash.
Impetus was given to public banking by the seizure, by Charles I in 1640 of 130,000
bullion left for safe custody by the city merchants at the Royal Mint. As a result of this
Royal repudiation, the merchants began to entrust their cashiers with large sums, but the
later mis-appropriated their masters’ money for their own benefit. Finding that their
employees had not treated them better than their king, the city merchants decided to keep
their cash with goldsmiths, who in those days had strong rooms and employed watchmen.
Early Beginning of “Issue” and “Deposit” Banking - Thus, large sums of money were
left with the goldsmiths for safe custody against their signed receipts, known as
“goldsmiths’ notes,” embodying an undertaking to return the money to he depositor or to
bearer on demand. Two developments quickly followed, which were the foundation of
“issue” and “deposit” banking, respectively. The first was that the goldsmiths’ note
become payable to bearer, and so was transformed from a receipt to a bank note. It was
payable on demand, and enjoyed considerable circulation. Secondly, the goldsmiths
gradually discovered that large sums of money were left in their keeping for long periods
and, following the example of Dutch bankers, they thought it safe and profitable to lend

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out a part of their customers’ money provided such loans were rapid within a fixed time.
Further, realizing that the business of loaning of other people’s money at interest was
profitable, and in order to attract larger amounts, the more enterprising of the goldsmiths
began to offer interest on money deposited with them, instead of charging a fee for their
services in guarding their clients’ gold. This marks an important step in the development
of banking in England. Business grew to such an extent that it soon became clear that a
goldsmith could always spare a certain proportion of his cash for loans, regardless of the
date at which his notes fell due. It equally became safe for him to make his notes payable
at any time, for so long as his credit remained good, he could calculate, on the law of
average, the amount of gold he needed to meet the daily claims of his note holders and
depositors.
Current Account – It was in 1672, that this development of English banking received a
rude setback. Charles II borrowed heavily from the goldsmiths and promptly like his
father repudiated his debts. A crisis ensued, and was followed by a general suspension of
payments. Confidence, however, was restored in spite of the shock and the general belief,
which it produced among people that the goldsmiths were guilty of imprudence and
exorbitant practices. It was soon after this date that the goldsmiths found that they could
receive money on what is now termed “current account,” i.e., money withdrawal without
notice.
1.3.3 Early Growth of Banks in India
The origin of modern banking in India dates back to 1770 when the first joint-stock bank,
named the Hindustan Bank, was started by the English Agency house of Alexander & Co,
in Calcutta. The bank was, however, would up in 1832.
Presidency Banks
The real growth of modern commercial banking began in the country when the
government was awakened to the need for banks in 1806 with the establishment of the
first Presidency Bank, called the Bank of Bengal, in Calcutta in that year. Then followed
the establishment of two other Presidency Banks, namely, the Bank of Bombay in 1840
and the Bank of Madras in 1843. To each of these banks, the government had subscribed
Rs. 3 lakhs to their share capital. However, a major part of their share capital was
contributed by the European shareholders. These Presidency Banks, however, enjoyed
the monopoly of government banking. They were also given the right of note-issue in
1823, which was however, withdrawn in 1862. These three Presidency Banks continued
till 1920. In 1921 they were amalgamated into the Imperial Bank of India.

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 Indian Joint-Stock Banks
The year 1860 is a landmark in the history of public banks in India, since in that year the
principle of limited liability was first applied to join-stock banks. Since 1860 till the end
of the nineteenth century, a number of Indian joint stock banks come into existence. For
instance, the Allahabad Bank was started at Allahabad in 1865. In 1875, the Alliance
Bank of Simla was started. In 1889, another Indian bank called Oudh Commercial Bank
was established. In 1895, the famous Punjab National Bank came into existence. Inspired
by the Swadeshi Movement, several Indian entrepreneurs ventured into the modern
banking business. During the boom period of 1906-13, thus, there was a mushroom
growth of banks. Many prominent banks also came into existence during this period.
These were the Bank of India (1906), the Canara Bank (1906), the Bank of Baroda
(1908), and the Central Bank of India (1911).
Foreign Banks
In addition to the Indian joint-stock banks, a number of multi-national foreign banks
called “exchange banks”, with their head offices in their home countries, entered the
banking system of India. Exchange banks were essentially meant for financing the
foreign trade of the country, but they also conducted banking activity in competition with
Indian banks. The exchange banks are termed “foreign banks”, because they were
financed and managed by non-Indians.
1.3.4 Types of Banks in India
There are various types of banks which operate in our country to meet the financial
requirements of different categories of people engaged in agriculture, business,
profession, etc. On the basis of functions, the banking institutions in India may be divided
into the following types:
Figure: 1
Types of Banks

Central Bank Development Banks Specialized Banks

(RBI, in India)
Commercial Banks
Public Sector Banks
Private Sector Banks
Foreign Banks
Exim Banks, SIDBI
And NABARD
Cooperative Banks
Primary Credit Societies
Central Cooperative Banks
State Cooperative Banks

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1.3.4.1 Central Bank
A bank which is entrusted with the functions of guiding and regulating the banking system
of a country is known as its Central bank. Such a bank does not deal with the general
public. It acts essentially as Government’s banker, maintain deposit accounts of all other
banks and advances money to other banks, when needed. The Central Bank provides
guidance to other banks whenever they face any problem. It is therefore known as the
banker’s bank. The Reserve Bank of India is the central bank of our country. The Central
Bank maintains record of Government revenue and expenditure under various heads. It
also advises the Government on monetary and credit policies and decides on the interest
rates for bank deposits and bank loans. In addition, foreign exchange rates are also
determined by the central bank. Another important function of the Central Bank is the
issuance of currency notes, regulating their circulation in the country by different
methods. No other bank than the Central Bank can issue currency.
1.3.4.2 Commercial Banks
Commercial Banks are banking institutions that accept deposits and grant short-term loans
and advances to their customers. In addition to giving short-term loans, commercial banks
also give medium-term and long-term loan to business enterprises. Now-a-days some of
the commercial banks are also providing housing loan on a long-term basis to individuals.
Types of Commercial banks: Commercial banks are of three types i.e., Public sector
banks, Private sector banks and Foreign banks.
(1) Public Sector Banks: These are banks where majority stake is held by the
Government of India or Reserve Bank of India. Examples of public sector banks are: State
Bank of India, Corporation Bank, Bank of Baroda and Dena Bank, etc.
(2) Private Sectors Banks: In case of private sector banks majority of share capital of the
bank is held by private individuals. These banks are registered as companies with limited
liability. For example: The Jammu and Kashmir Bank Ltd., Bank of Rajasthan Ltd.,
Development Credit Bank Ltd, Lord Krishna Bank Ltd., Bharat Overseas Bank Ltd.,
Global Trust Bank, Vysya Bank, etc.
(3) Foreign Banks: These banks are registered and have their headquarters in a foreign
country but operate their branches in our country. Some of the foreign banks operating in
our country are Hong Kong and Shanghai Banking Corporation (HSBC), Citibank,
American Express Bank, Standard & Chartered Bank, Grindlay’s Bank, etc. The number
of foreign banks operating in our country has increased since the financial sector reforms
of 1991.

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1.3.4.3 Development Banks
Business often requires medium and long-term capital for purchase of machinery and
equipment, for using latest technology, or for expansion and modernization. Such
financial assistance is provided by Development Banks. They also undertake other
development measures like subscribing to the shares and debentures issued by companies,
in case of under subscription of the issue by the public. Industrial Finance Corporation of
India (IFCI) and State Financial Corporations (SFCs) are examples of development banks
in India.
1.3.4.4 Cooperative Banks
People who come together to jointly serve their common interest often form a co-operative
society under the Co-operative Societies Act. When a co-operative society engages itself
in banking business it is called a Co-operative Bank. The society has to obtain a licence
from the Reserve Bank of India before starting banking business. Any co-operative bank
as a society is to function under the overall supervision of the Registrar, Co-operative
Societies of the State. As regards banking business, the society must follow the guidelines
set and issued by the Reserve Bank of India.
Types of Co-operative Banks
There are three types of co-operative banks operating in our country. They are primary
credit societies, central co-operative banks and state co-operative banks. These banks are
organized at three levels, village or town level, district level and state level.
(1) Primary Credit Societies: These are formed at the village or town level with
borrower and non-borrower members residing in one locality. The operations of each
society are restricted to a small area so that the members know each other and are able to
watch over the activities of all members to prevent frauds.
(2) Central Co-operative Banks: These banks operate at the district level having some of
the primary credit societies belonging to the same district as their members. These banks
provide loans to their members (i.e., primary credit societies) and function as a link
between the primary credit societies and state co-operative banks.
(3) State Co-operative Banks: These are the apex (highest level) co-operative banks in
all the states of the country. They mobilize funds and help in its proper channelization
among various sectors. The money reaches the individual borrowers from the state co-
operative banks through the central co-operative banks and the primary credit societies.

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 1.3.4.5 Specialized Banks
There are some banks, which cater to the requirements and provide overall support for
setting up business in specific areas of activity. EXIM Bank, SIDBI and NABARD are
examples of such banks. They engage themselves in some specific area or activity and
thus, are called specialized banks.
(1) Export Import Bank of India (EXIM Bank): If you want to set up a business for
exporting products abroad or importing products from foreign countries for sale in our
country, EXIM bank can provide you the required support and assistance. The bank grants
loans to exporters and importers and also provides information about the international
market. It gives guidance about the opportunities for export or import, the risks involved
in it and the competition to be faced, etc.
(2) Small Industries Development Bank of India (SIDBI): If you want to establish a
small-scale unit or industry, loan on easy terms can be available through SIDBI. It also
finances modernisation of small-scale industrial units, use of new technology and market
activities. The aim and focus of SIDBI is to promote, finance and develop small-scale
industries.
(3) National Bank for Agricultural and Rural Development (NABARD): It is a central
or apex institution for financing agricultural and rural sectors. If a person is engaged in
agriculture or other activities like handloom weaving, fishing, etc. NABARD can provide
credit, both short-term and long-term, through regional rural banks. It provides financial
assistance, especially, to co-operative credit, in the field of agriculture, small-scale
industries, cottage and village industries handicrafts and allied economic activities in rural
areas.
1.4 History of Banking in India
The first bank in India, though conservative, was established in 1786. From 1786 till
today, the journey of Indian Banking System can be segregated into three distinct phases
as mentioned below:
 Early phase from 1786 to 1969 of Indian Banks
 Nationalization of Indian Banks and up to 1991, but prior to Indian banking sector
Reforms.
 New phase of Indian Banking System with the advent of Indian Financial &
Banking Sector Reforms after 1991.

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1.4.1 Early Phase of Indian Banks for the period from 1786 to 1969
The General Bank of India was set up in the year 1786. Next came the Bank of Hindustan
and Bengal Bank. The East India Company established Bank of Bengal (1809), Bank of
Bombay (1840) and Bank of Madras (1843) as independent units and called it Presidency
Banks. These three banks were amalgamated in 1920 and Imperial Bank of India was
established which started as a private shareholders bank, mostly by the European
shareholders. In 1865 Allahabad Bank was established and for the first time exclusively
by Indians, Punjab National Bank Limited was set up in 1894 with headquarters at Lahore.
Between 1906 and 1913, Bank of India, Central Bank of India, Bank of Baroda, Canara
Bank, Indian Bank, and Bank of Mysore were set up. Reserve Bank of India came in
1935. During the first phase the growth was very slow and banks also experienced
periodic failures between 1913 and 1948. There were approximately 1100 banks, mostly
small. To streamline the functioning and activities of commercial banks, the Government
of India came up with The Banking Companies Act, 1949 which was later changed to
Banking Regulation Act 1949 as per amending Act of 1965 (Act No. 23 of 1965). Reserve
Bank of India was vested with extensive powers for the supervision of banking in India as
the Central Banking Authority.
1.4.2 Nationalization of Indian Banks and upto 1991, but prior to Banking sector
Reforms
Government took major steps in this Indian Banking Sector, particularly after
independence. In 1955, it nationalized Imperial Bank of India with extensive banking
facilities on a large scale especially in rural and semi-urban areas. It formed State Bank of
India to act as the principal agent of RBI and to handle banking transactions of the Union
and State Governments all over the country. After the nationalization of seven banks
forming subsidiary of State Bank of India. As a major process of nationalization, 14 major
commercial banks in the country were nationalized on 19th July 1969. This was the effort
of the then Prime Minister of India, Mrs. Indira Gandhi. Second phase of nationalization
Indian Banking Sector Reform was carried out in 1980 with seven more banks. This step
brought 80% of the banking segment in India under Government ownership.
1.4.3 New Phase of Indian Banking System with the Advent of Indian Financial and
Banking Sector Reforms after 1991
This phase has introduced many more products and facilities in the banking sector in its
reforms measure. In 1991, under the chairmanship of M Narasimham, a committee was
set up by his name, which worked for the liberalization of banking practices. The country

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 is flooded with foreign banks and their ATM stations. Efforts are being put to give
satisfactory service to customers. Phone banking and net banking is introduced. The entire
system became more convenient and swift. Time is given importance on par with money.
The financial system of India has shown a great deal of resilience. It is sheltered from any
crisis triggered by any external macroeconomics shock as other East Asian Countries
suffered. This is ail due to a flexible exchange rate regime, the foreign reserves are high,
the capital account is not yet fully convertible, and banks and their customers have limited
foreign exchange exposure.
1.5 E-Banking : Concept and Meaning
The emergence of paper currency as a medium of exchange has revolutionalised the
banking industry. By 1600 AD use of cheques became widespread and by mid-1900's,
banks started using the telegraph technology to 'wire' money from one location to another
in a matter of seconds. Banking today has become more complex with different products
and services which stems from reliance on automation and technological change which
has shaped it from a manual-intensive industry into one highly automated and technology
dependent. The process of doing banking functions deploying Information Technology is
a definition of 'Electronic Banking'. The scope and reach of Electronic Banking, i.e., E-
Banking has undergone a complete revolution. This now includes the whole gamut of
automation that is seen not only in the Bank branches /offices, but also a plethora of
delivery channels are made available. The networking of branches and offices of public
sector banks is still in its infancy with one or two exceptions. True online connectivity for
real time transactions is still not a reality even for intra-bank transactions in general,
barring few intra-city networks experimented by a few banks. Customer conveniences
such as extended business hours 7 day banking, 24 hours ATM access; are made a reality.
Fund transfers and transmission of 'letters of credit' via computers and telephone lines
have been an integral part of interbank and international banking, payment systems and
currencies markets for several years. The SWIFT (Society for Worldwide Interbank
Financial Telecommunications) network is the secure backbone for these payment
systems. The following 'Electronic Banking' mechanisms that exist or are being designed
are —
 Automated Teller Machines (ATM);
 Direct Deposits;
 Pay-by-Phone;
 PC Banking or Home Banking;

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  Credit Cards;
 Point-of-Sale Transfers/Debit Cards;
 Stored Value Cards or Smart Cards;
 Electronic Data Interchange (EDI);
 Electronic or Digital Cash;
 Direct Credits;
 Electronic Fund Transfers; and
 Real Time, Gross Settlement System.
"Banks are dinosaurs. We can bypass them." Gates envisioned microsoft at the centre of a
"transformation of the world financial system", where banks can be bypassed and
consumers will use software. Computers and Internet (and possibly a check-clearing
entity) to construct an independent payment system. Electronic banking and E-cash will
indeed push the limits of the term 'money' to a new extreme and challenge long held
notions of what makes money valuable. E-cash will bring us benefits as well as problems.
One major benefit of digital cash is its increased efficiency which will open new business
opportunities especially for small businesses. On the other hand, it will bring in problems
like taxation and money laundering, instability of the foreign exchange rate, disturbance
of money supply, and the possibility of financial crisis and so on.
The term 'Virtual Banking' that has come to be associated with electronic delivery of
services, basically means that customer is not interacting with the banks' staff across the
counter. Less and less customers are now visiting the physical branches and that the
frequency of their visits is coming down significantly. More and more customers are now
using electronic delivery channels which have come to be associated with virtual banking.
The latest wave in IT is Internal Banking. It is part of virtual banking yet another
electronic delivery channel for customers. It is becoming more and more obvious that the
Internet has unleashed a revolution that is impacting every sphere of life. The Internet is
reshaping work, communities, governance, education, banking and life-styles and
institutions. It is not merely a cheap alternative to Value Added Networks (VANs) as the
transport medium, but a major paradigm shift.
Internet banking means any user with a PC and a browser can get connected to his bank's
website to perform any of the virtual banking functions and avail himself of any of the
bank's services. There is no human operator present in a remote location to respond to his
needs such as telephone banking, in a 'Call Centre'. The bank has a centralized database

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 that is web-enabled. All these services that the bank has permitted on the Internet are
displayed in a menu.
1.6 History of Electronic Banking in India
The Banking industry is one of the oldest in the world. Banking originated about 4000
years ago in places such as Babylon, Mesopotamia and Egypt where grain and other
valuable commodities were stored and receipts given as proof of sale on purchase. The
emergence of paper currency as a medium of exchange has revolutionalised the banking
industry. By 1600 AD use of cheques became widespread and by mid-1900's, banks
started using the telegraph technology to "wire" money from one location to mother in a
matter of seconds. Banking today has become more complex with different products and
services which stems from reliance on automation and technological change which has
shaped it from a manual-intensive industry into one highly automated and technology
dependent.
1.6.1 The Emergence of Electronic Banking Products
Intense competition has forced banks to rethink the way they operated their business. They
had to reinvent and improve their products and services to make them more beneficial and
cost effective. Technology in the form of electronic banking has made it possible to find
alternate banking practices at lower costs.
More and more people are using electronic banking products and services and because a
larger section of the banks' future customer base will be made up of computer literate
customers, the banks must be able to offer these customers' products and services that
allow them to do their banking by electronic means. If they fail to do this they will,
simply, not survive
1.6.2 Automated Teller Machines
The ATM was one of the earliest electronic banking products, with Tillie-the-Teller, the
first ATM, being introduced in the mid-1970's. It provided customers with the ability to
withdraw or deposit funds, check account balances, transfer funds and check statement
information. As is the case with any new technology; it took some time before customers
became familiar with the ATM and came to accept it as an alternative way of doing their
banking.
1.6.3 Electronic Fund Transfer
Electronic Funds Transfer (EFT) is another Electronic Banking product that facilitates
transfer of funds from any branch of a bank to any other branch of any bank in the shortest
time.

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1.6.4 Telephone Banking
Telephone banking is only a relatively new electronic banking product. However, it is fast
becoming one of the most popular products. Customers can perform a number of
transactions from the convenience of their own home or office, in fact from anywhere they
have access to a phone. Customers can check balances and statement information, transfer
funds from one account to another, pay certain bills and order statements or cheque books.
1.6.5 Personal Computer Banking
Personal Computer Banking or PC Banking is also a fast growing area in electronic
banking. PC Banking lets customers’ access information on their accounts through a dial-
up connection with their bank. Customers can perform basically all the transactions that
are available with telephone banking. They also have the ability, in some cases, to
download information and process it in their own financial management software.
1.6.6 Internet Banking
Internet banking is an improvement over PC Banking. This is because Internet banking is
done over a highly accessible public network. The bank can set up their system, much the
same as PC Banking. It is accessible to anyone using the Internet, not just the bank's
customers.
1.6.7 Electronic Banking in relation to Internet
The Internet was developed in the late 1960's in California. It is basically a massive
network that is publicly accessible from a computer via a modem over telephone lines. It
is accessible by anyone and because of the geographic area it encompasses, it presents
banks with an existing network where opportunities for operating and marketing their
products abound. The Internet also provides banks with the ability to deliver products and
services to consumers at a cost that is lower than any existing method of delivery. Internet
banking is easy to use and is cost effective. A survey conducted in US shows that of all the
modes of transactions, Internet transaction is the cheapest for the banks.
Table: 1
Banking Transaction Costs
Type of Transaction Average Cost
Normal Branch Transaction $1.07
Telephone Banking $0.54
ATM $0.27
PC Banking
$0.02

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 Internet $0.01
Source: Booz Allen & Hamilton, Banking Survey, July, 1996. 1.8
1.7 Internet Banking
The internet technology, a major driver of the global village phenomenon has shaped and
continues to shape business models–from bricks and mortar to bricks and clicks or pure
play. The internet offers strategic market opportunity once it can be tapped into. It offers
24/7 exchanges, real-time responsiveness, interactivity, an efficient collation of customer
data and environmental scanning among others. “The potential of providing innovative
services over the Web” according to Chaudhury and Kuilboer (2002), “is limited only by
one’s imagination”. According to the study, it took other major media technologies
decades to hit a fifty million user population but the internet took about 5 years. Internet
use is estimated to double in every 100 days (Khan, 2007). Current figures put internet
use, in June 2010 in Asia, at 825,094,396 up from114,304,000 in 2000–constituting 42%
of the 56% of world population (Internet World Stats 2010). Indeed, the internet, together
with other technological advancements, has ushered in what many analysts term as the
New Economy– a global transformation of commerce. Since the internet took shape as a
strategic business tool in the nineties, it has been contended in many quarters that it has
unleashed a revolutionary era for businesses.
The internet saw many of its early adopters grinding to a halt and much expectation of an
internet boom was dashed. Notwithstanding this, the internet remains a strategic force that
cannot be ignored. As we traverse our communities, we will not fail to see websites
printed on billboards, newspapers, televisions and other media stimulating constant
attention to the internet. The effects of internet on economy in the future, according to
Siegel (2006), are difficult to predict but it is impacting more rapidly on businesses than
any other technology known to man. Many commercial interactions have been moved
onto the internet creating new areas of specialization such as e-commerce, e-government
and e-banking to provide the prospects for greater economic efficiency (UNCTAD
2007/2008 Report on Information Economy). The internet, if structurally understood, can
prove an even more valuable tool for business, education and government among others in
the future. observe that the effect of the internet on business, together with other digital
media. Entertainment, communication, information and commerce serve as the drivers of
internet usage with an explosive growth rate of access.

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The following table gives a recent statistics on the diffusion of the Internet across the
globe by Internet World Stats (2010).
Table : 2
Global Internet Diffusion Rate
Region Population Penetration User’s (%)
Africa 1,013,779,050 10.9 % 5.6 %
Asia 3,834,792,852 21.5 % 42.0 %
Europe 813,319,511 58.4 % 24.2 %
Middle East 212,336,924 29.8 % 3.2 %
North America 344,124,450 77.4 % 13.5 %
Caribbean 592,556,972 34.5 % 10.4 %
Australia 34,700,201 61.3 % 1.1 %
Source: Internet World Stats (2010)
Indeed the impact of the internet is not only pervasive but also progressive as depicted
above. Not only that there are 81,000,000 internet users in India in the current year which
was only 5,000,000 in the year 2000.This shows the user growth of 1,520% during the
decade (2000-2010) Source: Internet World Stats(2010). This reveals that the developing
economies are expanding technology to bring it to the doorstep of even rural dwellers. The
Internet banking is changing the banking industry and is having the major effects on
banking relationships. Even the Morgan Stanley Dean Witter Internet research emphasized
that Web is more important for retail financial services than for many other industries.
Internet banking involves use of Internet for delivery of banking products & services. It
falls into four main categories, from Level 1 - minimum functionality sites that offer only
access to deposit account data - to Level 4 sites - highly sophisticated offerings enabling
integrated sales of additional products and access to other financial services- such as
investment and insurance. In other words a successful Internet banking solution offers
1) Exceptional rates on Savings, CDs, and IRAs
2) Checking with no monthly fee, free bill payment and rebates on ATM surcharges
3) Credit cards with low rates
4) Easy online applications for all accounts, including personal loans and mortgages
5) 24 hour account access
6) Quality customer service with personal attention

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1.7.1 Drivers of Change
Advantages previously held by large financial institutions have shrunk considerably. The
Internet has leveled the playing field and afforded open access to customers in the global
marketplace. Internet banking is a cost-effective delivery channel for financial institutions.
Consumers are embracing the many benefits of Internet banking. Access to one's accounts
at anytime and from any location via the World Wide Web is a convenience unknown a
short time ago. Thus, a bank's Internet presence transforms from 'brouchreware' status to
'Internet banking' status once the bank goes through a technology integration effort to
enable the customer to access information about his or her specific account relationship.
The six primary drivers of Internet banking includes, in order of primacy are:
1) Improve customer access
2) Facilitate the offering of more services
3) Increase customer loyalty
4) Attract new customers
5) Provide services offered by competitors
6) Reduce customer attrition
1.7.2 Indian Banks on Web
The banking industry in India is facing unprecedented competition from non-traditional
banking institutions, which now offer banking and financial services over the Internet. The
deregulation of the banking industry coupled with the emergence of new technologies, are
enabling new competitors to enter the financial services market quickly and efficiently.
Indian banks are going for the retail banking in a big way. However, much is still to be
achieved. This study which was conducted by students of IIML shows some interesting
facts:
Throughout the country, the Internet Banking is in the nascent stage of development (only
50 banks are offering varied kind of Internet banking services). In general, these Internet
sites offer only the most basic services. 55% are so called 'entry level' sites, offering little
more than company information and basic marketing materials. Only 8% offer 'advanced
transactions' such as online funds transfer, transactions & cash management services.
Foreign & Private banks are much advanced in terms of the number of sites & their level
of development. Information technology analyst firm, the Meta Group, recently reported
that financial institutions who don't offer home banking by the year 2000 will become
marginalized." By the year of 2002, a large sophisticated and highly competitive Internet
Banking Market will develop which will be driven by

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 1) Demand side pressure due to increasing access to low cost electronic services.
2) Emergence of open standards for banking functionality.
3) Growing customer awareness and need of transparency.
4) Global players in the fray
5) Close integration of bank services with web based E-commerce or
even disintermediation of services through direct electronic payments (E- Cash).
6) More convenient international transactions due to the fact that the Internet along
with general deregulation trends, eliminate geographic boundaries.
7) Move from one stop shopping to 'Banking Portfolio' i.e. unbundled product
purchases.
Certainly some existing brick and mortar banks will go out of business. But that's because
they fail to respond to the challenge of the Internet. The Internet and its underlying
technologies will change and transform not just banking, but all aspects of finance and
commerce. It represents much more than a new distribution opportunity. It will enable
nimble players to leverage their brick and mortar presence to improve customer
satisfaction and gain share. It will force lethargic players who are struck with legacy cost
basis, out of business-since they are unable to bring to play in the new context
1.7.3 Internet Banking and Gujarat
As a business tool, internet banking is rapidly transforming the world of commerce and
banking – making banks faster and more efficient and allowing them to provide more
personalized services to the end user- customer. The advantage of Internet is that it allows
financial institutions to combine content from multiple sources to one computer. This
capability is now considered one of the key enablers for accelerating the use of home
banking programs. Moreover, net banking is considered to be the most cost-effective
channel for banks. Although this channel is available in Gujarat for the past three to four
years, it is only in the recent past that the internet banking has started picking up. A major
impediment in the use of the channel is the concern about the security of Internet
transactions.
On the retail end, banks have started offering Internet Banking through a large number of
branches. The facilities offered include account enquiry, money transfers, requests, mail
alerts, etc. Some banks have also linked it with railway ticketing and bill payments. Many
banks have also started offering Internet banking to their corporate customers. The facility
of Corporate Internet Banking service is available to all business enterprise, accessible

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 from anywhere in the globe providing various banking and financial services under single
umbrella and giving complete freedom of banking anywhere anytime on 24 × 365 basis.
1.8 Selection of Research Problem
Internet has created plenty of opportunities for players in banking sector. While the new
entrants have the advantage of latest technology, the goodwill of the established banks
gives them special opportunity to lead online world. But merely putting existing services
online won’t help the banks in holding their customer close. Instead banks must learn to
capitalize their customers’ different online financial services relationships. Hence the
Problem arises viz “Will the Banks be able to capitalize opportunities presented by the
Online Banking and harness the technology to improve the products and efficiency”?
An attempt is made to answer the aforesaid question through our study.
1.9 Research Purpose
The objectives planned for the study were
1) To know whether there is no significant difference between the perceptions of the
respondents that indicates the Prospectiveness of Internet Banking across the cities
such as Ahmedabad, Baroda, Bhavnagar, Rajkot and Surat City of Gujarat State.
2) To determine the most salient internet banking criterias which have the greatest impact
on behavioural intentions and satisfaction thereby indicating prospectiveness of
internet banking in Gujarat State.
3) To understand whether Internet Banking Services provided by the banks are
prospective or not in Gujarat State.
1.10 Significance of Research Effort
The study shows that e-banks are not perceived as a threat by many bricks-and-mortar
banks. In fact, most e-banks are attempting to form alliances and partnerships with banks,
financial institutions, and other businesses with physical presence in order to provide
services that cannot be delivered on the web alone (e.g., cash withdrawls, effective
customer service) (Business Week, 2000). Bankers’ Perspectives on Internet Banking
from an operational perspective, indicated that banks with web based banking realized
significant benefits. First, e-transactions significantly lower the cost per transaction and
thus contribute to the bottom line of the bank. Second, Internet banking allows banks to
offer ancillary services such as insurance, brokerage services, and mortgage payments
through their web site. Such services are offered either directly or through a partner firm.
Revenues generated from these services are an added bonus to the bank. Third, successful
launch of an e-commerce site improves service quality as the customer is presented with

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 several options (Internet, in person, ATM, phone, interactive voice response, etc.) to
transact with the bank. These options can result in an increased number of customer
accounts. Internet banking allows customers to conduct certain transactions (e.g.,
checking balances, funds transfers, bill payment, etc.) online at anytime and thus it
reduces the number of physical visits to a bank. This added convenience to the customer
lowers transaction costs to the bank—a win-win proposition for the bank and its
customers. Compounding this issue is the fact that there is a dearth of qualified
technology and business savvy individuals to run e-commerce operations. Such paucity
hinders the ability of many banks to launch web-banking unless they decide to outsource
these operations. Moreover banks are embracing e-commerce albeit slowly. They appear
to realize the potential of this profound change and do not want to be left behind. Banks
are cognizant of the strategic and operational value of the Internet as an effective channel
and seem to realize that the benefits outweigh the costs. However, they have a variety of
concerns ranging from security to the integration of the Internet channel with existing
business processes and systems. Despite these concerns, in the future, banks will have to
include web-based services in their portfolio of offerings to customers or else risk losing
customers to banks that do consider internet banking as one shop stop for satisfying all
the diverse financial needs of the customers.
1.11 Scope of the Study
The banking industry in India is facing unprecedented competition from non-traditional
banking institutions, which now offer banking and financial services over the Internet.
The deregulation of the banking industry coupled with the emergence of new
technologies, are enabling new competitors to enter the financial services market quickly
and efficiently. Indian banks are going for the retail banking in a big way. However,
much is still to be achieved. The results show that Internet banking is in its nascent
stage—only a small number of banks offer web-based banking to customers and the full
benefits of Internet banking are still to be realized by many banks. On the other hand, a
significant number of the banks believe that providing these services to customers in the
new economy is essential for survival and thus, mandatory. Analysis and Research of
perceptions which indicates prospectiveness of internet banking of 2000 e customers
across major cities such as Ahmedabad, Baroda, Bhavnagar, Rajkot and Surat was carried
out by the researcher on the basis of non proportional quota sampling. The study covered
the analysis of the behavioural intentions which make them think that internet banks are
one of the significant developments in the Banking Sector and even though internet

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 banking is at the nascent stage, more and more no. of customers would prefer internet
banking in coming times.
1.12 Limitations of the Study

The following limitations were observed during the research on finding the prospectiveness of
e-banking in Gujarat State.
1) The study was limited to NSE 50 banks with Indian exposure. Therefore it may not be
possible to generalize the findings to other countries and foreign banks.
2) The information gathering was carried out through specific persons mainly at head
office and branches of selected NSE 50 banks. Hence it did not permit to carry out a
wide study by covering substantial persons and geographical locations in the country
of the selected banks in India.
3) The study was limited to financial customers and further restricted towards Internet
Banking users where to identify whether their expectations mainly based on Internet
Banking Services in Indian Banking context
4) The study was limited to the Banking industry of India. Therefore the findings cannot
be generalized to other industries such as manufacturing, service sectors, operations
etc.
5) The internet users who have availed the Internet Banking Services for the last five
years were considered for the survey.
1.13 Chapter Plan
The thesis is divided into seven chapters as shown in the Table: 3
Table 3
Disposition of Thesis
Chapter Chapter Name Coverage
No.
1 Introduction It includes a background of the study, problem
formulation, research purpose and scope of the
study.
2 Literature Review It examines previous literature and designs a frame
of reference. The literature review in the area of e-
banking with special focus on internet banking is
broadly categorized under the following
themes.1.Adoption of Internet Banking 2. Factors

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 Responsible for Adopting Internet Banking 3.
Impact of Internet Banking on Service Quality &
Behavioural Intentions 4.E-Banking & its impact
on Profitability and 5. E-Banking: Prospects &
Challenges.
3 Research Methodology This chapter describes in detail the pilot survey
conducted by the researcher, development of the
research tool and analytical framework to carry out
the study.
4 Analysis of Study How the objectives of the study has been proved
and justified through the help of different statistical
tests and techniques has been mentioned.
5 Findings of Study Perceptions of the E-customers exhibiting the
behavioural intentions and satisfaction regarding
the usage of internet banking is deeply examined
and findings derived from the analysis are
mentioned.
6 Recommendations Observations of the study are mentioned in this
chapter. Recommendation is given to the banking
authorities as regards to how there can be increase in
the number of e-customers and in turn maximizing
the profitability for the banks.
7 Conclusion The final chapter describes the conclusion drawn
from the entire study along with limitations of the
study and direction for the future research.

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