CHAPTER-1

INTRODUCTION
 1. INTRODUCTION

Payment Systems are the key component of any financial system. They facilitate the
movement of money in the economy. The efficient functioning of the payment system
makes a key contribution to overall economic performance by allowing safe and timely
completion of financial transactions. Payment Systems also provides the conduit for
effective transmission of monetary policy.

World over, the payment systems segment of the financial system have been
witnessing rapid changes due to the developments in Information and communication
technologies.

Recognizing the importance of payments systems to the development the economy,

Reserve Bank of India, has taken number of steps during the last few years to build a robust
payments system. The steps taken include building the necessary payments infrastructure and
develop a strong institutional framework for the payment and settlement systems in the
country. Developments in payment systems for increasing its efficiency are a continuous
process. In the context of progressive integration of financial markets, both domestically and
cross border, and the fast-paced changes in technology and institutional infrastructure, there
is a need for annual review of payment and settlement systems. The parameters of the
reviews would be based on the timelines of customer service, cost of operation, service
charges and overall impact on the financial system.

This project covers the developments in retail and large payment systems during the
last few years.

In the emerging global economy, e-business have increasingly become a necessary

component of business strategy and a strong catalyst for economic development. The
integration of information and communications technology (ICT) in business has
revolutionized relationships within organizations and those between and among organizations
and individuals. Specifically, the use of ICT in business has enhanced productivity,
encouraged greater customer participation, and enabled mass customization, besides reducing
costs.
With developments in the Internet and Web-based technologies, distinctions between
traditional markets and the global electronic marketplace such as business capital size, among
others-are gradually being narrowed down. The name of the game is strategic positioning, the
ability of a company to determine emerging opportunities and utilize the necessary human
capital skills (such as intellectual resources) to make the most of these opportunities through
an e-business strategy that is simple, workable and practicable within the context of global
information and new economic environment. With its effect of leveling the playing field, e-
commerce coupled with the appropriate strategy and policy approach enables Small and
medium scale enterprises to compete with large and capital-rich businesses.

On another plane, developing countries are given increased access to the global Marketplace,
where they compete with and complement the more developed economies. Most, if not all,
developing countries are already participating in e-commerce, either as sellers or buyers.
However, to facilitate e-commerce growth in these countries, the relatively underdeveloped
information infrastructure must be improved.

HISTORY OF INTERNET

In the 50’s and early 60’s, prior to the widespread inter-networking that led to the Internet,
most communication networks were limited by their nature to only allow communications
between the stations on the network. Some networks had gateways or bridges between them,
but these bridges were often limited or built specifically for a single use. One prevalent
computer networking method was based on the central mainframe method, simply allowing
its terminals to be connected via long leased lines. This method was used in the 1950s by
Project RAND to support researchers such as Herbert Simon, in Pittsburgh, Pennsylvania,
when collaborating across the continent with researchers in Santa Monica, California, on
automated theorem proving and artificial intelligence. The Internet system was developed and
ready in the Late 1980s, but The Cold War held up the progress. When it ended in 1992, the
internet slowly became main stream. By the end of the decade, millions were using it for
business, education and pleasure.
 OBJECTIVE OF STUDY

1. To understand the concept of Electronic Payment System and its security services.

2. To bring out solution in the form of applications to uproot Electronic Payment.

3. To understand working of various Electronic Payment System based applications

4. To make a study in various Indian payment system like MICR, ECS / NECS,
NEFT and RTGS.
5. To analyze and compare the FIVE year annual payment report of BNP and to
visualize the growth of electronic payment in India.
6. From the analysis, to suggest the initiatives for the adoption of new payment modes.

7. To ensure that all the payment and settlement systems operating in the country
are safe, secure, sound, efficient, accessible and authorized.
8. To learn the future trends in payment and settlement systems.

9. To learn the most appropriate methods and terms of payment and required
documentation to ensure timely payment for the sale of goods and/or service
 NEED & IMPORTANCE OF THE STUDY

Electronic payment system is a system which helps the customer or user to make
online payment for their shopping. To transfer money over the Internet. Methods of traditional
payment.
Methods of electronic payment. Electronic cash, software wallets, smart cards, and
credit/debitcards.
 SCOPE OF THE STUDY

The Word E is in trend now, be it be shopping transactions or any other stuff it has eliminated
all the barriers and shrunk the world into one global village. E-marketing brought along with
E-payment options, E-security and various other issues. But, now we can shop from
anywhere around the world and that too eliminating the barriers of currency and language.

It would be very bias to only list the positive influence of the internet. Here in my project I
tried to cover all the possible options fro e payment and the system available also laying
equal emphasis on the pros and cons of each payment options.
CHAPTER-2 REVIEW OF LITERATURE
 REVIEW OF LITERATURE

COMPONENT OF INDIAN PAYMENT SYSTEM:

Retail Systems Large Value Systems

Electronic
Paper-based Electronic

MICR CTS ECS NEFT CARD RTGS

COMPONENT OF INDIAN PAYMENT SYSTEM

Retail Payment Systems

Retail payments are transactions which can typically be classified as, (i) Person to
Person, (ii) Person to Business - (eg. bill payments), (iii) Currency withdrawals( ATM/debit
cards) and (iv) Advances (credit cards). These payments generally refer to obligations arising
from retail commercial and financial transactions which can be either one-time person to
person (or business) payments or recurring bill payments (or domestic remittances from
person to persons) or payments to Governments. These transactions need not be of small
value alone, but are generally of low average transaction value but high transaction volumes.
They also involve a much broader range of payment instruments and transaction systems.
The instruments used to effect these payments differ based on the requirements. They can be
currency, paper based instruments like Cheque and demand drafts, electronic message based
systems, cards based systems and off-late Short Messaging System of mobile phone. These
instruments (excluding currency) along with the systems and procedures of clearing and
settlement arrangements for these instruments constitute the retail payment systems.

Consumers generally use retail payments in one of the following ways:

• Purchase of Goods and Services—Payment at the time the goods or services are
purchased. It includes attended (i.e., traditional retailers), unattended (e.g., vending
machines), and remote purchases (e.g., Internet and telephone purchases). A variety of
payment instruments may be used, including cash, check, credit, or debit cards.

• Bill Payment—Payment for previously acquired or contracted goods and services. Payment
may be recurring or nonrecurring. Recurring bill payments include items such as utility,
telephone, and mortgage/rent bills. Nonrecurring bills include items such as medical bills.

• P2P Payments—Payments from one consumer to another. The vast majority of consumer-
to-consumer payments are conducted with checks and cash, with some transactions
conducted using electronic P2P payment systems.

• Cash Withdrawals and Advances—Use of retail payment instruments to obtain cash from
merchants or automated teller machines (ATMs). For example, consumers can use a credit
card to obtain a cash advance through an ATM or an ATM card to withdraw cash from an
existing demand deposit or transaction account. Consumers can also use personal
identification number (PIN)-based debit cards to withdraw cash at an ATM or receive cash-
back at some point-of-sale (POS) locations.
 The most popular means of retail payment instrument is, the Currency which is the
legal tender. The main advantage of currency vis-à-vis other payments instrument is – its
universal acceptance, immediate final settlement and relatively lowest cost to the
payee for upfront payment (cost would be involved when the payment has to made at a
particular location). The major disadvantage of currency is – carrying of large quantities of
currency to make payments would involve transportation issues and is also a security risk.
Further, holding large quantities of currency does not fetch any return - the interest foregone
because of currency holding is a cost to the holder of currency. While currency as a payment

instrument would have no perceptible cost to the payer, the processing of this instrument
involves a cost to the society. Next to currency the other paper based payment instruments
viz. cheques have been aCommon mode of payment instrument for the business. The general
public prefers this mode mainly for payment of utility bills etc.

The developments in technology resulted in numerous innovations in the payment

system area. These innovations resulted in systems which are more efficient in terms of the
time and effort needed to process payment instructions. The innovations started with
processing of payment instructions stored in electronic formats in their storage media's, which
were manually transported to processing centers (clearing houses) which further graduated to
the transmission of electronic messages insecure formats through secured communication
channels. These innovations have resulted in the payment instruments like – electronic funds
transfer systems and card based systems; the latest innovation being mobile phone based
payment systems.

Retail payment
instruments

Cheque:
The Negotiable Instruments Act, 1881 defines a cheque as a bill of exchange drawn on
a specified banker and not expressed to be payable otherwise than on demand. A Cheque is a
document (usually a piece of paper) that orders a payment of money. The person writing the
cheque, the drawer, usually has a chequing account where their money is deposited. The
drawer writes the various details including the money amount, date, and a payee on the
cheque, and endorse it, ordering their bank, known as the drawee, to pay this person or
company the amount of money stated.Cheques as payment instrument is most popular
mode of payment in the country.
 Specimen of a Cheque

Parts of a cheque

 Drawer, the person or entity who makes the cheqe

 Payee, the recipient of the money

 Drawee, the bank or other financial institution where the cheque can be presented
for payment
 Amount, the currency amount
Features of a cheque

i. A Cheque must be in writing and endorsed.

ii. It contains an unconditional order.

iii. It is issued on a specified banker only.

iv. The amount specified is always certain and must be clearly

mentioned both in figures and words.
v. The payee is always certain.

vi. It is always payable on demand.

vii. The cheque must bear a date otherwise it is invalid and shall not be honored by the bank.
Types of Cheque

a) Open cheque

b) Crossed cheque.

c) Bearer cheque

d) Order cheque
Open cheque: An open cheque is a cheque which is payable at the counter of the
drawee bank on presentation of the cheque.
 Receive its payment over the counter at the
bank.
 Deposit the Cheque in his own account

 Pass it to some one else by signing on the back

of a cheque.

Crossed cheque:

A crossed cheque is a cheque which is payable only through a collecting banker and not
directly at the counter of the bank. Crossing ensures security to the holder of the cheque
as only the collecting banker credits the proceeds to the account of the payee of the
cheque.

When two parallel transverse lines, with or without any words, are drawn generally, on the
left hand top corner of the cheque. A crossed cheque does not effect the negotiability of
the instrument. It can be negotiated the same way as any other negotiable instrument.

Types of Crossing There are two types of negotiable instruments:-

• General Crossing

• Special Crossing

Cheque crossed generally

Where a cheque bears across its face an addition of the words “and company” or any
abbreviation thereof, between two parallel transverse lines, or of two parallel transverse lines
simply, either with or without the words “not negotiable”, that addition shall be deemed a
crossing, and the cheque shall be deemed to be crossed generally.
Cheque crossed specially

Where a cheque bears across its face an addition of the name of a banker, either with or
without the words “not negotiable”, that addition shall be deemed a crossing, and the cheque
shall be deemed to be crossed specially, and to be crossed to that banker.

 Account Payee or Restrictive Crossing

 Not Negotiable Crossing

Account Payee or Restrictive Crossing

This crossing can be made in both general and special crossing by adding the words Account
Payee. In this type of crossing the collecting banker is supposed to credit the amount of the
cheque to the account of the payee only. The cheque remains transferable but the liability of
the collecting banker is enhanced in case he credits the proceeds of the cheque so crossed to
any person other than the payee and the indorsement in favour of the last payee is proved
forged.The collecting banker must act like a blood hound and make proper enquiries as to the
title of the last indorsee from the original payee named in the cheque before collecting an
'Account Payee' cheque in his account.

Not Negotiable Crossing

The words 'Not Negotiable' can be added to General as well as Special crossing and a
crossing with these words is known as Not Negotiable crossing.The effect of such a
crossing is that it removes the most important characteristic of a negotiable instrument i.e. the
transferee of such a crossed cheque cannot get a better title than that of the transferor ( cannot
become a holder in due course ) and cannot covey a better title to his own transferee, though
the instrument remains transferable.
Bearer cheque: A cheque which is payable to any person who presents it for payment at the
bank counter is called ‘Bearer cheque’. A bearer cheque can be transferred by mere delivery
and requires no endorsement.

Order cheque: An order cheque is one which is payable to a particular person. In such a
cheque the word ‘bearer’ may be cut out or cancelled and the word ‘order’ may be written.
The payee can transfer an order cheque to someone else by signing his or her name on the
back of it.

cheques may not be valid if it is

 Ante-dated cheques: - cheques which have been written by the maker, and
dated at some point in the past. For example, a cheque issued on 20th May 2003
may bear a date 5th May 2003.

 Stale Cheque: - cheque is typically valid for six months after the date of
issue, after which it is a stale-dated cheque.

 Mutilated Cheque: - In case a cheque is torn into two or more pieces and
presented for payment, such a cheque is called a mutilated cheque. The bank
will not make payment against such a cheque without getting confirmation of
the drawer. But if a cheque is torn at the corners and no material fact is erased or
cancelled, the bank may make payment against such a cheque.

 Post-dated Cheque: cheque which has been written by the drawer for a date in the
future. For example, if a cheque presented on 8 th May 2003 bears a date of 25 th
May 2003, it is a post-dated cheque. The bank will make payment only on or after
25th May 2003.
MICR Cheque:

MICR stands for Magnetic Ink Character Recognition used primarily by the banking
industry to facilitate the processing of cheques. In MICR technology the information is
printed on the instrument with a special type of ink which is made up of magnetic material.
On insertion of the instrument in the machine, the printed information is read by the machine.
MICR system is beneficial as it minimizes chances of error, clearing of cheques becomes
easy and transfer of funds becomes faster in order to facilitate operations.
This process involving the following steps:

a. Standardization of encoding information at the bottom.

b. Encoding in magnetic ink specific details on the cheque itself, to facilitate

c. mechanical sorting. The code line contains the following information :

i. First six numbers indicate cheque number

ii. Next three numbers indicate city code

iii. Next three numbers indicate bank code

iv. Next three numbers indicate branch code

v. After some space there is number for transaction code i.e. whether the
transaction relates to a saving or a current account

d. Selections and acquisition of different types of equipments, necessary in the

clearing-house and banks for implementing the MICR technology.

e. The magnetized portion when put under MICR equipment allows instant
readability and identification.
Transaction
Code No. Nature of transaction represented by the Definitions
code
Codes reserved for clearing house control
01 to documents representing debit
09 instruments

10 Savings Bank Account Cheque

11 Current Account cheque

A cheque issued by a bank on
itself used for making own
12 Banker's cheque payments. Also issued in lieu
of demand drafts
on the same city.
Cheques issued to a running
13 Cash credit account cheque loan account
14 Dividend warrant

15 Traveler’s cheque
16 Demand Draft
A prepaid instrument issued
17 Cheques which will be by a bank on to itself, similar
issued in lieu of existing to banker's cheque issued in
payment order lieu of a draft on
the same city.
18 Gift cheque
19 Interest warrant
20 State government transactions
21 Central Government transactions
22 Railway transactions

23 Posts & Telegraphs transactions

24 Defense transactions
25 Telecommunication transactions

26 Reserved

Departmentalized ministries (UMALO)

 27 transactions
28 Refund warrant
Multi-city cheques
29 At Par Current Account Cheques pertaining to

Current account
Multi-city Cash Credit
Account
instruments payable at all
30 At par Cash Credit Account Cheques
branches of the bank
Savings Bank Account
cheques payable at all
branches of the bank
31 Savings Bank at par cheque
i.e multi-city cheques
Credit transactions to Non-
Resident External Accounts
maintained by
40 Credit transactions to NRE Accounts in
Non-Resident Indians
Indian Rupees
32 to Reserved
48
Income Tax Refund Orders
payable
at banks other than Reserve
49 Income Tax Refund Orders
Bank of India.
Process flow:
B receives cheque,
deposits in Y bank. A draws cheque
Where he Maintain on X bank to B.
account

Y bank sends the cheque to X bank for X bank honor

realization cheque on receipt.
Pays to Y bank
Clearing and settlement of
cheques

Local Cheques:

All cheques and other Negotiable Instruments payable locally would be presented through the
clearing system prevailing at the centre. Cheques deposited at branch counters and in
collection boxes within the branch premises before the specified cut-off time will be
presented for clearing on the following day. Bank would give credit to the customer account
on the same day of clearing settlement. Withdrawal of amounts so credited would be
permitted after reckoning the cheque return schedule of the clearing house.
Bank branches situated at centres where no clearing house exists, would present local
cheques on drawee banks across the counter and proceeds would be credited, at the earliest,
on realization

Outstation Cheques:

Maximum timeframe for collection of Cheque drawn on state capitals/major cities/other

locations are 7/10/14 days respectively. If there is any delay in collection beyond this period,
bank are entitled to pay interest at the rate specified in the Cheque Collection Policy of the
bank. In case the rate is not specified in the Cheque Collection Policy, they are entitled to
receive interest rate on Fixed Deposits for the corresponding maturity. Banks' Cheque
collection policy also indicates the limit up to which outstation cheques are given immediate
credit. Working” days shall not include Bank Holidays and days when clearing house in not
operational.

The clearing and settlement of cheques drawn on different banks require the coming
together of the banks in that area for transfer of instruments and the final settlement of funds.
This process is facilitated by the clearing houses at these centers. Currently, 1064 clearing
houses are operational in the country. Of these, at 59 centers the clearing and settlement
process has been mechanized by the introduction of “Magnetic Ink Character Recognition
(MICR)” based sorter machines. Eighty percent of the total cheque clearing volume and value
in the country are accounted for by these centers. To further bring in efficiency and
automating the settlement obligation Magnetic Media Based Clearing System (MMBCS) is
being implemented at centers with more than 15 bank branches, where, currently the process
is being carried out manually. At the remaining centers where the volumes of cheques
are low, manual clearing continues. The clearing and settlement cycle in the country is two
days
– one Day-1 the cheques are presented at the clearing house and Day-2 the funds
settlement and return clearing are accounted for.

Electronic Retail Payment Instruments:

Cheque Truncation System (CTS):

Cheque truncation is the conversion of physical cheque into electronic form for
transmission to the paying bank. Cheque truncation eliminates cumbersome physical
presentation of the cheque and saves time and processing costs.
The process of removing the paper check from its processing flow is called truncation. In
truncation, both sides of the paper check are scanned to produce digital images. The checks
are sorted by machine according to the routing/transit (RT) number as presented by the
magnetic ink character recognition (MICR) line, and scanned to produce a digital image. A
batch file is generated and sent to the Reserve Bank for settlement or image replacement. If a
substitute check is needed, the transmitting bank is responsible for the cost of generating and
transporting it from the presentment point to the Reserve Bank or other corresponding bank.
The electronic Information can be exchanged with other banks for clearing purpose.

Legal recognition : By amending Sec 6 of NI Act, the physical image of a truncated

cheque and electronic cheques, have been recognized equal to a paper cheque.

Method for truncation:

The truncation can be done by using image processing.

Imparting uniqueness of the cheque to the image: Image carries digital signature, and
physical endorsement of the presenting bank, in a prescribed manner.
Process flow

Step-1: The presenting bank captures the data & images of the cheques using their
Capture System.
Step-2: The captured images and data are sent to the central clearing house (CH) for
transmission to the payee/ Drawee banks. For that, RBI provides to the banks, the
Clearing House Interface (CHI) software. It enables the banks to connect and transmit
data in a secure way and with non-repudiation, to the Clearing House (CH).
Step-3: CH processes the data and arrives at the settlement figure for the banks and
sends the required data to payee/drawee banks for processing at their end.
Step-4: The drawee/payee banks use the same CHI for receiving the data and images from
CH. The drawee bank Capture System processes the inward data and images and
generates the return file for unpaid instruments.

Criteria to participate in CTS:

The criteria for banks participating in CTS are:

i. Membership of the clearing house.

ii. Membership of the Indian Financial Network (INFINET) Infrastructure requirement: The
infrastructure required for CTS from bank's end are, (a) connectivity from the bank
gateway to the clearing house, (b) hardware and software for the CTS applications.
RBI provides CHI and the banks have to procure other hardware and system software
for the CHI and the application software for their capture systems on their own.

Image specifications in the CTS:

The electronic images of truncated cheques is in gray scale technology. There

are 3 images of the cheques i.e. front grey, front black & white and back black &
white.

The image specifications are:

Image Type: Minimum DPI Format

Compression Front Grayscale: 100 DPI JFIF
JPEG
Front Black & White: 200 DPI TIFF CCITT G4
Reverse Black & White: 200 DPI TIFF CCITT
G4
The image quality of the Grey Scale image shall be 8 bits/pixel (256 levels).
Security of the image and data:

The security, integrity, non-repudiation and authenticity is ensured using the

Public Key Infrastructure (PKI). The CTS is compliant to the requirement of the IT Act,
2000. The PKI standards used are in accordance with the appropriate Indian Acts and
practices of IDRBT which is the certifying authority for banks & FIs in India.

Image Replace Document (IRD)

Under CTS, after the capture of the image, the physical cheque would be
warehoused with the presenting bank.
In case any connected persons require the instrument, the payee bank would issue a
copy of the image, under its authentication, which is called the Image Replacement
document (IRD). It is a legally recognized replacement of the original cheque for re-
presentment. The provisions of NI act (Section 81(3) of the NI Act as amended) also
permit the usage of such IRD.

Important characteristics of cheque truncation

1) Truncated is possible when the cheque enters the banking system.

2) Truncation can be done only in the clearing process, to reduce the time delay. It
can be done by the banks involved or cleari house. The drawer or holder cannot truncate a
cheque.
3) The paper cheque will be replaced by the electronic image in the process of
truncation.
4) The paper cheque shall be preserved by the collecting bank or the clearing house, after
truncation.
5) Truncation is a more secure system than the current exchange of physical
documents in which the cheque moves from one point to another.
Net cheque

Net cheque is mode of online payment where in the money is deposited from one account to
another. Net cheque dismisses the need of the physical cheques and the money is transferred
via the electronic medium.

The mechanism of this mode of online payment is simple. There is a regulatory authority that
registers the users who want to transfer money via net cheque. If want to transfer money via
online payment, the requirement is that both the involved parties are registered. There are
many network protocols which offer the e commerce services of online payment. It is
necessary that both the involved parties have an online account that is associated with a bank
which is recognized by that payment gateway. In this mode of online payment, when the net
cheque is deposited, the corresponding amount is debited from the giver’s account and the
same amount is credited in the receiver’s account. In return, the payment gateway used in the
online payment charges some commission for providing the services. The rates depend on the
amount being exchanged.

There is a net cheque server which keeps all the information about the registered users. It is
the duty of the servers to authenticate the users when they are initiating the online payment.
The servers store all the relevant information of the users.

This information includes a

 Unique id of the user

 His personal details

 Bank account details

 The digital signature and other details.

The digital signature is a form of an electronic signature. Each registered user who uses
online payment has a unique signature. When the sender sends a net cheque to the
receiver, he appends his digital signature on the cheque. This signature authenticates
the sender of the net cheque. The receiver can verify the digital signature to make sure
that sender of net cheque is valid and that the message is not tampered on its way.
Online payment using net cheques provides scalability and reliability. The servers used by the
net cheques are more than one. So even if one of the servers is out of order, you can rely on
the other servers. It also provides efficiency since you can be rest assured that the net cheque
system will never fail. The digital signature mechanism is implemented using the Kerberos.
This ensures security.

The advantages offered by net cheque online payment are many. It is time saving. When
cheque is deposited in conventional manner, it takes at least a day for the money to get
credited. In this mode of online payment, money is credited almost instantly.

Electronic Clearing Service (ECS):

The Reserve Bank of India has introduced the Electronic Clearing Service (Debit)
Scheme to provide faster method of effecting periodic and repetitive payment by direct debit
to customers accounts (duly authorized) thereby minimizing paper transactions and
increasing customers satisfaction .Electronic Clearing Service (Credit) Scheme to provide
institutions having to make large number of payments (such as Interest/Dividends) can
directly deposit the amount into the bank accounts of the share-holders/ depositors/ investors .
ECS is a retail payment system which facilitates bulk payments, that facilitate
payments from one-to-many and receipts that
are from many-to-one. The two components of this system are ECS (credit) and ECS (Debit).
This facility is now available at 67 major.

ECS-Credit System

In this method of payment whereby the institutions having to make a large number of
payments (such as interest / dividend) can directly deposit the amount into the bank accounts
of the share-holders/ depositors/ investors without having to issue paper instruments.

The ECS user's bank is called as the sponsor bank and the ECS beneficiary
account holder is called the destination account holder or beneficiary and his bank is
called the destination bank.
Working of ECS Credit system:

 Step 1: The corporate body institution (called “User”) which has to make payments
to a large number of customers/investors would prepare the payment data on a
magnetic media (i.e., tape or floppy) and submit the same to its banker (Sponsor
Bank).

 Step 2: The Sponsor Bank would present the payment data to the local Bankers
Clearing House authorizing the Manager of the Clearing House to debit the Sponsor
Bank’s account and credit the accounts (Destination Bank) of the banks where the
beneficiaries of the transactions maintain their accounts.

 Step 3: On receiving this authorization, the Clearing House will process the data and
work out an inter-bank funds settlement.

 Step 4: The Clearing House will furnish to the service branches of the destination
banks branch-wise credit reports indicating the beneficiary details such as the names
of the branches, where the accounts are maintained, the names of the beneficiaries,
account type, account numbers and the respective amounts.

 Step 5: The service branches will in turn pass on the advices to the concerned
branches of their bank, which will credit the beneficiary’s accounts on the appointed
date.

Benefits under ECS (Credit)

 Payment on the due date.

 Effortless receipt – No need for visiting the bank for depositing the dividend/interest
warrant.

 Loss of instrument in transit or fraudulent encashment thereof and consequent

correspondence with the company are totally eliminated.
ECS debit system

The Reserve Bank of India has introduced the Electronic Clearing Service (Debit) scheme to
provide faster method of effecting periodic and repetitive payments by ‘direct debit’ to
customers’ accounts (duly authorised) thereby minimising paper transactions and increasing
customer satisfaction. Electronic Clearing Service (Debit) envisage “a large number of debits
and one credit” in the case of collection of electricity bills, telephone bills, loan installments,
insurance premia, Club fees, etc by the Utility Service Providers.

As per the existing system for collection of electricity bills and telephone bills, the
customers/subscribers are required to go to the collection centres /designated banks and stand
in long queues for payment of bills/dues. There would not be any cash transaction or payment
through cheques in the new system. There is an overall limit of Rs.5, 00,000 per transaction.
A sum of Rs.0.50 p. only is collected by NCC, RBI towards Clearing House charges. Utility
service providers like MTNL, Telephone/Mobile companies, Telecom Departments, State
Electricity Boards, Banks (for collection of credit cards dues) LIC, Housing Finance
Companies, Intermediaries and Clubs etc are making use of ECS(Debit) Clearing system.
Working of ECS Debit system:

 Utility Companies, banks/institutions receiving periodic/repetitive payments towards

electricity bills/telephone bills/loan installments/insurance premia initially collect
mandates from their customers / subscribers for collection of amounts due from them
by direct debit to their accounts with banks. The mandate provides details such as the
name, account number, name of bank/branch etc. duly certified by the bank
concerned.
 Based on the details furnished in the mandates, the user company prepares transaction
data on electronic media and submits the encrypted data to the local Clearing House,
through its Sponsor bank.
 After due validation of the data, the local clearing house processes the same and
arrives at the inter-bank settlement as also generates bank-wise/branch-wise
reports(hard copies)
 NCC debits the destination banks’ accounts with clearing house and simultaneously
affords a consolidated credit to the sponsor bank’s account and furnishes the bank-
wise and branch-wise reports to the service branches of destination banks.
 Service branches forward the branch-wise reports to the respective branches for
debiting the accounts of customers with the indicated amounts.

Benefits under ECS (Debit)

 Faster Collection of bills by the companies and better cash management by them.

 Eliminates the need to go to the collection centres/banks by the customers and no

need to stand in long ‘Q’s for payment
 Automatic debiting to the accounts once the mandates are given by the customers,
to that effect cuts down the procedural delay.
Credit and Debit cards

Credit and Debit cards have been in use in the country for many years now. However
the card base as well as the usage has picked up only during the last five years. Nearly 2
million cards are added each month and the card base as at the closed of March 2007 was 98
millions. Nearly all the cards have been issued by bank in affiliation with card issuing
companies such as Visa, Master Card and American Express. Many banks converted their
ATM cards to debit cards to take advantage of the switching and clearing and settlement
facilities offered by Visa and Master Card. Smart Cards are relatively new and only a
handful of banks have issued such cards numbering around 3 lakh cards with outstanding
value of Rs.1000 crores.
Credit and Debit cards have been in use in the country for many years now. As at the
end of May 2007, banks have issued 24.13 million credit cards and 78.46 million debit
cards. The growth in the card based payment systems is being closely monitored. However
no conclusive inference could be drawn on the impact of the charges being levied by banks
as also the announcement in the Central Government Budget on the levying of service tax
for the transactions through the cards.
 1. Customer pays by
credit card

6. Principal bank 2. Merchant process

sends transaction credit card using the
back to merchant software
provided
ENTIRE
PROCESS
TAKES 5-15
SECONDS
5. Isuing bank 3. Ectronically
approves/declines submitted to
transaction back principal bank
to
principal bank

The bank 4. Principal bank sends

that issued request to
the credit issuing bank
card to
customer

Credit card Processing

National Electronic Funds Transfer (NEFT):

National Electronic Funds Transfer (NEFT) is a nation-wide system that facilitates

individuals, firms and corporate to electronically transfer funds from any bank branch to any
individual, firm or corporate having an account with any other bank branch in the country.It
is an online system for transferring funds. This facility is used mainly to transfer funds below
Rs. 2,00,000.
The Reserve Bank of India has instructed banks that they should not use NEFT for amounts
above Rs 2 lakh (200 thousand). The new rule came into effect on 15 November 2010. For

small transactions, National Electronic Fund Transfer (NEFT) which provided T+0 and
T+1 settlement system (depending on the time a customer gives instruction to the bank for
transferring the fund).

Process flow:

Step-1: An individual / firm / corporate intending to originate transfer of funds through

NEFT has to provide details

1. Amount to be remitted

2. Account number which is to be debited

3. Name of the beneficiary bank

4. Name of the beneficiary customer

5. Account number of the beneficiary customer

6. Sender to receiver information, if any

7. The IFSC(Indian Financial Service Code) number of the receiving branch

IFSC: Indian Financial System Code (IFSC) is used in NEFT transactions. It is an alpha
numeric code designed to uniquely identify the bank-branches in India. It is an 11 digit code
with first 4 characters representing the banks code, the next character reserved as control
character (Presently 0 appears in the fifth position) and remaining 6 characters to identify the
branch.

Step-2: The service bank branch prepares a message and sends the message to its
pooling centre (also called the NEFT Service Centre).

Step-3: The pooling centre forwards the message to the NEFT Clearing Centre (operated by
National Clearing Cell, Reserve Bank of India, Mumbai) to be included for the next available
batch.
Step-4: The Clearing Centre sorts the funds transfer transactions destination bank-wise and
prepares accounting entries to receive funds from (debit) the service banks and give the
funds to (credit) the beneficiary banks. Thereafter, bank-wise remittance messages are
forwarded to the beneficiary banks through their pooling centre (NEFT Service Centre).

Step-5: The beneficiary banks receive the inward remittance messages from the
Clearing Centre and pass on the credit to the beneficiary accounts.

Data Entry at the Sending Bank Branch

The sending bank branch shall prepare the Structured Financial Messaging system
(SFMS) message as and when the applications for the funds transfer is received and
arrange to send the message to NEFT Service Centre till the cut off time for the batch.
Transmission/Submission of NEFT message to the NEFT centre

The sending Service Centre shall transmit the NEFT SFMS message to the NEFT
Clearing Centre by using the communication network designated by Reserve Bank.
Revocation of Payment Instruction

A payment instruction issued for execution shall become irrevocable when it is executed
by the sending bank. Any revocation, after the payment instruction is executed by the
sending bank shall not be binding on any other party in the NEFT system.

Acknowledgement by the beneficiary bank and return in case of non-credit

No acknowledgements are envisaged under NEFT Scheme. A message which is not

returned unaffected before the next settlement day is treated to have been completed and
credit afforded to the beneficiary's account by the beneficiary branch. It is, therefore, vital
that unaffected credits are re-transmitted back as return NEFT transactions in the immediate
next batch itself.

Sender to be advised in case of refund

If the beneficiary specified in the sender's payment instruction fails to get payment through
the NEFT system for some valid reasons, the sender shall be informed immediately after
the

sending bank gets the returned NEFT. The sending bank shall also arrange to make payment
to the sender by crediting the account of the sender or otherwise placing funds at the
disposal of the sender.
Beneficiary to be advised of the receipt of funds

After crediting the account of the beneficiary, the beneficiary bank shall advise the
beneficiary of the funds received. The Statement of account/Pass Book entry or any
online messaging system shall indicate briefly the source of funds as well.
The NEFT system was initially designed to allow destination banks to return transactions on
a T+1 basis. The traffic analysis has revealed that a major chunk of returns are effected by
banks either in the last batch of the day or in the first batch of the next day, indicating that the
transactions are processed by the destination batches only at the end of the day instead of
batch-wise. In order to streamline the system and complete the processing cycle on a near-
real-time basis, the concept of return within two hours of completion of a batch has been
introduced. The B+2 return discipline would require banks to afford credit to beneficiary
accounts immediately upon completion of a batch or else return the transactions within two
hours of completion of the batch settlement, if credits are unable to be afforded for any
reason.
NEFT has eleven batches of settlement from 9am – 7pm on week days and five batches
of settlement at 9 am-1pm batches of settlement Saturdays.
This is a message based funds transfer system. The system provides secure one-to-
one funds transfer facility for customers of banks. Unlike its precursors the EFT system
which provided settlement facility only at few centers, the NEFT facilitates national
coverage, with centralized clearing and settlement facility. Further, to provide sound legal
basis to the system, the system is provided with Public Key Infrastructure (PKI) based
security system. There are eleven settlements during a day in this system, thereby
facilitating same day settlement of funds, for customers using this facility.
RTGS-Real Time Gross Transaction System:

RTGS The acronym 'RTGS' stands for Real Time Gross Settlement. The Reserve Bank of
India maintains this payment network. RTGS system is a funds transfer mechanism where
transfer of money takes place from one bank to another on a 'real time' and on 'gross' basis.
This is the fastest possible money transfer system through the banking channel. Settlement in
'real time' means payment transaction is not subjected to any waiting period. The transactions
are settled as soon as they are processed. 'Gross settlement' means the transaction is settled
on one to one basis without bunching with any other transaction. The money transfer takes
place in the books of the Reserve Bank of India, the payment is taken as final and
irrevocable.
Both the remitting and receiving must have Core banking in place to enter into RTGS
transactions. Core Banking enabled banks and branches have assigned RTGS 11-
character alphanumeric codes, which are required for transactions along with recipient's
account number.

 RTGS is a large value (minimum value of transaction should be Rs. 2, 00,000)

funds transfer system whereby financial intermediaries can settle interbank transfers
for their own account as well as for their customers.

 The system effects final settlement of interbank funds transfers on a

continuous, transaction-by-transaction basis throughout the processing day.

 Customers can access the RTGS facility between 9 am to 4:30 pm on week days
and 9 am to 12 noon on Saturday.

Banks could use balances maintained under the cash reserve ratio (CRR) instead of the intra-
day liquidity (IDL) to be supplied by the central bank for meeting any eventuality arising
out of the real time gross settlement (RTGS). The RBI fixed the IDL limit for banks to three
times their net owned fund (NOF).

The IDL will be charged at Rs 25 per transaction entered into by the bank on the RTGS
platform. The marketable securities and treasury bills will have to be placed as collateral
with a margin of five per cent.
Process of RTGS

The remitting customer has to furnish the following information to a bank for affecting
a RTGS remittance:

1. Amount to be remitted

2. His account number which is to be debited

3. Name of the beneficiary bank

4. Name of the beneficiary customer

5. Account number of the beneficiary customer

6. Sender to receiver information, if any

7. The IFSC(Indian Financial Service Code) Number of the receiving branch

Step1: Each bank is required to have a single gateway interface called Participant
Interface (PI) for RTGS system. The payment / settlement message originates from the
participant’s host system.

Step2: This message is passed on by the PI to Inter-bank Funds Transfer Processor

(IFTP) acting as broker. Communication between PI and IFTP is through RTGS only.

Step3: IFTP stores the message and in case of payment messages, constructs settlement
message, containing a core subset of the information required for settlement and routed to
the RTGS system at RBI.

Step4: After receipt of this subset, RBI (the settlement agent) carries the settlement by debit
and credit of the accounts of respective banks and conveys the status to IFTP.

Step5: On receipt of this confirmation, IFTP reconstructs the message by adding back
other details and sends settlement advice to both the originating and beneficiary
participant. The business information is not known to the settlement agent i.e. RBI
MESSAGE FLOW STRUCTURES

In India, the RTGS has been implemented by RBI. It has decided to use Y shaped structure
out of the four messages flow structures (V, Y, L, and T). In this structure the following
flow of instructions (it is not actual and is only for understanding the process) takes place:

MESSAGE FLOW STRUCTURES

Y- Message Flow Structure:

Each bank is required to have a single gateway interface called Participant Interface
(PI) for RTGS system. The payment / settlement message originates from the participant’s
host system. This message is passed on by the PI to Inter-bank Funds Transfer Processor

(IFTP) acting as broker. Communication between PI and IFTP is through RTGS only.IFTP
stores the message and in case of payment messages, constructs settlement message,
containing a core subset of the information required for settlement and routed to the RTGS
system at RBI. After receipt of this subset, RBI (the settlement agent) carries the settlement
by debit and credit of the accounts of respective banks and conveys the status to IFTP.On
receipt of this confirmation; IFTP reconstructs the message by adding back other details
and sends settlement advice to both the originating and beneficiary participant. The
business information is not known to the settlement agent i.e. RBI.
Under normal circumstances the beneficiary branches are expected to credit the
beneficiary's account within two hours of receiving the funds transfer message.
If the money cannot be credited for any reason, the receiving bank has to return the money to
the remitting bank within 2 hours. Once the money is received back by the remitting bank,
the original debit entry in the customer's account is reversed.

Payment Queues:

The system also provides for facilities to the participants to view their respective
transactions held in their payment queues, cancel such transactions and even change
their priority. However, participants can only view transactions on their own payment
queues. They can not view other participants’ queues or their own pending incoming
payment instructions.

Participant’s Dedicated Settlement Account for RTGS Transactions:

A single dedicated account, the RTGS Settlement Account for each participant for
outward and inward RTGS payments, is provided by the solution, enabling easy monitoring,
tracking and reconciliation of the transactions as well as more efficient liquidity management.

Each participant of the RTGS system will be required to open a dedicated settlement
account for putting through its RTGS transactions. This account will be an intra-day account
in the sense that it would be operational only during the duration of the RTGS day. The
account would be funded at the start of the day (SOD) from a current account, the
participant holds under the present dispensation at DAD, Mumbai. Balances in the RTGS
Settlement

account at the End of Day (EOD) of the RTGS day are swept back to the Participant’s
current account and thereby zeroing the RTGS settlement account.
 The system enables the participants to place standing instructions with DAD,
Mumbai to fund their RTGS settlement account each morning. They can specify an actual
amount or percentage of balance to be transferred to the RTGS settlement account every day
at SOD. Participants can also specify a minimum threshold value, which must be maintained
in their current account while funding their RTGS settlement account.
The system also provides a facility to fund the RTGS settlement account during the day
from the participants’ current accounts by the use of Own Account Transfers.

FIFO processing/Transaction Priority:

Payment transactions emanating from a participant’s payment Systems gateway

are processed by the RTGS system strictly in First-In-First-Out or FIFO basis. However,
to enable the participants to take care of urgent or time critical payments and to enable
more effective funds management, the system allows the participants to assign priorities to
their payment messages and thereby, enabling a particular transaction to be processed
before another transaction, which was submitted earlier to the RTGS system. Within
payment messages having the same priority, however, the transactions will be processed
on FIFO basis.

Liquidity and Collateral Management:

Any RTGS system entails active management of intra-day liquidity by all

participants. To ensure smooth settlement of transactions and to avoid bunching of
transactions and delay of credit to other participants, it is imperative that participants ensure,
at the time of submission of payment instructions, that there are sufficient funds in their
RTGS settlement account to settle their transactions as soon as they are submitted or within a
very short interval thereafter.
The RTGS system also provides several facilities and tools to aid and supplement the participants’ liquidity
management efforts. The provision of a separate RTGS settlement account, own account transfers, queuing and
priority assignment are all examples of such tools. There are two additional powerful intra-day liquidity utilities,
offered by the proposed RTGS system viz. Intra Day Liquidity and Gridlock Resolution Mechanism
 .
Intra Day Liquidity:

The RTGS system enables the provision of intra day lines of credit by the Reserve
Bank of India to the participants of the RTGS system to enable them to meet their intra day
liquidity requirements. Such liquidity will be provided by the RBI at its discretion and
under terms and conditions, to be specified by it from time to time. Such intra-day liquidity
will be fully collateralized and will be provided to the participants at a charge per
transaction.
However, failure to repay the credit before the end of the day will invite strict penal action

Gridlock Resolution Mechanism:

 The Grid lock mechanism has the potential to clog the entire system.

 The solution for this is an optimized gridlock resolution tool.

 The optimized gridlock resolution tool is to overcome crippling

liquidity problem.
 CHAPTER-3

INDUSTRY PROFILE COMPANY PROFILE

 INDUSTRY PROFI

BANK

A Bank is a financial institution that serves as a financial intermediary. Banker or Bank is a

financial institution that acts as a payment agent for customers, and borrows and lends
money. Banks act as payment agents by conducting checking or current accounts for
customers, paying cheques drawn by customers on the bank, and collecting cheques
deposited to customers' current accounts. Banks also enable customer payments via other
payment methods such as telegraphic transfer, Electronic Fund Transfer at Point Of
Sales, and automated teller machine (ATM).

BANKING INDUSTRY

The Banking Industry was once a simple and reliable business that took deposits from
investors at a lower interest rate and loaned it out to borrowers at a higher rate. However
deregulation and technology led to a revolution in the Banking Industry that saw it
transformed. Banks have become global industrial powerhouses that have created ever more
complex products that use risk and securitization in models. Through technology
development, banking services have become available 24 hours a day, 365 days a week,
through ATMs, at online bankings, and in electronically enabled exchanges where everything
from stocks to currency futures contracts can be traded .

The Banking Industry at its core provides access to credit. In the lenders case, this includes
access to their own savings and investments, and interest payments on those amounts. In the
case of borrowers, it includes access to loans for the creditworthy, at a competitive interest
rate.

Banking services include transactional services, such as verification of account details,

account balance details and the transfer of funds, as well as advisory services that help
individuals and institutions to properly plan and manage their finances. Online banking
channels have become key in the last 10 years. Mortgage banking has been encompassing for
the publicity or promotion of the various mortgage loans to investors as well as individuals
in the mortgage business. Online banking services has developed the banking practices easier
worldwide.
The collapse of the Banking Industry in the Financial Crisis, however, means that some of
the more extreme risk-taking and complex securitization activities that banks increasingly
engaged in since 2000 will be limited and carefully watched, to ensure that there is not
another banking system meltdown in the future.

RECENT DEVELOPMENTS IN THE GLOBAL BANKING INDUSTRY

A total asset of global banking industry is about hundred trillion in US $. Banking and
Insurance industry was affected by financial crisis of 2008. The crisis began with the collapse
of Lehman Brothers in the US, which rapidly spread all over the world resulting to great
economic recession after post war era. The credit crunch and liquidity situation further
worsen the market resulting too volatile market condition. Government and central banks all
over the world took necessary steps to save global economy and market condition.

Global banking and insurance industry is expected to recover rapidly from current
economic recession supported by the growth in emerging market economies. BRIC nations
offer great potential to insurance industry due to their huge population.

Critical to success in the banking and insurance is the knowledge of market trends, product
mix shifts, customer needs and effective market strategies. Our continuous networking with
customers and competitors creates complete visibility thus helping our customers make
confident business decisions.

The global financial crisis will bring about the most significant changes to the American and
European banks have seen in decades. There will be fundamental re-regulation of the
industry, ownership structures are shifting towards heavier state involvement and investor
scrutiny is rising strongly. Equity ratios will be substantially higher. As a result, growth and
profitability of the banking sector as a whole are likely to decline.
 INDIAN BANKING INDUSTRY

The Indian banking sector has witnessed wide ranging changes under the influence of the
financial sector reforms initiated during the early 1990s. The approach to such reforms in
India has been one of gradual and non-disruptive progress through a consultative process.
The emphasis has been on deregulation and opening up the banking sector to market forces.
The Reserve Bank has been consistently working towards the establishment of an enabling
regulatory framework with prompt and effective supervision as well as the development of
technological and institutional infrastructure. Persistent efforts have been made towards
adoption of international benchmarks as appropriate to Indian conditions. While certain
changes in the legal infrastructure are yet to be effected, the developments so far have
brought the Indian financial system closer to global standards.

Historical Background of Banking in India

From the early Vedic period the giving and taking of credit in one form or the other have
existed in Indian Society. The bankers are the pillars of the Indian society. Early days
bankers were called as indigenous bankers. The development of modern banking has started
in India since the days of East India Company. These banks mostly had no capital of their
own and depended entirely on deposits in India.

Indian banking comprises of players who include public sector banks, State bank of India and
its associates, private sector banks, scheduled banks, cooperative banks, regional rural
banks, foreign banks etc. The banking industry worldwide is transformed concomitant with a
paradigm shift in the Indian economy from manufacturing sector to nascent service sector.
Indian banking as a whole is undergoing a change. Indian banks have always proved beyond
doubt their adaptability to mould themselves into agile and resilient organizations.

The first bank in India, General Bank of India was established in 1786. From 1786 till today,
the journey of Indian banking system can be segregated into three distinct phases.
They are as follows

 Early phase from 1786 to 1969 of Indian Banks.

 Nationalization of Indian banks and up to 1991 prior to Indian banking sector reforms.

 New phase of Indian banking system with the advent of Indian Financial &
Banking sector Reforms after 1991.

Journey of Indian Banking system can be segregated into 3 distinct

phases: PHASE I:
 1786- The General Bank of India, Bank of Hindustan, Bengal Bank

 1809- East India Company established Bank of Bengal

 1840- Bank of Bombay

 1843- Bank of Madras

 1865- Allahabad Bank

 1894- Punjab National Bank Ltd.

 1906-1913- Bank of India, Central bank of India, Bank of Baroda, Canara

Bank, Indian Bank, Bank of Mysore
 1920- Imperial Bank of India

 1935- RBI

 Growth was slow & experienced periodic failures b/w 1913- 1948.

 Approximately 1,100 banks, mostly small

 The Banking Companies Act, 1949

 Banking Regulation Act,

1949
  PHASE II:

 Nationalization of Indian banks & up to 1991 prior to Indian Banking sector reforms.

 1955- Nationalized Imperial Bank of India

 1960- 7 subsidiaries of SBI nationalized

 19th July, 1969- 14 banks nationalized

 1980- 7 banks nationalized (80% of banking segment – Gov. owned)

 Nationalization lead to increase in deposits & advances.

PHASE III:

 New phase of Indian Banking system with advent of Indian Financial &
Banking Sector Reforms after 1991.
 Introduced many products & facilities in banking sector.

 1991- Narasimham Committee was setup

 New phase brought in many changes:

 Foreign banks

 ATM stations

 Customer service

 Phone banking

 Net banking

CURRENT SCENARIO

 Business Environment:

The Indian economy is on a growth path with the real GDP growth upwards of 9%.
Industrial and services sectors have accelerated growth while growth in agricultural
sector has continued to remain moderate. Inflation remained an area of concern. There
was however robust build up of foreign exchange resources - close to $ 200 bn. Stock
markets were buoyant while the Indian Rupee continued to appreciate against US
Dollar.
  Banking Scenario:

The future of the banking sector appears quite promising though there are quite a few
challenges to contend with. The customer is more discerning and has a much wider
access to technology and knowledge. Hence the imperative need to roll out innovative
customized products which will be the key differentiator amongst banks. Time and
distance have shrunk and the internet has greatly facilitated global reach and
therefore, evolution of delivery channels and interactive services have been a boon to
banking. The core banking solution platform is being increasingly adopted by the
banks to fully realize the opportunity thrown up by technology.

Unlike the previous year, credit growth of the system was not as profound but quite robust
nonetheless and resources though not really scarce, were a bit expensive. RBI initiated
various measures such as increase of reverse repo rate, higher CRR prescriptions etc. which
were aimed at moderating credit growth. To certain sector specific instructions have also
been issued by RBI to rein in expansion of Bank credit to such sectors. All this ushered in a
period of increasing cost, declining yields and consequently pressure on margins. Healthy
rebalancing of the credit portfolio was the answer to this syndrome.

HIGHLIGHTS OF THE BANKS PERFORMANCE

The year gone by was an exceptional year for the Bank in terms of most parameters. Net
profit surged by 60% from Rs. 701 crores to Rs. 1123 crores and the global business mix
crossed the milestone mark of Rs. 200,000 crores to touch Rs. 207,000 crores. While deposits
grew by 27.6% to Rs. 119882 crores, the share of low cost deposits hovered at 40% and your
bank continues to be one of the few banks with such a large share of low cost deposits. Credit
expansion was a robust 30% touching an aggregate level of Rs.86791 crores. The growth has
been quite broad based encompassing various segments such as agriculture, industry, SME
and retail. Foreign branches accounted for a smart rise of 34% in advances.

Priority Sector not only constitutes the Bank's social commitment, but is recognized today as
a profitable business opportunity. With almost two third branches in rural and semi urban
areas, the bank has ably risen to the occasion. While agriculture clocked a growth of 25%
and
constituted 18.5% of net bank credit, priority sector grew by almost 23% and accounted for
45.5% of net bank credit. The Bank could for the first time record net NPA below 1%. In fact
on the back of robust cash recoveries of Rs. 752 crores and upgradation of Rs. 132 core, gross
NPA slid by Rs. 379 crores to Rs. 2100 crores. Recoveries together with prudent provisioning
saw Net NPA falling sharply to Rs. 632 crores from Rs. 970 crores resulting in a healthy loan
loss coverage ratio.3

Challenges facHSBCing Industry in India

The banking industry in India is undergoing a major transformation due to changes in

economic conditions and continuous deregulation. These multiple changes happening one
after other has a ripple effect on a bank (Refer fig. 2.1) trying to graduate from completely
regulated seller market to completed deregulated customers market.

 Deregulation:

This continuous deregulation has made the Banking market extremely competitive
with greater autonomy, operational flexibility and decontrolled interest rate and
liberalized norms for foreign exchange. The deregulation of the industry coupled with
decontrol in interest rates has led to entry of a number of players in the banking
industry. At the same time reduced corporate credit off take thanks to sluggish
economy has resulted in large number of competitors batting for the same pie.

 New rules:

As a result, the market place has been redefined with new rules of the game. Banks
are transforming to universal banking, adding new channels with lucrative pricing and
freebees to offer. Natural fall out of this has led to a series of innovative product
offerings catering to various customer segments, specifically retail credit.
  Efficiency:

This in turn has made it necessary to look for efficiencies in the business. Banks need
to access low cost funds and simultaneously improve the efficiency. The banks are
facing pricing pressure, squeeze on spread and have to give thrust on retail assets.

 Diffused Customer loyalty:

This will definitely impact Customer preferences, as they are bound to react to the
value added offerings. Customers have become demanding and the loyalties are
diffused. There are multiple choices, the wallet share is reduced per bank with
demand on flexibility and customization. Given the relatively low switching costs;
customer retention calls for customized service and hassle free, flawless service
delivery.

 Misaligned mindset:

These changes are creating challenges, as employees are made to adapt to changing
conditions. There is resistance to change from employees and the Seller market mindset is
yet to be changed coupled with Fear of uncertainty and Control orientation. Acceptance
of technology is slowly creeping in but the utilization is not maximized.

 Competency Gap:

Placing the right skill at the right place will determine success. The competency gap
needs to be addressed simultaneously otherwise there will be missed opportunities. The
focus of people will be on doing work but not providing solutions, on escalating problems
rather than solving them and on disposing customers instead of using the opportunity to
cross sell.

Strategic options with banks to cope with the challenges

Leading players in the industry have embarked on a series of strategic and tactical initiatives
to sustain leadership. The major initiatives include:
 Investing in state of the art technology as the back bone to ensure reliable
service delivery
 Leveraging the branch network and sales structure to mobilize low cost current
and savings deposits
  Making aggressive forays in the retail advances segment of home and personal loan.

 Implementing organization wide initiatives involving people, process and

technology to reduce the fixed costs and cost per transaction
 Focusing on fee based income to compensate for squeezed spread, (e.g. CMS,
trade services)
 Innovating Products to capture customer ‘mind share’ to begin with and later
the wallet share
 Improving the asset quality as per Base II norms


In this era of increasing competition, banks will have to benchmark themselves against the
best in the world. For a resilient and strong banking and financial system, the banks need to
tackle issues like increase in profitability, efficiency, and productivity while achieving
economies of scale through consolidation and exploring available cost-effective solutions.

Major Players in the Indian Banking Industry:

Indian banking has grown much stronger than its Asian counterparts in recent years, in terms
of both performance indices and product range. The continued deregulation of deposits and
interest on loans have led to a greater understanding of capital structure,
increased competition and autonomy, as well as technological upgradation.
 HSBC BANK PROFILE

FOUNDER:

Years of establishment: HSBC was established in 1865 to finance trade between Europe and
Asia. For over 150 years we have connected customers to opportunities. We enable
businesses to thrive and economies to prosper, helping people to realize their ambitions
HSBC was born from one simple idea – a local bank serving international needs. In March
1865, HSBC opened its doors for business in Hong Kong, and today we serve around 38
million customers worldwide in 67 countries and territories.
The experiences of the past 150 years have formed the character of HSBC. A glance at our
history explains why we believe in capital strength, in strict cost control and in building long-
term relationships with customers. HSBC has weathered change in all forms – revolutions,
economic crises, new technologies – and adapted to survive. The resulting corporate
character enables HSBC to meet the challenges of the 21st century.

MISSION & VISION:

HSBC
Holdings
Vision:
"We aspire to be one of the world's great specialist banking
Groups, driven by commitment to our core philosophies
and Values"
Mission:

Through an international network linked by advanced technology, including a rapidly

growing e-commerce capability, HSBC provides a comprehensive range of financial
services: personal financial services; commercial banking; corporate, investment banking
and markets; private banking; and other activities.
MILE STONES :( ACHIEVEMENTS):

1865

The Hongkong and Shanghai Banking Corporation Limited opened in Hong Kong on 3
March 1865 and in Shanghai one month later. It was the first locally owned and locally
managed bank.
1875

By 1875 HSBC was present in seven countries across Asia, Europe and North America. It
financed the export of tea and silk from China, cotton and jute from India, sugar from the
Philippines and rice and silk from Vietnam.

1.1.1.1 1900

By 1900, after strong growth under Chief Manager Thomas Jackson, the bank had expanded
into 16 countries and was financing trade across the world. Bullion, exchange and merchant
banking were important features of the bank’s business.

1.1.1.2 1910

In the early 20th century, HSBC widened the scope of its activities in Asia. It issued loans to
national governments to finance modernisation and infrastructure projects such as railway
building.

1.1.1.3 1918

The First World War brought disruption and dislocation to many businesses. By the 1920s,
however, Asia was beginning to prosper again as new industries developed and trade in
commodities such as rubber and tin soared.

1.1.1.4 1935

The 1930s brought recession and turmoil to many markets. Nonetheless, HSBC asked
architects Palmer and Turner to design a new head office in Hong Kong: “Please build us the
best bank in the world.” The cutting-edge art deco building opened in 1935.

1.1.1.5 1941

The bank faced one of its most challenging times during the Second World War. Staff in Asia
showed huge courage in the face of adversity. Many became prisoners of war. Only the
London, Indian and US branches remained in full operation.
 1.1.1.6 1950

At the end of the war, HSBC took on a key role in the reconstruction of the Hong Kong
economy. Its support helped both established manufacturers and newcomers to grow their
businesses in Hong Kong.

1.1.1.7 1972

By the 1970s the bank had expanded through acquisition. HSBC bought Mercantile Bank and
The British Bank of the Middle East in 1959. In 1972 it formed a merchant banking arm,
extending its range of services.

1.1.1.8 1992

In the 1980s HSBC bought Marine Midland Bank in the US. In 1992, the newly created
HSBC Holdings plc made a recommended offer for full ownership of the UK’s Midland
Bank. Following the acquisition, HSBC moved its headquarters to London.

1.1.1.9 1998

In 1998, the bank announced it would adopt a unified brand, using HSBC and the
hexagon symbol everywhere it operated.

1.1.1.10 2017

As new markets blossom and flourish, HSBC continues to be where the growth is, connecting
customers to opportunities. The bank enables businesses to thrive and economies to prosper,
helping people fulfil their hopes and dreams and realise their ambitions.
BOARD OF DIRECTORS:

Name
Relationships Title Age
(Connections)

Antonio Simoes 38 Relationships CEO & Director 42

Jean Beunardeau 53 Relationships Chief Executive Officer of HSBC France 55

1.2 Other Board Members On Board Members

Type of
Name
Relationships Board Primary Company Age
(Connections)
Members

Jonathan Symonds 56Relationships Chairman of Mesoblast Limited 58

CBE, BA, FCA the Board

John Trueman 10Relationships Vice Chairman HSBC Bank Plc 74

Douglas Flint CBE 58Relationships Unit Chairman Institute of International 62

Finance, Inc.
DEPARTMENTS:

HSBC serves its customers in India through our four global businesses:

Retail Banking and Wealth Management: The Bank offers a wide range of services and
products to resident as well as non-resident Indian customers based in various countries
across the globe.
Commercial Banking: Commercial Banking (CMB) provides services to business and
corporate clients. Our services include business accounts, global liquidity and cash
management solutions, trade services, and a range of borrowing solutions.
Global Banking and Markets: Global Banking and Markets business provides financial
products and services for corporate and institutional clients. This includes transaction
banking, treasury services, investment banking, advisory, capital markets, foreign exchange,
fixed income and derivatives.
OTHER DEPARTMENT
Global Asset Management: HSBC Asset Management (India) Private Limited, investment
manager to HSBC Mutual Fund, offers a flexible product range to individual and
institutional investors including fixed income/pension mandates for large institutional clients.
Global Service Delivery: Global Service Delivery in India has more than 24,000 employees
and operates out of 11 Group Service Centres (GSCs). There are three centres each in
Bangalore and Hyderabad; while Gurgaon, Kolkata, Mumbai, Chennai and Vizag have one
centre each.
HSBC Securities and Capital Markets (India) Private Limited: HSBC Securities and Capital
Markets (India) Private Limited: HSBC Securities and Capital Markets (India) Private
Limited offers services in Investment Banking (IB), Infrastructure and Real Estate, Equities
research and stock broking. The IB business includes mergers and acquisition advisory
services and equities capital markets. Infrastructure and Real Estate Group services are
provided to governments, large corporates and top-tier banks. Equities research and stock
broking primarily cater to the institutional client base which includes foreign institutional
investors, foreign portfolio investors, local institutions, mutual funds, insurance companies,
and select high net worth and corporate clients.
Global Software Development: HSBC Global Software Delivery in India (registered entity -
HSBC Software Development (India) Private Limited (HSDI)) is spread across five locations
in Pune and Hyderabad. It supports the Group’s IT requirements worldwide through
development, maintenance and diverse banking applications.
Audit Services: HSBC Professional Services (India) Private Limited (HPSI) provides internal
audit services to global businesses and global functions across the HSBC Group and is also
involved in regional audit work in Asia-Pacific.
HSBC InvestDirect: HSBC InvestDirect (India) Limited (HIDL) through its subsidiary HSBC
InvestDirect Financial Services Limited (HIFSL) offers lending to high net worth individuals
and corporate customers.
Canara HSBC Oriental Bank of Commerce Life Insurance Company Limited: This is a joint
venture between Canara Bank, Oriental Bank of Commerce and HSBC Insurance (Asia
Pacific) Holdings Limited.
In 1998, the bank announced it would adopt a unified brand, using HSBC and the hexagon
symbol everywhere it operated.
As new markets blossom and flourish, HSBC continues to be where the growth is,
connecting customers to opportunities. The bank enables businesses to thrive and economies
to prosper, helping people fulfil their hopes and dreams and realise their ambitions.
 COMPETITION
Competitors
1. BNP Paribas

2. Citigroup

3. China Construction Bank Corporation

4. Deutsche Bank

5. Bank of America

6. National Australia Bank

7.Standard Chartered Bank
8.Royal Bank of Scotland

 SWOT Analysis
 Strengths

1. Strong brand name and good financial position

2. Present in various business groups like commercial banking, investment banking,

financial services and private banking

 Weaknesses

1.US a declining market

2.Weak retail banking as compared to competition

 Opportunities
1.Expansion in other countries
2.Diversifying portfolios for customers
3.Lower interest rates will boost market share

 Threats

1.Changing govt regulations and financial crisis like recessions

2.Stiff competition from global leaders

CHAPTER-4 DATA
ANALYSIS
 Q1. What is your age group?",

INTERPRETATION:

Based on the data provided for the question "What is your age group?", we can observe the following

distribution:

45.65% of the respondents belong to the age group of 18-25.

19.4% of the respondents belong to the age group of 26-35.

25.2% of the respondents belong to the age group of 36-45.

9.7% of the respondents are 46 years and above.

This data indicates that the majority of respondents fall into the 18-25 age group, comprising almost half of
the total respondents. The 26-35 age group is the next significant segment, followed closely by the 36-45 age
group. The smallest percentage is represented by individuals aged 46 and above.

This distribution suggests that electronic payment systems are widely adopted among younger age groups,
particularly those aged 18-25, which aligns with the tech-savvy nature and digital adoption trends of the
younger generation. However, it is worth noting that a significant portion of respondents in the other age
groups also utilize electronic payment methods, indicating a growing acceptance and adoption across different
age brackets.
Q2. Do you currently use any electronic payment methods in India?

INTERPRETATION:

Based on the data provided for the question "Do you currently use any electronic payment methods in
India?", we can observe the following distribution:

45.2% of the respondents use mobile wallets such as Paytm, Phone PAY , and Google Pay.

29.8% of the respondents use UPI apps offered by banks.

20.2% of the respondents use debit or credit card payments.

5% of the respondents use net banking.

This data indicates that mobile wallets are the most widely used electronic payment method among the
respondents, with almost half of the respondents utilizing them. UPI apps offered by banks are the next
popular choice, followed by debit or credit card payments. Net banking has the lowest adoption rate
among the respondents.

The high usage of mobile wallets and UPI apps suggests the popularity of digital payment platforms that
offer convenience and ease of use for various transactions. The significant percentage of respondents
using debit or credit card payments highlights the continued relevance of card-based payments in the
electronic payment landscape. The lower percentage of respondents using net banking may be attributed
to the preference for more mobile-centric payment options.
3. How frequently do you use electronic payment methods?

INTERPRETATION:

Based on the data provided for the question "How frequently do you use electronic payment methods?", we can
observe the following distribution:

31.7% of the respondents use electronic payment methods multiple times a day.

31.7% of the respondents use electronic payment methods daily.

23.1% of the respondents use electronic payment methods 2-3 times a week.

10.6% of the respondents use electronic payment methods once a week.

3% of the respondents use electronic payment methods rarely.

This data indicates that a significant portion of the respondents use electronic payment methods frequently, with
approximately one-third using them multiple times a day or daily. Another notable segment consists of
respondents who use electronic payment methods 2-3 times a week. Relatively smaller percentages of respondents
use electronic payment methods once a week or rarely.

The high usage frequency among a significant portion of respondents reflects the convenience and ease of
electronic payment methods, which encourage frequent usage for various transactions. It also suggests that
electronic payment methods have become an integral part of the daily financial routines of these individuals.
 Q4. What factors influenced your decision to use electronic payment methods?

INTERPRETATION:

Based on the data provided for the question "What factors influenced your decision to use electronic payment
methods?", we can observe the following distribution:

26.9% of the respondents cited convenience as a factor influencing their decision to use electronic payment
methods.

26.9% of the respondents mentioned security as a factor influencing their decision.

26.9% of the respondents considered acceptance by merchants as a factor influencing their decision.

7.7% of the respondents mentioned transaction fees as a factor influencing their decision.

10.6% of the respondents considered rewards or cashback offers as a factor influencing their decision.

1% of the respondents mentioned other factors.

This data indicates that convenience, security, and acceptance by merchants are equally important factors that
influence respondents' decisions to use electronic payment methods, as they all have the same percentage of
responses. Transaction fees are mentioned by a smaller percentage of respondents, indicating that it may be a less
significant factor in their decision-making process. Additionally, rewards or cashback offers were considered by
a relatively higher percentage of respondents, suggesting that such incentives play a role in influencing their
choice of electronic payment methods.
Q5. Are you aware of the various electronic payment methods available in India?

INTERPRETATION:

Based on the data provided for the question "Are you aware of the various electronic payment methods available in
India?", we can observe the following distribution:

35.9% of the respondents indicated that they are aware of most of the electronic payment methods available in
India.

46.6% of the respondents mentioned that they are aware of a few electronic payment methods available in India.

17.5% of the respondents stated that they are not aware of any electronic payment methods available in India.

This data suggests that a significant portion of the respondents have some level of awareness about electronic
payment methods in India. However, it is noteworthy that a relatively high percentage of respondents are only
aware of a few methods, indicating that there is room for increasing awareness among this segment. Furthermore,
a notable percentage of respondents reported a lack of awareness about any electronic payment methods,
indicating the need for more efforts to educate and inform individuals about the available options.
To gain further insights, it would be useful to explore the specific electronic payment methods that respondents
are aware of, as well as the sources through which they obtained their knowledge. This information can guide
strategies aimed at enhancing awareness and promoting the use of electronic payment methods in India.
 Q6. Which electronic payment methods are you familiar with?",

INTERPRETATION:

Based on the data provided for the question "Which electronic payment methods are you familiar with?",
we can observe the following distribution:

28.8% of the respondents are familiar with mobile wallets such as Paytm, PhonePe, and Google Pay.
22.1% of the respondents are familiar with UPI apps offered by banks.
40.4% of the respondents are familiar with debit or credit card payments.
7% of the respondents are familiar with net banking.
2% of the respondents are familiar with other electronic payment methods.

This data indicates that debit or credit card payments are the most widely familiar electronic payment method
among the respondents, with the highest percentage of familiarity. Mobile wallets and UPI apps offered by banks
are also relatively familiar to a significant portion of the respondents. Net banking has a lower level of familiarity
compared to the other options. Additionally, a small percentage of respondents reported familiarity with other
electronic payment methods, which were not specified in the provided data.
 Q7. How would you rate your understanding of electronic payment systems?

Excellen
t

poor

INTERPRETATION:
Based on the data provided for the question "How would you rate your understanding of electronic payment
systems?", we can observe the following distribution:

9.6% of the respondents rated their understanding of electronic payment systems as poor.
17.3% of the respondents rated their understanding as fair.
35.6% of the respondents rated their understanding as good.
37.5% of the respondents rated their understanding as excellent.
This data indicates that the majority of the respondents have a good to excellent understanding of electronic
payment systems, with almost three-fourths of the respondents falling within these categories. A smaller
percentage rated their understanding as fair, while the lowest percentage considered their understanding to be
poor.
The high percentage of respondents rating their understanding as good or excellent suggests a positive level of
knowledge and familiarity with electronic payment systems among the surveyed individuals. This indicates that
a significant portion of the respondents are likely comfortable and confident in using electronic payment
methods for their financial transactions.
Q8. How confident are you about the security of your financial transactions when using electronic payment
methods?

INTERPRETATION:
Based on the data provided for the question "How confident are you about the security of your financial
transactions when using electronic payment methods?", we can observe the following distribution:

18.3% of the respondents are not confident about the security of their financial transactions when using electronic
payment methods.
34.6% of the respondents are somewhat confident about the security of their financial transactions.
23.3% of the respondents are confident about the security of their financial transactions.
8.7% of the respondents are very confident about the security of their financial transactions.

This data indicates that while a significant percentage of respondents have some level of confidence in the
security of their financial transactions when using electronic payment methods, a notable proportion still
express concerns or lack confidence. The highest percentage of respondents fall within the category of being
somewhat confident, followed by those who are confident. The lowest percentage of respondents express
very high confidence in the security of their financial transactions.
Q9. How do you stay informed about electronic payment methods?

INTERPRETATION:

Based on the data provided for the question "How do you stay informed about electronic payment methods?", we
can observe the following distribution:

15.5% of the respondents stay informed through news and media.

52.4% of the respondents rely on friends or family recommendations.

23.3% of the respondents conduct online research to gather information.

8.7% of the respondents rely on advertisements for information.

This data highlights the various sources through which respondents stay informed about electronic payment
methods. The highest percentage of respondents rely on recommendations from friends or family, indicating the
influence of personal networks in spreading awareness and knowledge about electronic payment methods. Online
research is also a significant source of information for a considerable portion of respondents, emphasizing the
importance of accessible and reliable online resources. News and media play a smaller role in keeping respondents
informed, while advertisements have the lowest impact as a source of information.
Q10. How would you rate the availability of internet connectivity in your area for using electronic payment
methods?

INTERPRETATION:
Based on the data provided for the question "How would you rate the availability of internet connectivity in your
area for using electronic payment methods?", we can observe the following distribution:
19.6% of the respondents rated the availability of internet connectivity in their area for using electronic payment
methods as poor.
20.6% of the respondents rated it as fair.
18.6% of the respondents rated it as good.
41.2% of the respondents rated it as excellent.
This data suggests that a significant portion of the respondents perceive the availability of internet connectivity in
their area for using electronic payment methods as excellent, with the highest percentage of ratings falling within
this category. A relatively smaller percentage rated it as good, while the lowest percentage of ratings were poor or
fair.
The high percentage of respondents rating the availability of internet connectivity as excellent indicates a positive
perception of the infrastructure supporting electronic payment methods in terms of internet accessibility.
It suggests that a large majority of the respondents have access to reliable and high-speed internet connectivity,
which is crucial for smooth and seamless electronic transactions.
 FINDINGS

Based on the data provided for the availability of internet connectivity for using electronic payment methods, the
following findings can be highlighted:

i. Positive Perception: The majority of respondents (41.2%) rated the availability of internet connectivity as
excellent, indicating a positive perception of the infrastructure supporting electronic payment methods.
ii. Significant Access: A combined percentage of 60.6% of respondents rated the availability of internet
connectivity as good or excellent, suggesting that a substantial portion of the respondents have access to
reliable internet connectivity in their area.
iii. Room for Improvement: While the majority of respondents had positive ratings, a notable proportion
(40.2%) rated the availability as fair or poor. This indicates that there are still areas where internet
connectivity needs improvement to support electronic payment methods effectively.
iv. Impact on Adoption: The availability of reliable internet connectivity plays a crucial role in facilitating the
adoption and usage of electronic payment methods. Higher ratings of availability are likely to contribute to
increased usage and acceptance of electronic payment methods
v. Regional Variations: It is important to note that the data provided does not specify the geographic
distribution of respondents. It would be valuable to analyze regional variations to identify areas with lower
availability and prioritize improvements accordingly.
 CHAPTER-5

SUGGESTIONS, CONCLUSIONS
 .

SUGGESTIONS

 With all the benefits of electronic payment, it's no wonder that its use is on the
rise. More than 12 billion ACH payments were made in 2004, a 20 percent
increase from 2003. The 2004 Federal Reserve Payments Study noted that from
2000 to 2003, electronic payments grew as payment by check declined, which
suggests that electronic payments are replacing checks.

 In order to better serve their customers, banks are swiftly moving to offer
online bill pay services. Grant Thornton's 2005 survey of bank executives
found that 65 percent of community banks and 94 percent of large banks offer
24/7 online bill payment. Most of these services are free to members and
coordinate easily with personal software programs such as Quicken or MS
Money. Alternatively, consumers can subscribe to online bill pay services
such as Pay trust or Yahoo! Bill Pay. These services charge a monthly fee in
exchange for the convenience of paperless bill paying.
 CONCLUSION

Now days online transaction are going at very high speed, be it be online shopping
or money transaction, crediting debiting account and online money management.
So demand a better E-payment system is of prime importance and that can’t be without
considering E-security.

For any MNC company to survive in the field of E-marketing these two are most important
parameters i.e. E-payment and E-security as they always go hand in hand. If anyone is
lacking behind a business would eventually vanish out as they are interdependent on each
other and directly dependent on the success of the business.
 BIBLIOGRAPHY

 www.google.com

 www.paypal.com

 www.verisgn.com

 www.wikipedia.com