PRINCIPLES & PRACTICES

OF BANKING
MODULE C
BANKING TECHNOLOGY

29. ESSENTIALS OF BANK

COMPUTERISATION
BANK COMPUTERISATION
A committee was set up under the chairmanship of then Dy.
Governor of RBI, Dr. C. Rangarajan in 1983 to study the
possibility and stages involved in bank computerisation and
prepare guidelines for the same.
1984- First Rangrajan Committee Report on bank mechanism
NEEF FOR COMPUTERISATION
Customer service, housekeeping, decision making, productivityprofitability
Stand alone Computer System
Multi-user Systems: several people can work at the same time
Multi user computer networking: Centralised processing concept,
All information Is kept and processed at main central machines
and various terminals are attached to the main computer.

Branch Level Computerisation: EFT, ATMs

Computerisation at Regional Level
Branch profiles, Inter brnach reconciliation, credit
monitoring
Personnel data management.
Computerisation at Head Office : Investment Portfolio mgt,
Credit mgt

LAN: LOCAL AREA NETWORK

The computer network that links computers and peripherals
within a localised area say within a building is know as LAN.
Node: Each independent system is know as node
Server: Central Node
Topology : Layout
1. Star 2. Ring 3. Bus

WAN: WIDE AREA NETWORK

Based on tele communication network
Dial up conncetion: computers can be linked using ordinary
telephon lines
Modem: convert the digital signal into analog signals at the
transmitting end and reconverts at the receiving end

UPS : UNINTERRUPTED POWE SYSTEM

It is an inverter and battery charger with an automatic
change over of power supply form battery or load:
Types : Online, Offline

CORE BANKING

30. Payment systems & Electronic

Banking

NTRODUCTION
More and more innovations are being introduced in both the
cash payment systems.
Banking paper instrument: Cheques and Credit Transfer

 ELECTRONIC PAYMENT SYSTEMS

ATMs: Automated Teller Machines

The committee headed by Dr. C. Rangarajan recommended
the setting up of ATMs in India. Stand alone ATMs made their
appearance in India, in the early 1990s.
Convenience of ATMs
To the Customers
To the Bank
ATM Models in India
1. Online : When ATM is connected to the banks database
2. Offline : Withdrawal are permitted to a pre-fixed limit only
3. Stand-alone : When the ATM is not connected to any ATM
network
4. Networked : Anywhere anytime Banking

 Networking of ATMs
For optimising the cost on investments in ATMs, Banks joined together in
small clusters to share their ATM networks. In order to facilitate interoperability among these clusters at the national level, the IDRBT has
initiated the process of setting up a National Financial Switch to
facilitate apex level connectivity of other switches established by banks.
IBA was the first to set up a shared network system (SPNS) or SWADHAN
network of ATMs of its member banks in mumbai. The network went live
on 01/02/1997.
Objective: 24*7 electronic service to customer of member bank in
mumbai
ATM Customer Interfac
The following components of the ATM provide the customer interface:
a) Video Display Monitor
b) Keyboard/Keypad
c) Touch Screen
d) Slots : Card Reader, Cash Dispenser, Envelope Dispenser, Deposit Slot

 Electromagnetic Cards

Two international credit card giants viz. Visa International

and Master Card International are already present in india.
Credit Cards
A Small plastic card 8.5 cm by 5.5 cm
Different types of credit cards
1. Charge Card
2. Credit Card
3. Debit Card
4. Smart Cards
5. Restricted Cards/Member Card

Smart Cards
Plastic Card with an INTegrated Circuit IC Chip installed
The IC chip contains memory, may contain a processor, and
communications with the external world through contacts
on the surface of the card.
The size , position and utility of the contacts are specified
by an international standard (ISO 7816) so that the card
interact with a variety of equipment.
Types: Intelligent Memory Chip and Micro processor Cards
Processor smart cards are the most advanced and are
ideally suited foe banking & financial applications where
reuse of the card is allowed.
ISO 7816 defines the physical features and the
communication protocol
ISO 10202 defines the security features.

 ELECTRONIC BANKING

1. Anytime Banking
2. Anywhere Banking
3. Home Banking
Corporate Banking
Personal Banking: Telebanking,
4. Internet Banking
5. Mobile Banking

 CHEQUE TRUNCATION

A cheque truncation is defined by the new Section 6(b) of

Negotiable Instrument Act as a cheque which is truncated
during the course of a clearing cycle, either by the Clearing
House or by the bank, whether paying or receiving
payment, immediately on generation of an electronic image
for transmission, substituting the further physical
movement of the cheque in writing.

31. DATA COMMUNICATION

NETWORK AND EFT SYSTEMS
DATA COMMUNICATION NETWORKS
Transmission Devices and Interface Equipment
If digital singnals are to be transmitted over long distances, then
the signals get deteriorate. To overcome this problem, the digital
singls are converted into analog singnal for transimission over
telephone lines. This is done by an interface device called Modem.
(Modulator DE modulator).
Transmission Medium
The prevalent technologies for data communication media are
terrestrial, microwave, and satellites
Terrestrial cables:
Terrestrial wire pair: Twisted pair consists of two insulated copper
wires. Minimize the risk of cross talk, widely used. Low cost, ease
of convenience.

 Coaxial cable: an inner copper conductor held in position by

circular spacers. It can carry digital signals at very high rates of
500 mega bits per second.
Optical Fiber: Supports data rate of 2 giga/sec.High quality, low
error rate
Microwave system
Very high frequency radio signals used in telephone systems
and television transmission.
Communication Satellite:
The main advantage is that it is a single microwave relay station
which can send signals to a wide geographical area.
Transmisson Processors
Message switches: receives data from all terminals stores
them in a queur and routes them one at a time, to the CPU
during transmission.
Multiplexers: It is a device that enables more than one signal
to be sent simultaneously over one physical channel.

Modes and transmission

Simplex
Half duplex
Full duplex

EMERGING TRENDS IN COMMUNICATION NETWORK FOR

BANKING
RBIs VSAT network
As per the recommendation of SARAF COMMITTEE, The RBI
decided to set up a countrywide data communication
network for banks linking major centres viz. INFINET Indian
Financial network set up at hyderabad
It uses satellite communication with very small aperture
terminals-VSATs
Internet

EVOLUTION OF EFT SYSTEMS

The use of MICR technology for processing of cheques was the first
step towards the mechanisation o the cheque clearin system.
MICR- introduced by the American bankers association in 1954.
(page308)
DEVELOPMENTS IN INDIA
ECS
NEFT- National Electronic Fund Transfer
No upper limit,
Sending bank would prepare SFMS structured Financial Messaging
System and transmit NEFT SFMS message to the NEFT clearing
centre
Facilitates efficient, secure, economical, reliable
DIGITA L SIGNATURE

32.ROLE OF TECHNOLOGY UPGRADATION

AND ITS IMPACT ON BANKS

TRENDS IN TECHNOLOGY DEVELOPMENTS

Data warehousing and Data Mining
Data Warehousing
It is a database wherein data from heterogeneous sources
is stored to generate critical information for the decision
support system.
Characteristics
1. Subject oriented
2. Integrated, no inconsistencies
3. data is non-volatile, data is accessed in mass (not
regularly)
4. It is time-variant. Longer span -5 to 10 years

 Data Mining
Data Mining is a technique to reveal the strategic information hidden in
the data warehouse. It is the process of automatically finding patterns
and relations in large databases.
Storage of data warehouses and their extraction through data mining
techniques can be applied in:
Loan risk analysis, Credit risk analysis, stock portfolio creation & analysis
ROLES AND USES OF TECHNOLOGY UPGRADATION
Data and Message Transferring
Electronic Data Interchange (EDI)
Banks have been using EDI in the form of SWIFT messages.
IN India, VSNL provides Gateway for Electronic Data Interchnage
Services (GEDIS) worldwide.
EDI is usually referred to as electronic funds transfer (EFT).
Electronic Mail
E-mail is basically used for transmitting unstructured messages.

Corporate Websites
Used for marketing products and services
The banks are using websites for follwing purposes:
Dissemination of information, Financial Advice, Selling financial
services,
Account services, Gateway to the internet.
Management Information System (MIS)
The concept of MIS places particular emphasis on the
availability of data and the ease, with which it can be analysed
and turned into meaningful information for managerial decision
making.
Computer based information Systems
Decision Support System : ad hoc report generations, statistical
analysis,
graphics, tools to analyse what
if analysis.

IMPACT OF IT ON BANKS

ORGANISATIONAL STRUCTURE & ORIENTATION

Increasing org. productivity, faster information, better
control, reducing the hierachical tier system, faster decision
making.
SERVICE QUALITY
Access to real time information, broaden customer
relationship
However, it reduces personal element in the services.
HUMAN RESOURCES
Need for training and skill developemnet has increased
Resistance to change
PRIVACY AND CONFIDENTIALITY OF DATA
Customers feel theratened about inadequacy of privacy

33. SECURITY
CONSIDERATIONS
RISK CONCERN AREAS
Data and Software : A lack of control over data can lead to frauds
by unscrupulous elements.
Infrastructure : Computer servers, terminal, disk, printers,
controllers, modems, switches, UPS, power supply all ths are required
to be in place.
Peopleware : Group of persons
DIFFERENT TYPES OF THREATS
Accidental Damages : Environmental Hazards, Human Erros &
Ommisions
Unreliable systems
Malicious Damages: Interruption in services, Frauds

CONTROL MECHANISM
Physical Controls : Control over assets, over outputs, smoke
detectors,
fire extinguishers, protection against
hardware failures
Internal Controls : Accounting control & Administrative control
Operational Control :
Audit Trails: chronological record of all events occuring in a system
for tracing of irregularities and to detect consequences of error.
Data Encryption: process of systematic encoding of data before
transmitting so that an unauthorised person cant decipher it.
COMPUTER AUDIT
A regular programme of independent tests of security and control
procedures by auditors help in identifying lapses.
Aim: evaluation of the asset safeguarding, data integrity , system
effectivenss, and system efficiency.

 Audit Approaches :
Audit around the computer: examines internal control system
of the computer installation, input-output of the application
system
Does not work with systems that are complex and auditors cant
anticipate any problems that may come up due to deficiencies in
software.
Audit through the computer :
Useful when: application system is complex
IS AUDIT
This audit is carried out through the IT systems with the aid of
Computer Aided Audit Tools and Techniques CMTTs. CMTT is a
readily available user friendly software and various types are
used, with relevance to the purpose of IS audit.
Objective: to determine whether a computer system could
safeguard its assets (hardware, software, and data).

 Controls : Control is defined as the policies, procedures, practices

and organisational structures designed to provide reasonable
assurance that business objectives will be achieved and that
undesired events would be prevented or detected and corrected.
Deterrent Controls, Preventive Control, Detective, Corrective control
Benefits: Identify risk, prevent corrupation of data, frauds, unlawful
activity, indicate health of system, improvements in system.

IS SECURITY
Objective
CONFIDENTIALITY : To prevent unauthorized discloure of inf
INTEGRITY: To prevent the accidental or unauthorized deliberate
alteration or deletion of information
AVAILABILITY

Controls Required
User ID password, Authorisation, Access control, Alternate
authentication
Control
IS SECURITY IN BANKING
Threats to IS security
Email Viruse, Phishing Attacks etc.
Measures to ward off threats
IS security assessment,
Firewalls for data integrity
Change management of computer hardware and software

EVALUATIN REQUIREMENTS
Computer Hardware
Computer Software
Data
Communication channels
Disaster recovery Management for Computer environment
Disaster is any event which results in direct denial or
stoppage of essential business functions for a considerable
period of time.
Business Impact Analysis (BIA)
Before devising any Distaster recovery plan, BIA must be
carried out.
Disaster Recovery Planning
Phases of Distaster Recovery Planning:
Awareness, Preparation, Testing, Recovery

LEGAL FRAMEWORK FOR ELECTRONIC TRANSACTIONS

With the increased use of electronic means, it is imperative

that evidence of these activities should be available to
demonstrate the legal rights and obligations that flow from
them.
UNCITRAL United nation commission on international trade
law adopted in 1996, the model law on electronic
commerce.
IT act, 2000:
Defines new set of IT offenses
Amendments made in the following act;
The IPC, 1860
The indian Evidence Act, 1872
The Bankers books evidence act, 1891
The RBI Act, 1934

1.

2
a)
b)
c)
d)
e)

AUDIT TRAIL IS:

A) REPORT SUBMITTED BY AUDITOR
B) A CHRONOLOGICAL RECORD OF ALL EVENTS OCCURING IN SYSTEM
C) A CONCURRENT AUDIT
D) All of the above
E) none of the above

Objective of IS audit is
Conidentiality
Integrity
Avaiability
All of the above
None of the above

3. Which one is incorrect

A)The indian Evidence Act 1872
B) The RBI Act, 1934
C) The bankers books evidence act, 1881
D) The indian penal code 1860
E) none of the above
4. Expand RTGS
A) Real total goal settlement
B) Real time gross settlement
C) Real time gross system
D)Regional total gross settlement
E) none of the above
5. Features of Digital signature
A) Authenticity, integrity and confidentiality
B) Authenticity , integrity and non-repudiation
C) Authenticity , availability and integrity
D) Authenticity, availibity and non repudiation

6. Expand EFT
A) Electronic Foreign Transfer
B) Electronic Foreign Telecommunication
C) Electronic Fund Transfer
D) Electronic Fund Trade
E) none of the above
7. The credit card offers
A) revolving credit for certain period
B) online recovery of credit
C) pay off entire amount of card usage
D) all of the above
E) none of the above
8. Cheque truncation can be done by
A) using MICR data
B) sending cheque by speed post
C) using image processing D) A & C
E) none of the above

9. Transaction of internet bankin excludes;

a) Withdrawal of cash anywhere in india
b) Statement of account
c) Transfer of funds
d) All of the above
e) None of the above
10. Benefits in core banking are;
A) Reliable centralised data recovery
B) Data warehousing & data mining
C) Integrated customer centric service
D) Core infrastructure can be used for future expansion
E) All of the above

11. For interrupted power supply, the follwing device is used;

A) offline UPS
B) generator
C) convertor
D) online UPS
12. Head office activities include
A) Planning
B) personnel
C) internation businesss
D) operations
e) all of the above
13. A committee was set up to study the possibilities and stages
involved in bank computerisation under the chairmanship of
A) Mr C. Rangrajan
B) Mr. R. Rangnathan C) Mr. A muridharan
D) Mr. C Balakrishnan E) none of the above
14. Several people can work at the same time on
A) stand alone computer B) Multiuser system
C) mini computer
d) all of the above
E) none of the above

15 . Communication Technology
A) facilitates the processing of data B) helps in transmission of data
C) enables decision support system D) is a tool for data mining
16. Banks can use a corporate website for
A) dissemination of information
B) financial advice
C) accounts sevices
D) selling products
E) all of the
above
17. The phases of distaster recovery panning are;
A) awareness
B) preparation C) testing
D) recovery
E) all of the above
18. A typical computerised environment constitutes;
A) softaware, hardware, data
B) hardaware software UPS
C) software, modem, networking D) software, people data
19. Objective of iS security is to ensure
A) Confidentiality
B) integrity
C) availability
D) all of the above
E) none of the above

20. The universal set of standards for EDI is known as

A) EDIFACT
B) EDI C) ISO
D) BIS
E) None of the above

1) b
2) d
3) c
4) b
5) b
6) c
7) a
8) d
9) a
10) e

11) d
12) e
13) a
14) b
15) b
16) e
17) e
18) a
19) d
20)a