1 CHAPTER 1 INTRODUCTION 1.1 Definition Banking Is "Accepting, For

CHAPTER 1

INTRODUCTION

1.1 Definition

Banking is "accepting, for the purpose of lending or investment of deposits of money from the public, repayable on demand or otherwise and withdrawable by cheques, draft, order or otherwise."

Bank is defined as a person who carries on the business of banking. Banks also perform certain activities which are ancillary to this business of accepting deposits and lending. Since

Banking involves dealing directly with money, governments in most countries regulate this sector rather stringently.

Banking in India was defined under Section 5(A) as "any company which transacts banking, business" and the purpose of banking business defined under Section 5(B),"accepting deposits of money from public for the purpose of lending or investing, repayable on demand through cheque/draft or otherwise". In the process of doing the above-mentioned primary functions, they are also permitted to do other types of business referred to as Utility Services for their customers (Banking Regulation Act, 1949).

1.2 History of Banks

Banking in India originated in the last decades of the 18th century. The first banks were The

General Bank of India which started in 1786, and the Bank of Hindustan, both of which are now defunct. The oldest bank in existence in India is the State Bank of India, which originated in the Bank of Calcutta in June 1806, which almost immediately became the Bank of Bengal. This was one of the three presidency banks, the other two being the Bank of

Bombay and the Bank of Madras, all three of which were established under charters from the

British East India Company. For many years the Presidency banks acted as quasi-central banks, as did their successors. The three banks merged in 1925 to form the Imperial Bank of

India, which, upon India's independence, became the State Bank of India.

Indian merchants in Calcutta established the Union Bank in 1839, but it failed in 1848 as a consequence of the economic crisis of 1848-49. The Allahabad Bank, established in 1865 and still functioning today, is the oldest Joint Stock bank in India. It was not the first though. That honor belongs to the Bank of Upper India, which was established in 1863, and which survived until 1913, when it failed, with some of its assets and liabilities being transferred to the Alliance Bank of Simla.

When the American Civil War stopped the supply of cotton to Lancashire from the

Confederate States, promoters opened banks to finance trading in Indian cotton. With large exposure to speculative ventures, most of the banks opened in India during that period failed.

The depositors lost money and lost interest in keeping deposits with banks. Subsequently, banking in India remained the exclusive domain of Europeans for next several decades until the beginning of the 20th century.

Foreign banks too started to arrive, particularly in Calcutta, in the 1860s. The Comptoire d'Escompte de Paris opened a branch in Calcutta in 1860, and another in Bombay in 1862;

branches in Madras and Pondicherry, then a French colony, followed. HSBC established itself in Bengal in 1869. Calcutta was the most active trading port in India, mainly due to the trade of the British Empire, and so became a banking center. The Bank of Bengal, which later became the State Bank of India.

The first entirely Indian joint stock bank was the Oudh Commercial Bank, established in

1881 in Faizabad. It failed in 1958. The next was the Punjab National Bank, established in

Lahore in 1895, which has survived to the present and is now one of the largest banks in

India.

Around the turn of the 20th Century, the Indian economy was passing through a relative period of stability. Around five decades had elapsed since the Indian Mutiny, and the social, industrial and other infrastructure had improved. Indians had established small banks, most of which served particular ethnic and religious communities.

The presidency banks dominated banking in India but there were also some exchange banks and a number of Indian joint stock banks. All these banks operated in different segments of the economy. The exchange banks, mostly owned by Europeans, concentrated on financing foreign trade. Indian joint stock banks were generally undercapitalized and lacked the experience and maturity to compete with the presidency and exchange banks.

The period between 1906 and 1911, saw the establishment of banks inspired by the Swadeshi movement. The Swadeshi movement inspired local businessmen and political figures to found banks of and for the Indian community. A number of banks established then have survived to the present such as Bank of India, Corporation Bank, Indian Bank, Bank of

Baroda, Canara Bank and Central Bank of India.

1.3 Pre-Independence

The banks in India were established by the British .The period during the First World War

(1914-1918) through the end of the Second World War (1939-1945), and two years thereafter

until the independence of India were challenging for Indian banking. The years of the First

World War were turbulent, and it took its toll with banks simply collapsing despite the Indian

economy gaining indirect boost due to war-related economic activities. At least 94 banks in

India failed between 1913 and 1918 as indicated in the following table:

Years Number of banks Authorised capital Paid-up Capital

that failed (Rs. Lakhs) (Rs. Lakhs)

1913 12 274 35

1914 42 710 109

1915 11 56 5

1916 13 231 4

1917 9 76 25

1918 7 209 1

World War I and its Impact on Banking in India

The World War I years (1913 to 1918) were indeed difficult years for the world economy.

The alarming inflationary situation that had developed as a result of war financing and

concentration on the war led to other problems like neglect of agriculture. During the war

period, a number of banks failed. Some banks that failed had combined trading functions with

banking functions. More importantly, several of the banks that failed had a low capital base.

1.4 Post-independence

The partition of India in 1947 adversely impacted the economies of Punjab and West Bengal, paralyzing banking activities for months. India's independence marked the end of a regime of the Laissez-faire for the Indian banking. The Government of India initiated measures to play an active role in the economic life of the nation, and the Industrial Policy Resolution adopted by the government in 1948 envisaged a mixed economy. This resulted into greater involvement of the state in different segments of the economy including banking and finance.

The major steps to regulate banking included:

 In 1948, the Reserve Bank of India, India's central banking authority, was nationalized,

and it became an institution owned by the Government of India.

 In 1949, the Banking Regulation Act was enacted which empowered the Reserve Bank

of India (RBI) "to regulate, control, and inspect the banks in India."

 The Banking Regulation Act also provided that no new bank or branch of an existing

bank may be opened without a license from the RBI, and no two banks could have

common directors.

 In 1959, the Government of India passed the State Bank of India (Subsidiary Banks)

Act, which enabled SBI to take over eight former State-associated banks as its

subsidiaries.

Name of the Bank Subsidiary wef

1. State Bank of Bikaner 1st January 1960

2. State Bank of Jaipur 1st January 1960

3. State Bank of Hyderabad 1st October 1959

4. State Bank of Indore 1st January 1968

5. State Bank of Mysore 1st March 1960

6. State Bank of Patiala 1st April 1960

7. State Bank of Saurashtra 1st May 1960

8. State Bank of Travancore 1st January 1960

In about 5 years after nationalisation of banks, the branch network expanded by 129 per cent.

Nationalisation was also visualised as a process that would entail large scale reorganization of the nationalised banks with only one or two major banks acting as all-India banks catering to the wholesale market for credit and with a monopoly of foreign exchange business

However, despite these provisions, control and regulations, banks in India except the State

Bank of India, continued to be owned and operated by private persons. This changed with the nationalization of major banks in India on 19th July, 1969.

1.5 Banking Regulations Act, 1949

The Banking Regulation Act was passed as the Banking Companies Act 1949 and came into

force wef 16.3.49. Subsequently it was changed to Banking Regulations Act 1949 wef

01.03.66. Summary of some important sections is provided hereunder. .

 Banking means accepting for the purpose of lending or investment of deposits of

money from public repayable on demand or otherwise and withdrawable by cheque,

drafts order or otherwise 5(i) (b).

 Banking company means any company which transacts the business of banking 5(i)(c)

 Transact banking business in India 5 (i) (e).

 Demand liabilities are the liabilities which must be met on demand and time liabilities

means liabilities which are not demand liabilities 5(i)(f)

 Secured loan or advances means a loan or advance made on the security of asset the

market value of which is not at any time less than the amount of such loan or advances

and unsecured loan or advances means a loan or advance not secured 5(i)(h).

 Defines business a banking company may be engaged in like borrowing, lockers, letter

of credit, traveller cheques, mortgages etc 6(1).

 States that no company shall engage in any form of business other than those referred

in Section 6(1) & 6(2).

 For banking companies carrying on banking business in India to use at least one word

bank, banking, banking company in its name (7).

 Restrictions on business of certain kinds such as trading of goods etc. (8)

 Prohibits banks from holding any immovable property howsoever acquired except as

acquired for its own use for a period exceeding 7 years from acquisition of the property.

RBI may extend this period by five years (9)

 Prohibitions on employments like Chairman, Directors etc (10)

 Paid up capital, reserves and rules relating to these (11 & 12)

 Banks not to pay any commission, brokerage, discount etc. more than 2.5% of paid up

value of one share (13)

 Prohibits a banking company from creating a charge upon any unpaid capital of the

company. (14) Section 14(A) prohibits a banking company from creating a floating

charge on the undertaking or any property of the company without the RBI permission.

 Prohibits payment of dividend by any bank until all of its capitalized expenses have

been completely written off (15)

 To create reserve fund and 20% of the profits should be transferred to this fund before

any dividend is declared (17 (1))

1.6 The Reserve Bank of India

The Reserve Bank of India (RBI) was established through the Reserve Bank of India Act,

1934 and it commenced its operations on April 1, 1935. It was established as a private

shareholders' bank, then it was nationalized in 1949, and it became fully owned by the

Government of India. It draws its powers and responsibilities through other legislations also

such as the Banking Regulation Act, 1949. The RBI has over the years been responding to

changing economic circumstances and these organizational developments.

Functions of Reserve Bank of India

The Reserve Bank of India Act of 1934 entrust all the important functions of a central bank

the Reserve Bank of India.

1. Bank of Issue

The Bank has the sole right to issue bank notes of all denominations. The Reserve Bank has a

separate Issue Department which is entrusted with the issue of currency notes.

2. Banker to Government

The second important function of the Reserve Bank of India is to act as Government banker,

agent and adviser. The Reserve Bank is agent of Central Government and of all State

Governments in India excepting that of Jammu and Kashmir. The Reserve Bank has the

obligation to transact Government business, via. To keep the cash balances as deposits free of

interest, to receive and to make payments on behalf of the Government and to carry out their

exchange remittances and other banking operations. The Reserve Bank of India helps the

Government - both the Union and the States to float new loans and to manage public debt.

3. Bankers' Bank and Lender of the Last Resort

The Reserve Bank of India acts as the bankers' bank. According to the provisions of the

Banking Companies Act of 1949, every scheduled bank was required to maintain with the

Reserve Bank a cash balance equivalent to 5% of its demand liabilities and 2 per cent of its

time liabilities in India. By an amendment of 1962, the distinction between demand and time

liabilities was abolished and banks have been asked to keep cash reserves equal to 3 per cent

of their aggregate deposit liabilities. The minimum cash requirements can be changed by the

Reserve Bank of India.

4. Controller of Credit

The Reserve Bank of India is the controller of credit i.e. it has the power to influence the

volume of credit created by banks in India. It can do so through changing the Bank rate or

through open market operations.

As supreme banking authority in the country, the Reserve Bank of India, therefore, has the

following powers:

(a) It holds the cash reserves of all the scheduled banks.

(b) It controls the credit operations of banks through quantitative and qualitative controls.

for information.

The Banking Ombudsman Scheme provides a forum to bank customers to seek redressal of

their most common complaints against banks, including those relating to credit cards, service

charges, promises given by the sales agents of banks, but not kept by banks, as also, delays in

delivery of bank services, non-payment or delay in payments .

1.7 Nationalization of Banks

The nationalization of banks in India took place in 1969 by Mrs. Indira Gandhi the then prime minister. It nationalized 14 banks then. Majority of the banks were mostly owned by businessmen and even managed by them.

Before the steps of nationalization of Indian banks, only State Bank of India (SBI) was nationalized. It took place in July 1955 under the SBI Act of 1955. Nationalization of Seven

State Banks of India (formed subsidiary) took place on 19th July, 1960. The State Bank of

India is India's largest commercial bank and is ranked one of the top five banks worldwide. It serves 90 million customers through a network of 9,000 branches and it offers -- either directly or through subsidiaries –a wide range of banking services.

The second phase of nationalization of Indian banks took place in the year 1980. Seven more banks were nationalized with deposits over 200 crores. Till this year, approximately 80% of the banking segment in India was under Government ownership. After the nationalization of banks in India, the branches of the public sector banks rose to approximately 800% in deposits and advances took a huge jump by 11,000%.

 1955: Nationalization of State Bank of India.

 1959: Nationalization of SBI subsidiaries.

 1969: Nationalization of 14 major banks.

 1980: Nationalization of seven banks with deposits over 200 crores.

Objectives of Nationalization of Banks

 To control the commercial heights of the economy

 To extend banking facilities to unbanked and under banked centres, especially

in rural areas

 To ensure an increased flow of assistance to the neglected sectors

 To foster the growth of new and progressive entrepreneurs

Consequences of Nationalization

 The quality of credit assets fell because of liberal credit extension policy.

 Political interference has been as additional malady.

 Poor appraisal involved during the loan meals conducted for credit disbursals.

 The credit facilities extended to the priority sector at concessional rates.

 The high level of low yielding SLR investments adversely affected the

profitability of the banks.

List of Nationalized Banks

1. Andhra Bank 15.Punjab and Sind Bank

2. Bank of Baroda 16.Punjab National Bank

3. Bank of India 17.State Bank of Bikaner & Jaipur

4. Bank of Maharashtra 18.State Bank of Hyderabad

5. Canara Bank 19.State Bank of India (SBI)

6. Central Bank of India 20.State Bank of Indore

7. Corporation Bank 21.State Bank of Mysore

8. Dena Bank 22.State Bank of Patiala

9. Indian Bank 23.State Bank of Saurashtra

10. Indian Overseas Bank 24.State Bank of Travancore

11. Oriental Bank of Commerce 25.UCO Bank

12. Syndicate Bank 26.Union Bank of India

13. IDBI Bank 27.United Bank of India

14. Vijaya Bank

1.8 Liberalization of Banks

In the early 1990s, the then Narsimha Rao government embarked on a policy of

liberalization, licensing a small number of private banks. These came to be known as New

Generation tech-savvy banks, and included Global Trust Bank (the first of such new

generation banks to be set up), which later amalgamated with Oriental Bank of Commerce,

Axis Bank(earlier as UTI Bank), ICICI Bank and HDFC Bank. This move, along with the

rapid growth in the economy of India, revitalized the banking sector in India, which has seen

rapid growth with strong contribution from all the three sectors of banks, namely,

government banks, private banks and foreign banks.

The next stage for the Indian banking has been setup with the proposed relaxation in the

norms for Foreign Direct Investment, where all Foreign Investors in banks may be given

voting rights which could exceed the present cap of 10%, at present it has gone up to 49%

with some restrictions.

The new policy shook the Banking sector in India completely. Bankers, till this time, were used to the 4-6-4 method (Borrow at 4%; Lend at 6%; Go home at 4) of functioning. The new wave ushered in a modern outlook and tech-savvy methods of working for traditional banks.

All this led to the retail boom in India. People not just demanded more from their banks but also received more.

1.9 Privatization of Banks

In many ways, India provides an excellent testing ground for hypotheses about privatization and its impact, except that so far privatization has not been attempted on a scale that researchers would like to see. The country has a large, well diversified public sector. Unlike many of the transition economies, it also has a long tradition of private enterprise, including big companies in the private sector, although there are certain sectors in which private sector participation is quite new, these sectors having been reserved until recently for the public sector.

Privatization in India generally goes by the name of „disinvestment‟ or „divestment‟ of equity. This is because privatization has thus far not meant transfer of control or even of controlling interest from government to anybody else. The government has sold stakes ranging from one per cent to 40% in 40 PSUs, but in no company has its stake fallen below the magic figure of 51% which is seen as conferring controlling interest.

In order to finance the private industrial and business activity, a network of development banking and financial institutions has been organized by the Government which are as follows:

 Industrial Finance Corporation of India (IFCI)

 Industrial Credit and Investment Corporation of India (ICICI)

 Industrial Development Bank of India (IDBI)

 State Finance Corporation

 NABARD,

 EXIM (Export Import) Bank

 Small Industries Development Bank of India (SIDBI)

 Unit trust of India (UTI)

 Nationalized Banks

 LIC

 Co-operative banking institutions

1.10 Globalization of Banks

Publicly owned banks handle more than 80% of the banking business in India and the rest is in the hands of private sector banks. However, banking in both the government and private sector is being revolutionized by this latest phenomenon called globalization. Globalization has offered a number of advantages to the banking sector in India.

Remarkable advancements in communication and information technology have facilitated the globalization of these domestic banks. Apart from the benefits, several risks are also associated with the opportunities made available by globalization.

1.11 Banking Sector Reforms 1999-2000

In the five decades since independence, banking in India has evolved through four distinct phases. During Fourth phase, also called as Reform Phase, Recommendations of the

Narasimham Committee (1991) paved the way for the reform phase in the banking. Important initiatives with regard to the reform of the banking system were taken in this phase. Important

among these have been introduction of new accounting and prudential norms relating to income recognition, provisioning and capital adequacy, deregulation of interest rates & easing of norms for entry in the field of banking.

Major Reform Initiatives:

Some of the major reform initiatives in the last decade that have changed the face of the

Indian banking and financial sector are:

 Interest rate deregulation. Interest rates on deposits and lending have been deregulated with banks enjoying greater freedom to determine their rates. On the deposit side, interest rates on all deposits, except savings accounts, have been de-regulated. Similarly, on the bank lending, rates to be charged by the banks on most of the credit facilities have been deregulated except a small component for lending related to certain segments.

 Adoption of prudential norms in terms of capital adequacy, asset classification, income recognition, provisioning, and exposure limits, investment fluctuation reserve, etc.

 Reduction in pre-emption – lowering of reserve requirements (SLR and CRR), thus releasing more lendable resources which banks can deploy profitably.

 Government equity in banks has been reduced and strong banks have been allowed to access the capital market for raising additional capital.

 Banks now enjoy greater operational freedom in terms of opening and swapping of branches, and banks with a good track record of profitability have greater flexibility in recruitment.

 New private sector banks have been set up and foreign banks permitted to expand their operations in India including through subsidiaries. Banks have also been allowed to set up

Offshore banking Units in Special Economic Zones.

 New areas have been opened up for bank financing: insurance, credit cards, infrastructure financing, leasing, gold banking besides of course investment banking asset management, factoring, etc.

 New instruments have been introduced for greater flexibility and better risk management: e.g. interest rate swaps, forward rate agreements, cross currency forward contracts, forward cover to hedge inflows under foreign direct investment, liquidity adjustment facility for meeting day-to-day liquidity mismatch.

 Several new institutions have been set up including the National Securities Depositories

Ltd., Central Depositories Services Ltd., Clearing Corporation of India Ltd., Credit

Information Bureau India Ltd.

 Technology infrastructure for the payments and settlement system in the country has been strengthened with electronic funds transfer, Centralised Funds Management System,

Structured Financial Messaging Solution, Negotiated Dealing System and move towards Real

Time Gross Settlement.

 Adoption of global standards. Prudential norms for capital adequacy, asset classification, income recognition and provisioning are now close to global standards. RBI has introduced Risk Based Supervision of banks (against the traditional transaction based approach).

 Credit delivery mechanism has been reinforced to increase the flow of credit to priority sectors through focus on micro credit and Self Help Groups. The definition of priority sector

has been widened to include food processing and cold storage, software upto Rs 1 crore,

housing above Rs. 10 lakh, selected lending through NBFCs, etc.

Impact on performance of banks

There is no doubt that banking sector reforms have increased the profitability, productivity

and efficiency of banks. There has been an improvement in overall capital adequacy of banks

and as on March 31, 2002 92 out of 97 commercial banks operating in India had capital

adequacy above the statutory minimum level of 9%. Introduction of prudential norms relating

to asset classification, income recognition and the most significant achievement of the

financial sector reforms has been the marked improvement in the financial health of

commercial banks in terms of capital adequacy, profitability and asset quality as also greater

attention to risk management. Further, deregulation has opened up new opportunities for

banks to increase revenues by diversifying into investment banking, insurance, credit cards,

depository services, mortgage financing, securitisation, etc. At the same time, liberalisation

has brought greater competition among banks, both domestic and foreign, as well as

competition from mutual funds, NBFCs, post office, etc

1.13 Narasimham Committee- II

This Committee is also called the “Committee on Banking Sector Reforms” and was

appointed by Central Government and was headed by Shri M. Narasimham. This

Committee submitted its report on 23.4.1988.

Recommendations

1. Three Tier Banking: There should be three types of banks: ( i ) Two or three large Indian

Banks with international character; ( ii ) Eight or Ten large National Banks to take care of

the needs of large/medium corporate sector, and (iii ) Large or Local Area/ Regional Banks

to serve local trade, small industry and agriculture.

2. Universal Banking: The distinction between Development Finance Institutions and

commercial banks should disappear paving the way for universal banking. DFIs should also

give working capital finance while commercial banks term loans.

3. Narrow Banking: Week banks whose accumulated losses and net NPAs exceed their capital

funds can be rehabilitated by branding them as “Narrow Banks” (banks which restrict their

operation to only certain activities).

4. Mergers: Merger among the banks to be encouraged especially among the strong banks to

obtain “Force Multiplier Effect”.

5. Govt. Holding in Banks: Govt. holding in banks should be reduced to 33% The Govt.

should not disinvest its capital. The capital should be increased by market subscription to

bring down the Govt. holding to 33%.

6. Capital Adequacy Requirement: The Capital Adequacy ratio should be increased from

existing 8% to 9% by 2000 AD. And to 10% by 2002. ( Since accepted) The start up capital

for new private banks be increased.

7. Asset Classification: An account should be classified as NPA if interest or installment is not

serviced for a period of 90 days.

8. Provision Requirement: Banks should make general provision of 1% on their standard

assets.

9. Autonomy to Banks: Functional autonomy should be given to the banks. The appointment

of M.D. / Chairman should be left to the Board of the banks.

1.14 Universal Banking

Universal Banking is a multi-purpose and multi-functional financial supermarket (a company

offering a wide range of financial services e.g. stock, insurance and real-estate brokerage)

providing both banking and financial services through a single window.

Definition of Universal Banking: As per the World Bank, "In Universal Banking, large

banks operate extensive network of branches, provide many different services, hold several

claims on firms(including equity and debt) and participate directly in the Corporate

Governance of firms that rely on the banks for funding or as insurance underwriters".

In a nutshell, a Universal Banking is a superstore for financial products under one roof.

Corporate can get loans and avail of other handy services, while can deposit and borrow. It

includes not only services related to savings and loans but also investments.

1.14.1 The Concept of Universal Banking

The entry of banks into the realm of financial services was followed very soon after the

introduction of liberalization in the economy. Since the early 1990s structural changes of

profound magnitude have been witnessed in global banking systems. Large scale mergers,

amalgamations and acquisitions between the banks and financial institutions resulted in the

growth in size and competitive strengths of the merged entities. Thus, emerged new financial

conglomerates that could maximize economies of scale and scope by building the production

of financial services organization called Universal Banking.

By the mid-1990s, all the restrictions on project financing were removed and banks were

allowed to undertake several in-house activities. Reforms in the insurance sector in the late

1990s, and opening up of this field to private and foreign players also resulted in permitting

banks to undertake the sale of insurance products. At present, only an 'arm's length

relationship between a bank and an insurance entity has been allowed by the regulatory

authority, i.e. IRDA (Insurance Regulatory and Development Authority).

1.14.2 Universal Banking – Pros and Cons

The solution of Universal Banking was having many factors to deal with, which can be

further analyzed by the pros and cons.

Advantages of Universal Banking

 Economies of Scale. The main advantage of Universal Banking is that it results in greater

economic efficiency in the form of lower cost, higher output and better products. Many

Committees and reports by Reserve Bank of India are in favour of Universal banking as it

enables banks to exploit economies of scale and scope.

 Profitable Diversions. By diversifying the activities, the bank can use its existing expertise in

one type of financial service in providing other types. So, it entails less cost in performing all

the functions by one entity instead of separate bodies.

 Resource Utilization. A bank possesses the information on the risk characteristics of the

clients, which can be used to pursue other activities with the same clients. A data collection

about the market trends, risk and returns associated with portfolios of Mutual Funds,

diversifiable and non diversifiable risk analysis, etc, is useful for other clients and

information seekers. Automatically, a bank will get the benefit of being involved in the

researching

 Easy Marketing on the Foundation of a Brand Name. A bank's existing branches can act as

shops of selling for selling financial products like Insurance, Mutual Funds without spending

much efforts on marketing, as the branch will act here as a parent company or source. In this

way, a bank can reach the client even in the remotest area without having to take resource to

an agent.

 One-stop shopping. The idea of 'one-stop shopping' saves a lot of transaction costs and

increases the speed of economic activities. It is beneficial for the bank as well as its

customers.

 Investor Friendly Activities. Another manifestation of Universal Banking is bank holding

stakes in a form: a bank's equity holding in a borrower firm, acts as a signal for other investor

on to the health of the firm since the lending bank is in a better position to monitor the firm's

activities.

Disadvantages of Universal Banking

 Grey Area of Universal Bank. The path of universal banking for DFIs is strewn with

obstacles. The biggest one is overcoming the differences in regulatory requirement for a bank

and DFI. Unlike banks, DFIs are not required to keep a portion of their deposits as cash

reserves.

 No Expertise in Long term lending. In the case of traditional project finance, an area where

DFIs tread carefully, becoming a bank may not make a big difference to a DFI. Project

finance and Infrastructure finance are generally long- gestation projects and would require

DFIs to borrow long- term. Therefore, the transformation into a bank may not be of great

assistance in lending long-term.

 NPA Problem Remained Intact. The most serious problem that the DFIs have had to

encounter is bad loans or Non-Performing Assets (NPAs). For the DFIs and Universal

Banking or installation of cutting-edge-technology in operations are unlikely to improve the

situation concerning NPAs.

CHAPTER 2

TECHNOLOGICAL TRENDS IN PUBLIC SECTOR BANKS

2.1 Core Banking Solutions

Core Banking Solutions (CBS) or Centralised Banking Solutions is the process which is completed in a centralized environment i.e. under which the information relating to the customer‟s account (i.e. financial dealings, profession, income, family members etc.) is stored in the Central Server of the bank (that is available to all the networked branches) instead of the branch server. Depending upon the size and needs of a bank, it could be for the all the operations or for limited operations. This task is carried through advanced software by making use of the services provided by specialized agencies. Due to its benefits, a no. of banks in India in recent years have taken steps to implement the CBS with a view to build relationship with the customer based on the information captured and offering to the customer, the customised financial products according to their need.

Advantages for Customer:

 Transaction of business from any branch,

 Lower incidence of errors. Hence accuracy in transactions.

 Better funds management due to immediate availability of funds.

For Banks:

 Standardisation of process within the bank.

 Better customer service leading to retention of customer and increased customer traffic.

 Availability of accurate data & Better use of available infrastructure.

Following are some of the CORE BANKING SERVICES provided by public sector banks.

1. Internet Banking

The total number of registered users for Internet banking in India is over two million. But this

figure needs to be adjusted for dormant users and multiple accounts (a user having accounts

with more than one bank). India has a little less than a million active Internet banking users.

Thus indicating that, the concept of Internet banking is surely catching on.

India lags behind other countries in Internet banking. In the US, the number of commercial

banks with transactional websites is 1,275 or 12 percent of the total number of banks. Of

these, seven could be called „virtual banks.‟

From the Asian market experience, it is clear that Internet banking is here to stay and will be

a major channel to acquire and service customers. Markets like Korea and Singapore have

nearly 10 percent of their population banking over the Internet.

2. Automatic Teller Machine

The introduction of ATM‟s has given the customers the facility of round the clock banking.

The ATM‟s are used by banks for making the customers dealing easier. ATM card is a device that allows customer who has an ATM card to perform routine banking transaction at any time without interacting with human teller. It provides exchange services. This service helps the customer to withdraw money even when the banks are closed. This can be done by inserting the card in the ATM and entering the Personal Identification Number and secret Password.

ATM‟s are currently becoming popular in India that enables the customer to withdraw their money 24 hours a day and 365 days. It provides the customers with the ability to withdraw or deposit funds, check account balances, transfer funds and check statement information. The advantages of ATM‟s are many. It increases existing business and generates new business.

It allows the customers:

 To transfer money to and from accounts.

 To view account information.

 To receive cash.

Advantages of ATM’s:

To the Customers

 ATM‟s provide 24 hrs. 7 days and 365 days a year service.

 Service is quick and efficient

 Privacy in transaction

 Wider flexibility in place and time of withdrawals.

 The transaction is completely secure – you need to key in Personal Identification

Number (Unique number for every customer).

To Banks

 Alternative to extend banking hours.

 Crowding at bank counters considerably reduced.

 Alternative to new branches and to reduce operating expenses.

 Relieves bank employees to focus on more analytical and innovative work.

 Increased market penetration.

3. Mobile Banking

Mobile Banking (also known as M-Banking or SMS Banking) is a term used for performing

balance checks, account transactions, payments, etc., via a mobile device such as a mobile

phone. It was Internet Banking, which ushered in a new era in banking convenience by

bringing the entire operations to the computer, and now mobile banking promises to take it to

the next level.

Mobile Banking addresses this fundamental limitation of Internet Banking, as it reduces the

customer requirement to just a mobile phone. Mobile usage has seen an explosive growth in

most of the Asian economies like India, China and Korea. The main reason that Mobile

Banking scores over Internet Banking is that it enables 'Anywhere Anytime Banking'.

Mobile banking has been at the threshold of a revolution for some time. While many

operators, as well as banks, had introduced mobile banking applications, it never became

popular due to security concerns. The number of people using mobile banking services has

jumped from under 10,000 to 120,000 in two years. While the trend is growing, lack of

awareness of services, apart from perceived security issues are inhibiting faster take-off.

Reserve Bank of India has set-up the Mobile Payments Forum of India (MPFI), a 'Working

Group on Mobile Banking' to examine different aspects of Mobile Banking (M-banking).

The Group had focused on three major areas of M-banking, i.e.

(i) Technology and security issues,

(ii) Business issues and

(iii) Regulatory and supervisory issues.

Various Mobile Banking Services to the Consumers

Banks offering mobile access are mostly supporting some or all of the following services:

Account Information

 Mini-statements and checking of account history

 Alerts on account activity or passing of set thresholds

 Monitoring of term deposits

Payments & Transfers

 Domestic and international fund transfers

 Mobile re-charging

 Commercial payment processing

 Bill payment processing

Investments

 Portfolio management services

 Real-time stock quotes

 Personalized alerts and notifications on security prices

Support

 Status of requests for credit, including mortgage approval, and insurance coverage

 Check (cheque) book and card requests

 Exchange of data messages and e-mail, including complaint submission and tracking

Content Services

 General information such as weather updates, news

 Loyalty-related offers

 Location-based services

4. Telebanking

Telebanking refers to banking on phone services. A customer can access information about his/her account through a telephone call and by giving the coded Personal Identification

Number (PIN) to the bank. Telebanking is extensively user friendly and effective in nature.

Telebanking offers the following services to its customers:

 To get a particular work done through the bank, the users may leave his instructions in the

form of message with bank.

 Facility to stop payment on request. One can easily know about the cheque status.

 Information on the current interest rates.

 Information with regard to foreign exchange rates.

5. Multi City Cheque

"Multi City Cheque" or MCC is a facility wherein the customer can issue cheques drawn at

the base branch and payable at any branch at remote centre. These cheques will be treated as

local cheques at the remote branch. There will be no collection charges and the credit will be

given on the same day, as applicable to local cheques. Even if the cheque is dropped at any

other bank other than the base bank, there will not be any collection charges. For example, if

Mr. A is paid a Multi city cheque by Mr. B at SBI branch in Delhi, Mr. A can drop the same

at any bank in Mumbai where he holds an account, and there will not be any collection

charges.

6. Credit Card

The credit card can be defined as a small plastic card that allows its holder to buy goods and services on credit and to pay at fixed intervals through card issuing agency. The credit card releases the customers form botheration of carrying cash and ensures safety.

A person who earns a salary of Rs 60,000 per annum is eligible for card. A reference from a banker and the employers of the applicant is insisted upon.

7. Debit Card

Debit cards will offer direct withdrawal of funds from a customer‟s bank account. The spending limit is determined by the user‟s bank depending upon available balance in the account of the user. It is a special plastic card connected with electromagnetic identification that one can use to pay for things purchased directly from its bank account. Under the system, cardholder‟s accounts are immediately debited against purchase or service to the computer network. Hence, under debit card the card holder must have adequate balance in his account.

The system is intended to replace cheque system of payment. These can be maintained only for customers maintaining satisfactory accounts and for a minimum period of 6 months.

8. Demat Account

In India, a demat account, the abbreviation for dematerialised account, is a type of banking

account which dematerializes paper-based physical stock shares. The dematerialised account

is used to avoid holding physical shares: the shares are bought and sold through a stock

broker.

This account is popular in India. The Securities and Exchange Board of India (SEBI)

mandates a demat account for share trading above 500 shares. As of April 2006, it became

mandatory that any person holding a demat account should possess a Permanent Account

Number (PAN),

1. Fill demat request form (DRF) (obtained from a depository participant or DP with the

customer‟s depository account is opened).

2. Deface the share certificate(s) customer wants to dematerialise by writing across

Surrendered for dematerialisation.

3. Submit the DRF & share certificate(s) to DP. DP would forward them to the issuer / their

R&T Agent.

4. After dematerialisation, customer‟s depository account with DP would be credited with the dematerialised securities.

Benefits

 A safe and convenient way to hold securities;

 Immediate transfer of securities;

 No stamp duty on transfer of securities;

 Elimination of risks associated with physical certificates such as bad delivery, fake

securities, delays, thefts etc.;

 Reduction in paperwork involved in transfer of securities;

 Reduction in transaction cost;

 Nomination facility.

2.2 Payment and Settlement Systems

In recent years, alternate money transmission avenues, especially the development of

electronic money schemes, have been gaining currency. While electronic money has the

potential to take over from cash for making small-value payments, making such transactions

are becoming easier and cheaper for both consumers and merchants. This raises policy issues

for central banks in its role as the guardian of the payment network and implementer of the

monetary policy. The emergence of peer-to-peer money transmission mechanisms poses a

challenge to current role of banks as gatekeepers to traditional payment systems. Robust

payment systems, therefore, are a key requirement in maintaining and promoting financial

stability with technology playing both a facilitating and disruptive role in them.

Reserve Bank’s initiatives for electronic payments and banking

As part of its public policy objective of promoting a safe, secure, sound and efficient payment

system, the Reserve Bank has taken several initiatives to develop and promote electronic

payments infrastructure. Towards this end, the RBI introduced the following:

a. Electronic Clearing Service (ECS).

b. Electronic Funds Transfer (EFT) system.

c. Real Time Gross Settlement (RTGS) system.

d. National Electronic Funds Transfer (NEFT).

e. Cheque Truncation System (CTS). a. Electronic Clearing Service (ECS)

With a view to upgrading our payment system to the international standards, the Reserve

Bank took the initiative and set up Electronic Clearing Service in India, in the mid 1990s,

which is the counterpart of the automated clearing house (ACH) system in certain other

countries. It has two variants –

ECS - Credit Clearing and ECS - Debit Clearing.

While the Credit Clearing operates on the principle of „single debit-multiple credits‟ and is

used for making payment of salary, pension, dividend and interest, etc.

The Debit Clearing functions on the principle of „single credit-multiple debits‟ and is used for

collecting payments by utility service providers like electricity, telephone bills as well by

banks for receiving principal / interest repayments for housing and personal loans from the

borrowers.

At present, about 18 million transactions flow through the ECS system every month. This facility is currently available at 70 centers in the country. b. Real Time Gross Settlement System

The payment system in the country largely follows the deferred net settlement regime, under which the net amount is settled between the banks, on a deferred basis. Such a dispensation entails an element of settlement risk. Hence, as a step towards risk mitigation in the large value payment systems, the RTGS was operationalised by the RBI in March 2004, which enables settlement of transactions in real time, on a gross basis. Almost all the inter-bank transactions in the country and many time-critical customer transactions are now settled through this system.

RTGS is fully secured electronic funds transfer system where banks and customers can receive payments on real time basis. The outreach of RTGS transactions has also grown geographically. Out of about 75,000 bank branches in the country, more than 48,300 bank branches now accept requests for remittance through RTGS system for customer transactions as well as inter-bank transactions.

A minimum threshold of rupees one lakh has been prescribed for customer transactions to ensure that RTGS system is used only for large value transactions and retail transactions take an alternate channel of electronic funds transfer. The daily average of transactions is over

34,000 by volume and over Rs.2 lakh crore by value.

The RBI also provides collateralised Intra-Day-Liquidity (IDL) support to the member banks for the RTGS operations.

c. National Electronic Fund Transfer:

The NEFT was launched by the RBI in November 2005 as a more secure, nation-wide retail

electronic payment system to facilitate funds transfer by the bank customers, between the

networked bank branches in the country. It has, however, been observed that the public sector

banks are not the most active users of this product and the majority of NEFT outward

transactions are originated by a few new-generation private sector banks and foreign banks.

For instance, in June 2008, while these banks, as a segment, accounted for a little over 43 per

cent each of the aggregate volume of outward and inward NEFT transactions, the share of

public sector banks in total outward NEFT transactions was rather low at a little over 12 per

cent, of which half the volume was the contribution of the State Bank of India.

The RBI has been pursuing the matter with the PSBs for increasing their participation in the

NEFT system in terms of the number of NEFT-enabled branches and the number of NEFT

transactions originated by them. I would like to urge upon the bankers present here to initiate

appropriate measures to stimulate greater usage of this payment medium and thereby,

improve their share in this regard.

d. Cheque Truncation System (CTS)

The latest electronic payment product introduced by the RBI is the Cheque Truncation

System, which was launched, on a pilot basis, in the National Capital Region of New Delhi

on February 1, 2008, with the participation of 10 banks. At present all the banks are

participating in the system through 53 direct member banks.

The main objective of the CTS is to improve the efficiency and substantially reduce the

cheque processing time in the system. The traditional clearing system requiring the physical

presentation of cheques in the clearing house for payment and settlement, inevitably entails consequential inefficiencies in terms of clearing time and infrastructure required.

Once the CTS become fully operational, the system would be the largest in the world and would leapfrog the country from the paper-based instruments to a fully electronic mode of payment and settlement. Necessary amendments have been made to the Negotiable

Instruments Act, 1881, which provides legal recognition to the electronic image of the truncated cheque. These amendments provide a legal basis for the cheque truncation system. . e. National Electronic Clearing Service (NECS)

The National ECS is a product being developed by the RBI to enable centralised processing of the ECS transactions, in contrast to the existing ECS system that has decentralised operations at 70 locations, spread all over the country. Under the National ECS, the processing of all the ECS transactions would be centralised at the National Clearing Cell at

Nariman Point, Mumbai and sponsor banks would need to only upload the relative files to a web server, with online data validation facility.

Destination banks would receive their inward clearing data / file at a central location, through the web server. The National ECS would leverage the Core Banking platform of the commercial banks, to enable around 50,000 core-banking-enabled branches of the various banks, to avail of this service. The system would facilitate end-to-end seamless posting of the

NECS transactions in a straight-through-processing (STP) environment. This would help the users and member banks to send, receive and process the data files at one centralised place, thereby improving the efficiency of the payment system.

CHAPTER 3

MARKETING TRENDS

The bank of the future has to be essentially a marketing organisation that also sells banking products. New distribution channels are being used; more & more banks are outsourcing services like disbursement and servicing of consumer loans, Credit card business. Direct

Selling Agents (DSAs) of various Banks go out and sell their products. They make house calls to get the application form filled in properly and also take your passport-sized photo.

Home banking has already become common, where you can order a draft or cash over phone/internet and have it delivered home. ICICI bank was the first among the new private banks to launch its net banking service, called Infinity. It allows the user to access account information over a secure line, request cheque books and stop payment, and even transfer funds between ICICI Bank accounts. Citibank has been offering net banking to its Suvidha program to customers. Banks can no longer confine themselves to selling the traditional way.

Initially the public sector banks were dominating the banking scene so they never felt the need for marketing. However Post liberalization, several new-generation private-sector banks changed the face of the industry. Customers no longer had to stand in long queues or make 10 trips for loans to be sanctioned. Private-sector banks brought in concepts like customer relations officers, focused marketing teams and single-window banking. Moreover, with new technology, private-sector banks like ICICI Bank and HDFC Bank could offer customer services like ATMs, phone banking, Internet banking, automatic money transfers and computerised monthly statements.

Public sector banks have woken up to competition. Industry estimates state that roughly 12 per cent to 15 per cent of public-sector bank customers shifted to private-sector banks in the late nineties. Now public-sector banks are finally getting their act together. Still holding 82

per cent of the lending market, they are cashing in on their strengths like experience, network,

products, and facility. All it takes is to package it and sell it well.

Some initiatives have been taken by the following banks:

Indian Bank:

 The 96-year-old bank has just turned some executives into marketing officers at most of its

1,300 branches. To boost its selling efforts it pulled in 265 MBA students to market the

bank's products during their summer training. It has also introduced 24-hour customer care

centres in Mumbai, Chennai and Bangalore.

State bank of India

 For a start, SBI is refurbishing key branches in a phased manner, to smarten up and

give itself a more customer-friendly look. The makeover will have taken place at about 20 to

30 key branches. The bank is also turning customer friendly in other ways. It is developing

customised loan packages like Doctor Plus and Teacher Plus and has tied up with companies

like Maruti. Apart from this, SBI has opened 69 Personal Banking Branches in key cities

especially to cater to retail customers. Also, the bank is trying to simplify systems so work is

completed fast. Today loans are disbursed within a week instead of taking over a month for a

loan sanction.

 Under a business process re-engineering plan, the bank will have a more focused

marketing team. SBI has computerised nearly 41 per cent of its branches and has 1,700

networked ATMs located in 176 centres. By next April, it plans to computerize all its

branches and install 3,100 ATMs.

Union bank of India

 UBI is gradually changing the look of its big branches and pumping in Rs 25 lakh (Rs

2.5 million) to Rs 30 lakh (Rs 3 million) for each one. Smaller ones will undergo Rs 10 lakh

(Rs 1 million) refurbishments. Already, 800 branches out of 2,020 have a new look. And, from launching around one product in a year about six years ago, this year it has launched close to 30 new products. UBI also plans to increase the number of marketing officers. In

2001, for the first time 117 marketing officers were put in place in key branches.

 To give itself a uniform look, in 2001, the bank changed its logo. Today all the branches sport the same boards. The bank spent close to Rs 11 crore (Rs 110 million) on mass media advertising last year.

CHAPTER 4

OTHER TRENDS

4.1 Retail Banking

Retail banking includes a comprehensive range of financial products viz. deposit products,

residential mortgage loans, credit cards auto finance, personal loans, consumer durable loans ,

loans against equity shares, loans for subscribing to initial public offers (IPO), debit cards bill

payment service , mutual funds and investment advisory services .

The emergence of middle class with substantial purchasing power in India during the last one

decade or so and its desire to spend according to the changing life style, has offered to the

Indian banking system, a ready market, for mobilization and deployment of their funds.

Given the rising purchasing power of this class, there is huge untapped potential for business.

While new generation private sector banks have been able to create a niche in this regard, the

public sector banks have not lagged behind. Leveraging their vast branch network and

outreach, public sector banks have aggressively forayed to garner a larger slice of the retail

pie. By international standards, however, there is still much scope for retail banking in India.

4.2 Customer Relationship Management

Traditionally, banking was personal, where customer knew the bank employee and vice

versa. The main bondage was the relationship the customer enjoys with the bank- the closer

the customer feels to the bank, the more are his chances of remaining as future customer.

Things have changed now. Newer technologies result in lack of personal touch and a

customer can be lured by big financial institutions at the end of world by providing better

services than any local bank. So banks are turning to Customer Relationship Management

(CRM) in search of effective ways to woo and retain their clients. The satisfied customers

always help in improving the business turnover through referrals and positive publicity.

Offering the right product to the right customer at the right time through the right delivery channel is basic concept of CRM. Now the banks have realized that they cannot expect to own their customers. The primary goal is to uncover cross selling opportunities and provide more customized services to retain customers. In real terms, CRM can be implemented only if proper infrastructure is created. The introduction of concepts like customer profiling and segmentation, target marketing, customer‟s life time value analysis, campaign analysis, etc. become necessary. The bank will be required to collect continuous feedback and take necessary steps to improve the brand image.

Customer Relationship Management (CRM) refers to the ability to understand, anticipate and manage the needs of the customer, interaction and relationship resulting in increased profitability through revenue and margin growth and operational efficiencies. Analytical insight into CRM can provide a clearer picture of the profitability of specific customers. The banks can distinguish between low income generating customers and highly profitable customers and offer distinguished service based on this. The banks now offer internet banking, ATM, phone banking, voice response unit, customer care and other services for the convenience of the customer. Only when customer feels value will he reciprocate the relationship with loyalty. Banks have now adopted “Universal Banking” and providing all financial services under one roof.

4.3 Change of Bank Logos

Logos give a brand its identity. They are a company‟s most valuable asset. It‟s no secret that a whole lot of Fortune 500 companies devote millions of dollars each year to develop their brands and promote their corporate identity. In fact, logos are what instantly make a brand recognisable. They make a brand memorable. Logos are strong symbols that have the power to unite, not just organisations, but people too.

Competitors & competition makes organisations sit up and take charge. Banks are all about

image & service. With a whole lot of multinationals setting up, Indian banks realised it was

time they changed. A whole lot of them developed new corporate identities to look younger

& trendy.

Public sector banks are going in for a change in logo as a means of re-branding and re

positioning their services to the „new age customer‟ in a new market scenario. As a part of the

strategy to face the changed scenario, one finds the country's public sector banks, one by one,

going in for image overhauls. It begins with a change in logo –witness the new „Rising

Baroda Sun‟ which the Bank of Baroda has gone in for, as part of its re-branding. Next in line

was Canara Bank. A couple of months ago, Union Bank of India unveiled its new logo.

Banks don‟t want to be perceived as „last-generation‟s banks‟ and a new logo gives a quick

facelift.

4.4 Recruitments in Public Sector Banks

State Bank of India (SBI) recently advertised for hiring 20,000 clerical staff across India.

Corporation Bank and Bank of Maharashtra have also advertised for probationary officers,

clerks and other officers. Other banks like Union Bank of India and Bank of Baroda, too, are

planning to hire in the range of 1000 employees, while other banks like Indian Overseas Bank

(IOB), Canara Bank are in the process accessing the staff requirements.

Other public sector banks are also hiring since a huge chunk of employees. This is because

government-owned banks had gone in for massive recruitment in the early 70s. Senior

officials from Bank of India said that they are looking at hiring 500 people for clerical cadre

and another 1,000 as officers in the year 2009. According to experts, the large-scale

retirements in PSBs and the change in the business models of banks with the implementation

of core banking solution (CBS) are driving recruitment.

CHAPTER 5

CASE STUDY ON PUNJAB NATIONAL BANK (PNB)

Punjab National Bank of India, the first Indian bank started only with Indian capital, was nationalized in July 1969 and currently the bank has become a front-line banking institution in India with 4525 Offices including 432 Extension Counters. The corporate office of the bank is at New Delhi. Punjab National Bank of India has set up representative offices at

Almaty (Kazakhstan), Shanghai (China) and in London and a fully fledged Branch in Kabul

(Afghanistan).

Punjab National Bank with 4497 offices and the largest nationalized bank is serving its 3.5 crore customers with the following wide variety of banking services:

 Corporate banking

 Personal banking

 Industrial finance

 Agricultural finance

 Financing of trade

 International banking

Punjab National Bank has been ranked 38th amongst top 500 companies by The Economic

Times. PNB has earned 9th position among top 50 trusted brands in India.

Punjab National Bank India maintains relationship with more than 200 leading international banks worldwide. PNB India has Rupee Drawing Arrangements with 15 exchange companies in UAE and 1 in Singapore..

Vision and Mission

Vision

 To evolve and position the bank as a world class, progressive, cost effective and

customer friendly institution providing comprehensive financial and related

services.

 Integrating frontiers of technology and serving various segments of society

especially weaker section.

 Committed to excellence in serving the public and also excelling in corporate

values.

Mission

 To provide excellent professional services and improve its position as a leader in

financial and related services.

 Build and maintain a team of motivated workforce with high work ethos.

 Use latest technology aimed at customer satisfaction and act as an effective

catalyst for socio economic development.

Products and Services

1. Savings Fund Account - Total Freedom Salary Account, PNB Prudent Sweep,

PNBVidyarthi SF Account, PNB Mitra SF.

2. Account Current Account - PNB Vaibhav, PNB Gaurav, PNB Smart Roamer.

3. Fixed Deposit Schemes - Spectrum Fixed Deposit Scheme, Anupam Account,

Mahabachat Schemes, Multi Benefit Deposit.

4. Scheme Credit Schemes - Flexible Housing Loan, Car Finance, Personal Loan, Credit

Cards.

5. Social Banking - Mahila Udyam Nidhi Scheme, Krishi Card, PNB Farmers Welfare

Trust.

6. Corporate Banking - Gold Card scheme for exporters, EXIM finance.

7. Business Sector - PNB Karigar credit card, PNB Kushal Udhami, PNB Pragati

Udhami, PNB Vikas Udhami.

Article

CHAPTER 6

Conclusion

Entry of new banks resulted in a paradigm shift in the ways of banking in India. The growing competition, growing expectations led to increased awareness amongst banks on the role and importance of technology in banking. The arrival of foreign and private banks with their superior state-of-the-art technology-based services pushed Indian Banks also to follow suit by going in for the latest technologies so as to meet the threat of competition and retain their customer base. Deregulation and technological change are the two single biggest changes in the banking environment.

In India, investments in technologies by financial services organizations are increasing, and new initiatives emerging, albeit at a basic level. However, in the long run, it is evident that technology investments in transaction and process automation will cease to be a differentiator.

Technology has enabled banks to overcome the barriers of time and extending their services to customers. The new technology channels like ATMs, EFT (Electronic funds transfer), debit and credit cards mobile banking, telebanking, etc. are accessible to customers on a 24 x

7 basis.

With automation, banks can offer single window service, extend business hours and provide anywhere anytime banking. It gives bank personnel more time to devote to business planning and development also facilitates each player in market to have its unique products and services for competitive advantage. New technology driven channels help the banks to reduce cost as the cost of transaction in new channel is a fraction of what it was on branch counter.

For e.g.: A counter transaction in typical branch would cost around Rs 50-60, while it is around only Rs.15 to 20, if done through ATM. The cost will be further lowered if done through internet. Recently RBI issued a circular stating that withdrawal from ATM would be free irrespective of the card issuing bank which will be effect from April 1st, 2009.

In view of this, technology has changed major functions performed by banks:

1. Access to liquidity.

2. Transformation of assets.

3. Monitoring of risks.

4. Information technology and the communication networking systems have a crucial bearing on the efficiency of money, capital and foreign exchange markets.

CHAPTER 7

Recommendation

The banking system has made considerable investment in the related infrastructure to upgrade the payment system. However, there are several challenges that need to be effectively addressed if the full benefits of the achievements so far are to be reaped.

The primary reason for slow pace of adoption of the electronic modes of funds transfer, particularly in the retail segment, is the lack of education – particularly on the part of the bank staff at the branch level that have interface with the public.

A survey conducted by one of the Regional Offices of the RBI in the recent past revealed that in the limited sample covered; there were several bank branches in the State which were not even aware of the National Electronic Fund Transfer system. The banks, therefore, need to make concerted efforts to increase the degree of awareness at the level of the branch staff so that the electronic fund transfer services percolate down to the level of the public in a significant manner.

The other side of the coin is the lack of customer education and awareness about the features and benefits of the EFT, which precludes wider adoption of this product and leads to carrying on with the traditional modes of payment.

Bibliography

 WWW.GOOGLE.COM

 WWW.SBI.CO.IN

 WWW.IBA.ORG.IN

 WWW.RBI.ORG.IN

 WWW.PNBINDIA.COM