CHAPTER V TECHNOLOGICAL ADVANCEMENT OF INDIAN COMMERCIAL BANKS. 5.2 Banking Transformation through Technology

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1 CHAPTER V TECHNOLOGICAL ADVANCEMENT OF INDIAN COMMERCIAL BANKS 5.1 Introduction 5.2 Banking Transformation through Technology 5.3 Channels of Banking Technology Types of Online Banking 5.4 Technological Advancement of Indian Banking Sector Automated Teller Machines Innovative Payment and Settlement Systems of Banking Sector Types of Innovative Payment Systems Evolution of Credit Cards/Debit Cards Mobile Payments Aadhaar Enabled Payment System and IMPS 5.5 Electronic Clearing Service (ECS)/ NationalElectronic Clearing Service (NECS) National Electronic Fund Transfer (NEFT) system Credit/Debit Cards and ATMs 5.6 Conclusion

2 CHAPTER V TECHNOLOGICAL ADVANCEMENT OF INDIAN COMMERCIAL BANKS 5.1 Introduction The origin of banking can be traced to ancient times, starting with rudimentary money lending and bartering practices for agricultural and other commodities. But it gained great momentum only after the industrial revolution which commenced in Europe in the 17 th Century, when Europeans started establishing colonies around the world and the need for credit for trade was felt like never before. Ever since banks started operating, their essential mode of operation remained much the same until late into the 20 th Century. But the arrival of the Internet in the 1990s changed all that. A plethora of possibilities emerged for worldwide commerce, which naturally impacted the functioning of banks as well. Even now, technological evaluation shapes the nature and extent of global economic activity and continues to fundamentally alter the global banking landscape. Information technology in banking is fast evolving. From enabling banking services to driving transformation in the industry, Information Technology holds a promise to change the face of banking in the next few years. New entrants are looking to leverage their existing strengths in the Indian banking arena. The opportunity available to these entrants through leveraging their understanding of technologies and markets they operate in, promises innovative business models with a focus on delivering customer value. The need to provide personalized, speedy and cost effective services is pushing banks to further reorient and innovate the business model of banking and enabling technology. It has become inevitable and is seen as the

3 only way for banks to survive in the increasingly competitive banking arena. Technology not only simplifies the banking process and service channels but also plays a holistic role in enabling financial inclusion. However, some bankers are of the opinion that unless the financial inclusion is supported in some form by the government it will not be a viable initiative. Many Indian banks have embarked on the journey of technology revolution and are at varying degrees of success. This is due to the fact that not all of them have understood diversity of their customer base and their varying needs. Indian banks took a major step forward in customer services when the Banking Codes and Standards Board of India (BCSBI) were released in A lot has still to be done as has been highlighted in a recent RBI report on customer services. Banks have also been quick to impose penalties and fees while getting away with apologies for gross negligence in some cases. This has been one of the hurdles in driving customer adoption of new facilities offered by some banks. This is a critical point banks need to consider for accelerating adoption of technologies. Indian banking industry today is in the midst of an IT revolution. A combination of regulatory and competitive reasons has led to increasing importance of total banking automation in the Indian Banking Industry. Information Technology enables sophisticated product development, better market infrastructure, implementation of reliable techniques for control of risks and helps the financial intermediaries to reach geographically distant and diversified markets. In the area of payment systems, there have been significant advancements of technology on the customer transactions. India is one of the countries that have effectively tackled huge volumes of paper instruments in cost effective manner. The Magnetic Ink Character Recognition (MICR) cheque clearing System, cheque transaction system (CTS) is another innovative solution that has been developed to enhance the efficiency of

4 paper-based clearing system. CTS have eliminated the need for physical movements of cheques. The National Electronic Clearing System (NECS), with its centralized processing capability coupled with the implementation of CBS has brought down the clearing and settlement cycle. Electronic Fund Transfer (EFT)/ National EFT (NEFT) is another illustration, where better process re- engineering coupled with CBS and strict adherence to NEFT procedural guidelines has made this product offer fund transfer service on a real time basis to customer. 5.2 Banking Transformation through Technology Technology has been a key enabler for banks to transform their business. The role of technology has changed from being a tool to gain operational efficiencies to being a strategic resource to design products, manage risk and ensure the last mile connectivity. Although banks leverage technology to improve operational efficiency and reduce cost, improving customer experience and delivery quality remains top on their list. With the customers getting tech savvy, banks also have focused on increasing use of technology to ensure customer satisfaction and move ahead of its competitors. Technology has helped banks to use alternate channels like internet, mobile and ATMs. In addition to Core Banking solution (CBS), many banks under study are also using data warehouses to provide strategic information for better customer insight. Besides this, the technology has found extensive usage in customer relationship management, treasury management, human resource management, electronic transfers, enterprise risk management, business intelligence, improving internal effectiveness and managing IT risks. The banks have implemented/upgraded their systems to make their business more scalable, efficient and uninterrupted along

5 with reduced processing time. There are a few initiatives taken by the banks under study in technology space. The Indian banking sector is experiencing a shift from the traditional branch customer channel to more technology-centric channels. Technology has played an important role in changing the way banks do business or how customers do banking. It has transformed from an enabler to a business driver. Banks need to strengthen their already-built technology platforms to achieve their business objectives. The near future holds an approach of enhanced focus on technology at an accelerating pace as rightly summarized by Mr. AnaAs we become global, banks would need to become technologically more sophisticated in diverse areas, whether it is moving towards adopting advanced approaches in Basle II or in 5.3 Channels of Banking Technology Instead of merely providing what the bank concerned could offer from its fold, banking may encompass extension of all the services that are required and dictated by customers. Clients should get services from the banks on a 24x7 basis on an online ATM connected to the network. Whosoever the banker may be, a customer should be able to access his or her bank account through a PC/laptop/mobile or an ATM around the corner. The time spent by the bank with customers would be reduced, thereby improving profitability through low operational cost that would ensure time saving for the customers, as a byproduct. A large branch network is generally considered to be the fountainhead of administrative problems. But with IT making inroads into the functioning of banks in

6 the form of virtual banking, e-banking, Internet banking etc., banks would be able to generation banks started off with all branches fully networked and, in fact, some of them now operate with a fully centralised database that optimises costs compared to inter-connection of distributed database in widespread branches. Many banks, including PSU banks, would have online ATMs, phone banking, virtual banking, e banking, Internet banking and the like by In the last five years, most large financial institutions, particularly banks, underestimated the likely role of the Internet in various spheres of business and administrative functions. There has been solid growth in the number of people going online, as well as in the value of financial services conducted, in the breadth of financial products traded and in the depth of relationships conducted using digital channels. The next conspicuous mistake made by financial institutions is the failure to recognise the power of the digital economy to make a deeper transformation of corporate and wholesale finance. The digital economy has consistently caught financial institutions off-balance, lurching from one leg to another, each time trying to correct a previous mistake. Market research only tells us about today and reveals nothing about tomorrow. replaced fax and people began to expect near instant answers. No one has time to go through a detailed note but prefers to have interactive presentations on PowerPoint. High-flying schedules of many executives resulted in laptops being the prime luggage of many frequent fliers. 5.4 Technological Advancement of Indian Banking Sector ng Solution (CBS), does not remain an edge anymore, but has become the basic prerequisite for

7 any bank. Building on this, banks need to move on to adopting higher technology in order to provide better products and upgrade their risk management systems. As we become global, banks would need to become technologically more sophisticated in diverse areas, whether it is moving towards adopting advanced approaches in Basle II or in upgrading their delivery channels for providing better customer service. Whether large or small, traditional or non-traditional, regional or global, all banks now face a similar competitive imperative. Short-term survival and long-term success require simultaneous focus on often conflicting priorities: reducing operating costs, driving new sources of revenue and building capital. Growth can be achieved through innovative customer friendly strategies to stem the reduction of the customer base and to grow deposits. This all must be accomplished in the market which is getting extremely competitive. While the competition is a fact of life and banks need to be geared up for the same, the competition is going to intensify in the coming days, both from traditional competitors (banks) and also from non-bank entities. Though the regulatory focus is on reducing the arbitrage, the current crisis has taught us that the shadow banking system is increasingly becoming an important constituent of the financial system. Banks need to innovate and improve their efficiency to remain competitive and the role of technology in this regard is very critical. Indian banking industry, today, is in the midst of an IT revolution. The Indian Banking fraternity is adopting the latest technological advances to address the threat of competition and to meet customer expectations. A combination of regulatory and market forces has supported the implementation of technology and automation in the Indian banking industry.

8 5.4.1 Automated Teller Machines An electronic banking outlet, which allows customers to complete basic transactions without the aid of a branch representative or teller. There are two primary types of automated teller machines, or ATMs. The basic units allow the customer to only withdraw cash and receive a report of the account's balance. The more complex machines will accept deposits, facilitate credit card payments and report account information. To access the advanced features of the complex units, you will usually need to be a member of the bank that operates the machine. ATMs are scattered throughout cities, allowing customers easier access to their accounts. Anyone with a debit or credit card will be able to access most ATMs. Using a machine operated by your bank is usually free, but accessing funds through a unit owned by a competing bank will usually incur a small fee. Table 5.1 Bank wise Number of Automated Teller Machines Year Nationalized Banks State Bank Group Old Private Sector Banks New Private Sector Banks Foreign Banks , , , ,

9 Average 18, , , , r Source: Trend and Progress of Banking, Reserve Bank of India, various issues. It is clearly revealed from the above table that the Nationalized Banks possess percent of the ATMs in the country, State Bank Group percent, Old Private Sector banks 6.27 percent, New Private Sector banks percent and Foreign Banks 2.64 percent. Hence it is inferred that the Nationalized Banks play a very important role in the implementation of ATMs in the country. Extension of banking services through Automatic Teller Machines has been carried by all types of banks except Cooperative Banks. On an average, the Nationalized Banks tops in the installation of Automatic Teller Machines which is followed by State Bank Groups and New Private Sector Banks. The Old Private Sector Banks and Foreign Banks have only minimum number of Automatic Teller Machines. The yearly increase in the number of ATMs is more in case of State Bank Groups. The correlation is high and positive in all the cases which is 0.99 for Nationalized Banks, 0.96 for State Bank Group, 0.94 each for Old Private Sector banks and New Private Sector banks and 0.91 for Foreign Banks. However, the analysis reveals a steady increase in the number of machines installed over the years under study from to Table 5.2 Trend on the Number of Automated Tellers Machine On Trend Off site of Off Trend Trend Year site Total ATMs site ATMs ATMs , , ,

10 Average 27, , , r Source: Trend and Progress of Banking, Reserve Bank of India Bulletin, various issues. With regards to the installation of ATMs, some are installed in the premises of banks as on site ATMs whereas, some are being installed outside of the premises to enhance easy operation of the beneficiaries as off site ATMs. The overall percentage of offsite ATM is The growth rate of ATMs is estimated through Trend analysis by taking as the base year. It is revealed from the study that during , the growth rate is 629 percent for Onsite ATMs, 519 percent for Offsite ATMs, and 546 percent for the total number of ATMs. The average growth rate is 264 percent, 178 percent and 208 percent respectively for Onsite ATMs, Offsite ATMs, and for total number of ATMs. The coefficient of correlation calculated in this regard is 0.99, 0.95 and 0.97 respectively for onsite, off site and total number of ATMs. Hence, it can be concluded that irrespective of the sites, the ATM services is extended to all by the banks in India.

11 Table 5.3 Area wise Distribution of ATMs Growth Area No No No No Rural Centers , Semi Urban Centers , Urban Centers , Metropolitan , Centers Total ,14, Source: Trend and Progress of Banking, Reserve Bank of India Bulletin. Like bank branches, there was also an increase in the penetration of ATMs in recent years as evident from a fall in the population per ATM. While there was greater concentration of ATMs in urban areas than in rural areas, the number and percentage of ATMs in rural areas was on a steady rise in the recent years. A large part of the increase in ATMs in rural areas was due to public sector banks. The growing penetration of ATMs in rural areas could also be seen from a continued fall in the population per ATM in rural areas areas here refer to rural and semi-urban In recent years, the penetration of ATM centers are more in Rural Areas (33.9), Semi Urban Centers (22.2), Urban Centers (16.5) and Metropolitan Centers (15.8) with the overall growth of 19.2 percent. Bank wise number of ATMs of SCBs at Various Centres Although urban and metropolitan centres account for over 65 per cent of the total number of ATMs in the country, there has been a rising trend in the share of

12 ATMs located in rural and semi-urban centres in the recent years. With the objective of further liberalising and rationalising the branch authorisation policy, the general permission to domestic scheduled commercial banks is now allowed to open branches in Tier 1 centres, the Reserve Bank said in a notification. a "branch" would include a full-fledged branch, including a specialised branch, a satellite or mobile office, an extension counter, an off-site ATM, administrative office, controlling office, service branch and credit card centre. The RBI has considerably relaxed the branch opening norms for banks. Branch authorisation has been relaxed to the extent that banks do not require prior permission to open branches in centres with population less than 1 lakh, they have only to report having done so. Table 5.4 Bank wise number of ATMs of SCBs at Various Centres Bank group Rural Semiurban Urban Metropolitan Total Public Sector Banks 8,552 18,445 22,518 20,137 69, Nationalised Banks 4,406 8,283 10,873 11,797 35, SBI Group 4,053 9,847 10,912 7,779 32, Private Sector Banks 2,982 9,244 13,349 17,526 43, Old Private Sector Banks 768 2,760 2,354 1,684 7, New Private Sector Banks 2,214 6,484 10,995 15,842 35,535

13 Foreign Banks , Total 11,564 27,710 36,111 38,629 1,14, Growth over previous year Source: Compiled from the Annual Reports, RBI. Individually, Public Sector Banks have more number of ATMs installed in Urban Centers (32.3), Nationalised Banks have more number of ATMs in Metropolitan Centers (33.4), SBI Group have more number of ATMs in Urban Centers (33.5), Private Sector Banks have more number of ATMs in Metropolitan Centers (40.7), Old Private Sector Banks have more number of ATMs in Semi Urban Centers (36.5), New Private Sector Banks have more number of ATMs in Metropolitan Centers (44.6) and Foreign Banks have more number of ATMs in Metropolitan Centers (77.6). Totally 10.1 percent of ATMs were placed in Rural area, 24.3 percent in Semi Urban area, 31.7 percent in Urban area and 33.9 percent in Metropolitan area. Usually, the branches are situated in various places like Rural area, Semi Urban area, Urban and Metropolitan Centers. The same is the case of ATMs too. It is revealed in the reports that as on March 2013, 33.9 percent of the ATMs are installed in Rural Centers, Semi Urban Centers (22.2), Urban Centers (16.5) and Metropolitan Centers (15.8) with the overall growth of 19.2 percent. However, concentration is more in case of rural areas as it is evident from the percentage of variation which is high in case of installation of ATMs in rural areas.

14 5.4.2 Innovative Payment and Settlement Systems of Banking Sector A key requirement of sturdy banking system is the availability of an efficient payment system. In the light of inter linkages it has with other financial systems, the payment system forms the backbone of the financial system. With the entire world converging into a single big bowl of globalization, there has been multitudinous increase in the number of cross border transactions. The outburst of innovations and technological advancements have revolutionized the financial markets and played a vital role in blurring the distinction between banks and non-banks. The banks would, however, have a vital role to play in the payment system of any economy, hence would continue to remain special from the point of financial systems. Globally, there has been a rapid advancement in Information and Communication Techno customer services and organisational structures, among others. Innovative adoption in the form of internet banking, ATMs and mobile applications have created a profound impact on the delivery channels of banking services. Also, a number of innovative developments in retail payments have emerged, which affect the retail payment market by influencing users in their choice of payment instruments and by significantly reshaping the payment processes. Developing countries with an underdeveloped payment infrastructure have higher potential for introducing innovative payment solutions, and thereby even leapfrogging some of the advanced countries in terms of the usual steps for developing retail payment instruments/infrastructure. Notwithstanding the growth of various electronic modes of payment in India, it still has a long way to go in terms of achieving the high levels of penetration of such modes across the world, particularly in high income countries. It is noteworthy,

15 however, that India stands out globally in terms of usage of mobile phones as a mode of payment. Table 5.5 Penetration of Electronic Modes of Payment () Category World Upper Lower High Middle Low Middle India Middle Income Income Income Income Income Credit card Debit card Electronic mode payments (wire and online ) Mobile phone to pay bills Source: Global Findex (Global Financial Inclusion Database), World Bank. The above table gives a picture of the percentage of population of 15 years and above using Credit card, Debit card, Electronic mode to make payments and Mobile phone to pay bills. The usage of the Credit card is 14.8 percent in the world level which is 49.8 percent in High Income group, just 1.8 percent in India which is lower than the Low Income group. In the case of debit cards, the usage in India is 8.4 percent which is much lower than the world usage of 30.4 percent but just above the low income group of 7.4 percent. The usage of Electronic mode payments is comparatively low in India to the tune of just 2.0 when compared to world level which is 14.5 percent and much lower than the High Income group which is 55.2 percent and higher than the Low Income group of 1.9 percent. While in the case of the usage of Mobile phone to pay bills, it is equivalent to the world level usage and Lower Middle Income group, but the usage is much felt by the Low Income group.

16 Hence, it is inferred that in India, the debit card usage is much more than other types of cards Types of Innovative Payment Systems While India has a well-established and profitable banking system, it also is home to millions who are denied access to basic financial services. This knowledge paper provides a fresh perspective on what it will take to catalyze explosive growth in electronic payments and accelerate financial inclusion. The Automated Data Flow (ADF) project was initiated by the Reserve Bank to automate flow of data from accurate and timely manner without manual intervention. There is continued progress under ADF and as at end-june 2013, about 80 per cent of the returns of a majority of the banks had been brought under this system. Further, banks have initiated the setting up of a Returns Governance Group (RGG), comprising officials from compliance, business and technology. As they attempt to increase their reach and penetrate new customer segments in a profitable manner, banks are establishing payment ecosystems that work across organizational boundaries to deliver innovative payment services. penetration, we see several emerging models of competition and cooperation in these areas. However, as banks ensuring their continuing focus on keeping their core strategic payment functions inhouse while aggressively sharing their noncore ones. They will also need to learn to define and manage complex service-level agreements while monitoring associated costs and risks. Due to the efforts of the RBI and the BPSS now over 75 percent of all transaction volume are in the electronic mode, including both large-value and retail

17 payments. Out of this 75 percent, 98 percent come from the RTGS (large-value payments) whereas a meagre 2 percent come from retail payments. This means consumers have not yet accepted this as a regular means of paying their bills and still prefer conventional methods. Retail payments if made via electronic modes are done by ECS (debit and credit), EFT and card payments. The Indian payments systems have however undergone a change with respect to methods of payments, there now being card-based payments, Electronic Funds Transfers, Electronic Clearing Services and ways to pay via the mobile and internet. In India payments can be divided in two ways- firstly, large-scale payments and small-scale payments and secondly, paperbased and electronic. Most large-scale payments concern corporates or government payments and are settled by the RBI. Small-scale payments are mainly retail payments concerning individuals which are generally paper-based transactions. Most large-value payments are handled electronically. However, even the retail payments are showing a tendency of shifting to the e-payment mode, mainly because of consumer awareness and regulations by the RBI Evolution of Credit Cards/Debit Cards Payment systems of the 21st century not only include the traditional paper based payments, electronic fund transfers, credit, debit and charge card but also new technologies such as digital wallets, e-cash, mobile payment, e-cheques and so on. A newly emerged form of payment system is allowing a 3rd party to offer online transaction capability for consumers (by merchants). Companies facilitating this new form of payment are called Payment Service Providers (PSP). A payment service provider (PSP) offers merchants online services for accepting electronic payments by a variety of payment methods including credit card, bank-based payments such as

18 direct debit, bank transfer, and real-time bank transfer based on online banking. Some PSPs provide unique services to process other next generation methods including cash payments, wallets such as PayPal, prepaid cards or vouchers, and even paper or e-check processing Mobile Payments The term mobile payments refers to the process of using a handheld device to make purchases and hence for making payments. Such payment can either be made remotely or at a point of sale. The entire world is converging onto the handheld devices and the financial services are no different. The banks are being swayed by the halo of the newly opened market of mobile banking and mobile payments. Some are thinking of capitalizing the first-mover advantage by developing innovative mobile solutions with an objective to gain market share and increase revenues, while others are waiting for the technology standards to get set and customer adoption and interest to rise. This newly evolved payment channel will not only provide the banks an opportunity to tap new revenue streams but would also aid in reducing overall costs of serving the customers Aadhaar Enabled Payment System and IMPS New payment service offered by the National Payments Corporation of India to banks, financial institutions using "Aadhaar" which is a unique identification number issued by the Unique Identification Authority of India (UIDAI) to any resident of India. A customer can perform balance enquiry, cash withdrawal, cash deposit and fund transfer from Aadhaar enabled bank agents (called Business Correspondents).Banks are forming ventures with the mobile operators to form Business Correspondents and attempting to reach to the bottom of the pyramid.

19 Bharati Airtel and SBI have announced their banking correspondent JV, in which service points. This was followed by Vodafone announcing a tie-up with ICICI Bank. Similarly, Nokia tied up with Union Bank of India where Nokia Stores will be the BCs. Idea Cellular also signed up as a banking correspondent to Axis Bank. Tata Indicom and MChek had also received funds from the GSMA Mobile Money for the unbanked fund to provide Microfinance services in rural areas. The National Payment Corporation established specialized Interbank Mobile Payment Service switch (IMPS) specifically for mobile phone transactions, which links a unique Mobile Money ID (MMID) to a specific bank account. By making this link, mobile phone accounts are tied into a switch that will enable any transaction between banks on this switch. This has led to Indian Banks offering a host of services through IMPS. The innovative uses of this platform go beyond offering of conventional non financial transactions like checking balances. This is a wonderful option for people who need to remit money to their relatives within India and is a virtual money order with almost no transaction charges. Paper Based Payment Systems: Paper based transactions account for 60 per cent of total transactions processed through both MICR and Non-MICR clearing houses. To enhance the safety, security and efficiency of paper based system, the Reserve Bank took steps like (i) discontinued high value clearing in a non-disruptive manner over a period of one year; (ii) extended speed clearing which facilitates local clearing of outstation cheques, to 66 MICR centres; (iii) Initiated steps to roll out Cheque Truncation System (CTS) in Chennai covering all the southern centres after successfully implementing the same in the National Capital Region; (iv) issued a new cheque standard styled CTS-2010 to enhance the integrity of images procured under

20 CTS by mandating minimum security features covering quality of paper, watermark, banks logo in invisible ink, and void pantograph on cheque forms. Electronic Payment Systems: The large value electronic payment systems, viz., Real Time Gross Settlement System (RTGS) and the Retail Electronic Payment Systems, viz., National Electronic Clearing Services (NECS and ECS), National Electronic Fund Transfer (NEFT) and Card Payment Systems are the electronic payment systems available in India. To encourage the electronic transactions, the waiver of processing charges for ECS/NECS/NEFT/RTGS was further extended up to March 31, Real Time Gross Settlement Systems: The implementation of RTGS systems by Central Banks throughout the world is driven by the goal to minimize risk in highvalue electronic payment settlement systems. In an RTGS system, transactions are settled across accounts held at a Central Bank on a continuous gross basis. Settlement is immediate, final and irrevocable and thus the credit risks due to time lags in settlement are eliminated. India introduced RTGS system in 2004 and since then, each year the volume and value of transactions transacted is increasing in multiples. 5.5 Electronic Clearing Service (ECS)/ National Electronic Clearing Service (NECS) The ECS facility of multiple credits/debits against a single debit/credit for bulk payments has been extended to 89 centres. To facilitate the users to submit a single file at a centralized location instead of multiple files at many locations, the National Electronic Clearing Service (NECS) was introduced in September A near two- fold increase in volumes and value of transactions processed through NECS

21 credit was seen during the year which could be attributed to more banks (116), branches (about 48,000) and increased number of companies participating in the system. To facilitate State Governments to operate from a single location in the State (the capital city), a concept of Regional ECS (RECS Credit) was introduced in Bengaluru in May 2009 and is now extended to Chennai. The State Governments were otherwise using the Local-ECS variant available at different cities/local centres for making repeated payments to persons/entities National Electronic Fund Transfer (NEFT) system: The centralized version of EFT termed National Electronic Funds Transfer (NEFT) introduced in 2005 enables the funds to be ransferred electronically irrespective of location. Viewing the system successfully handling significant volumes, the following measures were initiated to strengthen the NEFT system: (i) mandated creation of Customer Facilitation Centre (CFC) at the service centre of the NEFT member bank for prompt resolution of customer complaints. A directory of the CFCs has been placed at the RBI website for the benefit of the public; (ii) return discipline for NEFT transactions tightened by mandating the returns within two hours of completion of a batch against the earlier T+1; (iii) increased the number of settlements from six to eleven on week days and from three to five settlements on Saturdays to achieve a near-real time ful credit to Credit/Debit Cards and ATMs During , Reserve Bank mandated the following steps to enhance the quality of customer service in banks and mitigate risks arising out of usage of

22 credit/debit cards over internet: (i) additional authentication on usage of credit cards over internet, based on the information not available on the card; (ii) online alert to be or `5,000 and above; (iii) additional authentication and online alert to be implemented for transactions carried out over telephone (IVRS) from January 2011; (iv) reimbursement to the customers the amount wrongfully debited by banks on account of failed ATM transactions within 12 days and automatically pay compensation of `100 per day for delays in such disbursement to them; (v) to place a standardised ATM complaint template permitted banks to allow their customers cash withdrawal up to `1,000 per day using debit cards at POS terminals. Table 5.6 Value of ECS Transactions (in lakhs) Year ECS Trend ECS Trend EFT/ Trend Credit Debit NEFT Average r Source: Trend and Progress of Banking, RBI Reports.

23 Table 5.6 describes the innovative payment systems available with the banks which are ECS credit, ECS Debit and EFT/NEFT. On an average from the year to shows that the average amount on ECS credit is Rs , ECS Debit is Rs , EFT/NEFT is Rs The growth of the value of transactions is calculated with the help of trend analysis which is obtained by dividing the current figure by the base year figure of ECS Debit scheme has got immence growth to the tune of 3608 percent in the year , ECS credit has got a growth of 778 percent and the same for EFT/NEFT is 5215 percent. However, the average growth in the trend shows that the growth is 823 percent for ECS credit, 1772 percent for ECS Debit and 1226 percent for EFT/NEFT. The correlation analysis depicts a high and positive degree of relationship for ECS Debit of 0.98, EFT/NEFT of 0.85 and is very low in the case of ECS credit i.e Hence, it is inferred that the value of transaction is more in case of National Electronic Funds Transfer. Table 5.7 Volume and Value of Electronic Transactions by SCBs (Volume in million, Value in ` billion) Type of Volume Value change transaction change ECS Credit ,838 1, ECS Debit , Credit cards , Debit cards NEFT ,904 29, RTGS ,39,308 6,76, Source: Trend and Progress of Banking, RBI Reports.

24 With regards to the volume of ECS transactions, individually both Credit Cards and Debit Cards have recorded a high rate during the years and next to NEFT and is low for RTGS whereas, the change is meagre in the case of ECS Credit and ECS Debit. But the growth in volume shows the fact that the transactions of NEFT is high which is followed by Debit Cards and Credit Cards. Comparitively the growth rate is low for ECS Debit and ECS Credit. However, it is concluded from the observation that the ECS transctions as a whole is increasing over the years. Table 5.8 Bankwise distribution of Credit and Debit Cards by SCBs (in million) Outstanding No. of Credit Outstanding No. of Debit Cards Cards Bank Group of of growth growth Public Sector Banks Nationalised Banks SBI group Private Sector Banks Old Private Sector Banks New Private Sector Banks Foreign Banks Total Trend Source: Trend and Progress of Banking, RBI Reports. The number of credit cards issued by Private Sector Banks and New Private Sector Banks are comparitevely more than other banks, but the overall growth

25 rate is more for SBI group (18.18), New Private Sector Banks (15.63) and Private Sector Banks (14.43). Though the Public Sector Banks have issued more number of credit cards, the growth percent in the year 2013 over the year 2012 is more for SBI group (21.79), Public Sector Banks (21.44), Nationalised Banks (21.39) whereas the growth percent is negative in case of Foreign Banks (-13.16) as the expansion of credit cards have lowered from 3.8 million to 3.3 million. The growth rate in the year 2013 over 2012 is estimated as 10 percent for the credit cards while the same is 19 percent for the debit cards. Table 5.9 Trend in Payment Systems (billion) Year Currency in Non Cash Non Cash Retail Trend circulation as a Trend Retail Payments to percentage to Payments GDP ratio GDP Average Source: Various RBI publications and Database on Indian Economy. Non Cash Retail Payments include cheques, ECS, NEFT, cards and RTGS customer transactions. It is noted from the above table that on an average billion Non Cash Retail Payments have been in existence in India till The growth rate for the year is 166 percent with an average growth rate of 91

26 percent. The Non Cash Retail Payments to GDP ratio is fluctuating whereas, steady increase is recorded in the case of currency in circulation as a percentage to GDP. Table 5.10 Bank wise Number of Debit Cards issued (in millions) Year Nationalized Banks State Bank Group Old Private Sector Banks New Private Sector Banks Foreign Banks Average r Source: Trend and Progress of Banking, Reserve Bank of India, various issues. Of the total debit cards outstanding as at the end of March 2013, percent were issued by Nationalized Banks, percent were issued by State Bank Group, 4.73 percent were issued by Old Private Sector Banks, percent were issued by New Private Sector Banks and 1.01 percent was issued by Foreign Banks. On an average from the year to , percent were issued by Nationalized Banks, percent were issued by State Bank Group, 5.17 percent were issued by Old Private Sector Banks, percent were issued by New Private Sector Banks and 2.65 percent were issued by Foreign Banks. The correlation is

27 positive and perfect in the case of all types of banks and the total cards issued except for the cards issued by the foreign banks where the correlation shows a negative degree of On an overall assessment, it could be ascertained that all banks are doing their might in issuing the debit cards to the general public to make them technologically vibrant in banking transactions. Table 5.11 Bank wise Number of Credit Cards issued (in millions) Year Nationalized Banks State Bank Group Old Private Sector Banks New Private Sector Banks Foreign Banks Average r Source: Trend and Progress of Banking, Reserve Bank of India, various issues. Of the total credit cards outstanding as at the end of March 2013, 4.58 percent were issued by Nationalized Banks, percent were issued by State Bank Group, 0.20 percent were issued by Old Private Sector Banks, percent were issued by New Private Sector Banks and percent were issued by Foreign Banks. On an average from the year to , 3.77 percent were issued by

28 Nationalized Banks, percent were issued by State Bank Group, 0.21 percent were issued by Old Private Sector Banks, percent were issued by New Private Sector Banks and percent were issued by Foreign Banks. The correlation is positive in the case of Nationalized Banks (0.84) and meagre in the case of Old Private Sector Banks (0.07) whereas the same is negative in the cases of State Bank Group (-0.84), New Private Sector Banks (-0.45), Foreign Banks (-0.84) and in total number of cards issued (-0.74). On an overall assessment, it could be ascertained that the performance of all banks with regards to the issue of credit cards is not good except Nationalized Banks. Table 5.12 Trend on Debit Cards and Credit Cards (in millions) Year Number of Debit Cards Trend Number of Credit Cards Trend issued issued Average r Source: Trend and Progress of Banking, Reserve Bank of India, various issues.

29 The trend on the issue of number of debit cards is on an upward swing as it has increased from million in the year to million in the year The trend for the same is calculated as an increase of 334 percent in the year with an average growth rate of 152 percent over the years. The trend on the issue of number of credit cards is on a downward swing as it has decreased from million in the year to million in the year The trend for the same is calculated as a decrease of 15 percent in the year with an average declining rate of 8 percent over the years. The correlation between the issue of debit and credit card is negative to the tune of reflecting the inverse relationship between the two, over the years under study. The exponential growth rate shows an increase of 24.5 percent for the issue of debit cards with the correlation determination of 0.99 and the exponential growth rate shows an increase of 6.1 percent for the issue of credit cards with the correlation determination of The trend line is positive for credit cards and is negative for credit cards. H 0 : The modes of technological transactions do not differ significantly. Table 5.13 t test for the Technological Deepening of Indian Banking Sector 95 Confidence Interval Standard Sig. (2- Items Mean t of the Difference Deviation tailed) Lower Upper ATM ECS Debit ECS Credit EFT/NEFT Debit Cards Credit Cards Source: Computed.

30 On an average EFT/NEFT is having more number of issues whereas, the credit cards have the least. As per the t test all the items significantly differ as all the items have the calculated values more than the table value of 1.97 for 6 degrees of freedom at 5 level of significance. As per the calculated values of t, Credit Cards top (14.59) which is followed by ECS Credit (6.91), ATM (5.26), Debit Cards (3.94), ECS Debit (2.49) and EFT/NEFT (2.33). Table 5.14 Regression Analysis for the Technological Deepening of Indian Banking Sector Model Unstandardized Coefficients B Std. Error Standardized Coefficients (Constant) ATM ECS Debit E ECS Credit 8.508E EFT/NEFT E Debit Cards 1.680E Credit Cards 1.193E Source: Computed. Dependent Variable: year *Y= Year ( ) + ATM (1.711) - ECS Debit -.065) + ECS Credit (.010) - EFT/NEFT -.603) + Debit Cards (.058) + Credit Cards (.213). The model reveals that ECS Debit and EFT/NEFT are negative whereas, ATM, ECS Credit, Debit Cards and Credit Cards show positive results.

31 5.6 Conclusion Information technology plays a vital role in the development of any industry through reducing geographical barriers. Indian Banking sector has been showing greater emphasis on the techno and innovation since the reforms. The Indian banking sector has undergone noteworthy transformation from local braking to anywhereanytime banking with the implementation of technology. Over the past couple of years, a huge growth has been registered in the number of transaction done through electronic devices. Indian banks have increased number of technological products like Net Banking, Mobile Banking Online Shopping, Ticket Booking, Bill Payment and Automated Teller Machines (ATMs) and so on. Banks are increasingly developing models to address needs for wide spectrum of customers ranging from Gen Y to under banked to pensioners and technology is a key enabler for all this. Innovative models using mobile devices and efficient payment systems will make banking services more widely available 24 x 7. It is becoming more and more critical to develop new intelligence that enables financial institutions make informed judgments and become much more customer centric. Smarter banks will increasingly invest in techniques to gain new customer insights, effectively segment their customers, develop deeper relationships and be the bank of choice. Banks will be increasingly using technology that will enable them to determine pricing, new products and services, the right customer approaches and marketing methods, which channels customers are most likely to use and how likely customers are to change providers or have more than one provider. The outcome of this chapter shows that the technology of banking transactions finds various means and ways to fulfill the needs of the customers at large. Though there are various measures adopted in banking transactions, the transactions through ATMs have been playing a vital role in making the transactions

32 successful. The role of banks in the extension of customer services through ATMs is done by all types of banks irrespective of their operations. The study shows that the Nationalized Banks possess percent of the ATMs in the country, State Bank Group percent, Old Private Sector Banks 6.27 percent, New Private Sector Banks percent and Foreign Banks 2.64 percent. Hence, it is inferred that the Nationalized Banks play a very important role in the implementation of ATMs in the country. The overall percentage of offsite ATM is among the total ATMs installed. The average growth rate is 264 percent, 178 percent and 208 percent respectively for Onsite ATMs, Offsite ATMs, and for total number of ATMs. The coefficient of correlation calculated in this regard is 0.99, 0.95 and 0.97 respectively for onsite, off site and total number of ATMs. The penetration of ATM centers is more in rural areas (33.9), Semi Urban Centers (22.2), Urban Centers (16.5) and Metropolitan Centers (15.8) with the overall growth of 19.2 percent. The usage of Electronic mode of payments is comparatively low in India to the tune of just 2.0 when compared to world level which is 14.5 percent and much lower than the High Income group which is 55.2 percent and higher than the Low Income group of 1.9 percent. The average growth in the trend shows that the growth is 823 percent for ECS credit, 1772 percent for ECS Debit and 1226 percent for EFT/NEFT. The number of credit cards issued by Private Sector Banks and New Private Sector Banks are comparitevely more than other banks, but the overall growth rate is more for SBI group (18.18), New Private Sector Banks (15.63) and Private Sector Banks (14.43). Though the Public Sector Banks have issued more number of credit cards, the growth percent in the year 2013 over the year 2012 is more for SBI group (21.79), Public Sector Banks (21.44), Nationalised Banks (21.39) whereas the growth percent is negative in the case of Foreign Banks (-13.16) as the expansion of