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2 INTRODUCTION TO ELECTRONIC BANKING i

3 Publishing-in-support-of, EDUCREATION PUBLISHING RZ 94, Sector - 6, Dwarka, New Delhi Shubham Vihar, Mangla, Bilaspur, Chhattisgarh Website: Copyright, Author All rights reserved. No part of this book may be reproduced, stored in a retrieval system, or transmitted, in any form by any means, electronic, mechanical, magnetic, optical, chemical, manual, photocopying, recording or otherwise, without the prior written consent of its writer. ISBN: Price: The opinions/ contents expressed in this book are solely of the author and do not represent the opinions/ standings/ thoughts of Educreation. Printed in India ii

4 INTRODUCTION TO ELECTRONIC BANKING By Asifulla A EDUCREATION PUBLISHING (Since 2011) iii

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6 About The Author Mr. Asifulla A is a Teaching Assistant at Institute of Management Studies, Davangere University, Davangere. He passed MBA in Marketing from Davangere University and Secured Fifth rank. He has more than four years of teaching experience in the domain of higher education (specifically in MBA) and qualified UGC-NET exam. Presently he is pursuing his Ph.D in Davangere University under the guidance of Dr. B Bakkappa. He has written more than thirty articles and presented in various national and international conferences. His articles have published in various national and international journals, Proceedings and edited volumes. He has received one best paper award in National conference. He has participated as a resource person at various institutes/colleges. ***** v

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8 Preface A sound and effective banking system is the backbone of an economy. Technology is enabling banks to provide the convenience of anytime-anywhere-banking. Banks are now reengineering the way in which their services reached to their customers by bringing in flexibility in their distribution channels. The aim of this book is to provide a strong foundation on concepts of banking system and advent use of IT and its role in Indian banking systems. This book is useful for Commerce and Management students of all Indian universities. This book designed and prepared with utmost care to make it extremely useful for all individuals interested in gaining knowledge about electronic banking system. Most of the work done in this book based on the review of literature from various books, journals and E-source. For further references or study, we recommend students and teachers to refer the links given in reference list at the end. I am thankful to my professor and guide Dr. B Bakkappa, senior professor of Management in the state of Karnataka for his guidance and continuous support in preparing this book. I extend a special thanks to Dr. V Murugaiah, Professor and Chairman of (CDC) Collegiate Development council, Davangere University and Dr. J K Raju, Associate Professor, Davangere University, for their motivation to me in preparing this book. ***** I welcome your suggestions. Mr. Asifulla A vii

9 Acknowledgement My debt to those who have helped me in one way or the other is heavy indeed. While I take this opportunity to thank my beloved guide Dr B Bakkappa, Senior Professor of Management in the state of Karnataka for his support and motivation. No words can adequately express my debt of gratitude to my parents, for generating in me a perennial interest in higher studies. I am thankful to my Father-in-law, Mother-in-law and all my family members for their support and motivation in making my efforts to bring this book. I will be failing in my duty if I do not mention here the tremendous cooperation I received from my wife, Mrs. Noor Ayesha Attar in the completion of this book and I wish to thank for her continues support, encouragement, her understanding and love helped me to bring this effort to fruition. I would like to thanks to the members of Educreation Publishers for their active response, guidelines and for the great support in the whole process of publication. ***** Mr. Asifulla Attar viii

10 Introduction to Electronic Banking Brief Table of Content S. No Content Page No 1 About the Author v 2 Preface vii 3 Acknowledgement viii 4 Introduction to Banking 1 5 Electronic Banking 32 6 E- Banking Security 67 7 Banking Regulatory Framework 90 8 Banker and Customer Relationship 99 9 Bibliography 1. References 115 ***** ix

11 Table of Contents S.NO. Content Page No. Chapter 01 Introduction To Banking: 1 Introduction 2 Evolution of Indian Banking. 3 Brief history of Indian Banking industry. 5 Meaning of a Bank 8 Definitions of Bank. 8 Types of Banks. 9 Functions of a Bank. 17 RBI and its Functions. 22 Principal provisions of banking regulation Act. Chapter Summary 31 Conclusion 31 Chapter 02 Electronic Banking 32 Introduction. 33 history of Internet Banking 34 Traditional banking and E-Banking Impact of E-Banking on Traditional Banking. 38 Advantages and Disadvantages of E- Banking. 39 Financial Benefits of E- Banking. 41 Product and services of E-Banking. 41 Risk Associated with E-Banking. 43 Pillars of E-Banking. 44 Characteristics/ Nature of E-Banking. 45 Delivery channels of E-Banking. 4+ x

12 Types of Electronic Currency. 59 IT In Banks. 61 Benefits of IT to the Indian Banks. 64 Chapter Summary 64 Conclusion 65 Learning Questions 66 Chapter 03 E- Banking Security 67 Risk in E-Banking. 68 Security issues in E-Banking services. 70 Chapter 04 Common security problems in E- Banking. 72 Legal Issues in E-Banking. 74 Recommendations of the RBI for security and Privacy in E- Banking. 77 Cyber Crimes- Introduction. 80 Effects of cyber-crimes. 81 Reasons for cyber-crimes. 81 Classification of Cyber Crimes. 82 Information System Security (ISS). 86 Chapter Summary 88 Conclusion 88 Learning Questions 89 Banking Regulatory Framework Banking Regulatory Framework at Glance. Laws Formed 91 Banking regulation Act RBI Act Chapter Summary 97 Conclusion 97 Learning Questions 98 Chapter 05 Banker and Customer Relation 99 Introduction 100 Meaning 100 Definitions. 101 Introduction: Banker and customer Relationship. xi

13 Classifications of Banker and Customer Relationships 103 Termination of Banker and Customer Relationship 111 Chapter Summary 113 Conclusion 114 Learning Questions 114 ***** xii

14 INTRODUCTION TO BANKING Chapter 1 Introduction To Banking Introduction Evolution of Indian Banking. Brief history of Indian Banking industry. Meaning of a Bank Definitions of Bank. Types of Banks. Functions of a Bank. RBI and its Functions. Principal provisions of banking regulation Act. Chapter Summary Conclusion Learning Questions. 1

15 Asifulla A INTR ODUCTION BANKING in India is as old as the mountains. A strong banking system is an indicator for the economic development of any nation. Indian banking is the lifeline of a nation and its people. A sound and effective banking system is the backbone of an economy. Banking has helped in developing vital sectors of the economy to accompany in a new dawn of progress on the Indian horizon. The sector has translated the hopes and aspirations of millions of people into reality. Today, Indian banks can confidently compete with modern banks of the world. As far back as the second or third century A.D., Manu, the great Hindu jurist, devoted a section of his work to deposits and advances and laid down rules relating to rates of interest to be paid or charged. During the Mogul Period, the indigenous bankers played a very important role in lending money and financing of foreign trade and commerce. They were also engaged in the profitable business of money changing. Every town, big or small, had a sheth, also known as shah, shroff or chettiar who performed a number of banking functions. The first modern bank found in Italy in Genoa in 1406; its name was Banco di San Giorgio (Bank of St. George). Banks in its crude form is an old age phenomenon. It was in existence even in ancient times Ravilpout, a French writer, for instance, mentions about bank and bank notes in Babylon in 600 B.C. To strengthen the banking sector, financial reforms initiated as a part of the economic reform started in India since 1991 onwards. Reforms introduced in two phases, based on the report of Narsimahan committee in the year of 1991 and In India, the situation of the banks is quite different from the banks overseas particularly in developed markets. Indian banks are not facing huge write-downs or losses and are still quite well capitalized. In India, however, this could be an opportune moment for banks to focus on the internal processes and consolidate their IT platforms across functionalities to use technology as an effective strategic tool. The use of technology in India has 2

16 INTRODUCTION TO BANKING undergone rapid transformation. The last two decades have witnessed a sea change in the nature of services offered by not only banks but also the financial sector and even the Government - all of which have had a positive impact on the customers of these organizations and the public at large. All banks in India have realized in the post-liberalization era that in order to remain competitive and provide the best services to their customers, they need to have the latest technology in place. Irrespective of their ownership status (public sector or private sector), almost all of them have given maximum importance to technological development and deployment. In banking, in the past, the technology strategy considered as subordinate to business strategy. However, now with so much advancement in technology it has become as important as business strategy. Technology has provided an altogether new way of interacting and providing service to bank customers rather than merely replicating activities of the bank employees. EVOLUTION OF INDIAN BANKING INDUSTRY Banking in India originated in the first decade of 18th century with the General Bank of India coming into existence in This followed by Bank of Hindustan. Both these banks are now defunct. After this, the Indian government established three presidency banks in India. The first of the three was the Bank of Bengal in 1809, the other two banks, viz., the Bank of Bombay and the Bank of Madras, were establish in 1840 and 1843, respectively. The three presidency banks subsequently amalgamated into the Imperial Bank of India (IBI) under the Imperial Bank of India Act, 1920, which is now the State Bank of India (SBI). A couple of decades later, foreign banks like Credit Lyonnais started their Calcutta operations in the 1850s. That time, Calcutta was the most active trading port, mainly due to the trade of the British Empire and due to which banking activity took roots there and prospered. The first fully Indian owned bank is the Allahabad Bank, which was establish in

17 4 Asifulla A By the 1900s, the market expanded with the establishment of banks such as Punjab National Bank (PNB), in 1895 in Lahore and Bank of India (BOI), in 1906 in Mumbai, both of which founded under private ownership. The Reserve Bank of India (RBI) formally took on the responsibility of regulating the Indian banking sector from After India s independence in 1947 RBI nationalized and given broader powers. The banking industry is entering a new phase, where there is increasing competition from non-banks, not only in the domestic market but also in the international markets. The operational structure of banking in India expected to undergo a deep change during the next decade. With the upcoming new private sector banks, the private banking sector has become enriched and diversified with focus on wholesale as well as retail banking. The existing banks have wide branch network and geographic spread, whereas the new private sector banks have massive capital, lean personnel component, the perfection in developing good financial products. In the late 1960s the Government of India nationalized all the major commercial banks by transferring the ownership from private ownership to government ownership. A second round of nationalization of banks happened in the late seventies. As a result, during the seventies and eighties the nationalized banks, which owned by the government, together accounted for 95 percent of the market share for all banks in the country, the remaining five percent being contributed mainly by banks in the private sector and some multinational banks whose presence was limited to the large cities. This scenario continued until the early 1990s, when the Government of India, as part of its overall financial-sector reforms, decided to grant banking licenses to start nine new banks in the private sector. 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. In view of this, technology has changed the contours of three major functions performed by banks, i.e., access to liquidity, transformation of assets and monitoring of risks.

18 INTRODUCTION TO BANKING Further, information technology and the communication networking systems have a crucial bearing on the efficiency of money, capital and foreign exchange markets. BRIEF HISTORY OF INDIAN BANKING The Bank of Hindustan was the first bank in India, established in Since, 1770, the journey of Indian Banking System can be bifurcated into three distinct Phase. Three distinct phases identified in the history of Indian banking. They are: 1. Pre-Nationalization period prior to Nationalization of banks and the period prior to banking sector reforms up to Banking sector reforms after Pre-Nationalization period prior to 1969 The banking system of India started with the establishment of the first joint stock bank, The General Bank of India, in the year After this, banks such as Hindustan Bank and Bengal Bank came into existence. East India Company established three banks- The Bank of Bengal in 1809, The Bank of Bombay in 1840, and the Bank of Madras in These three Presidency Banks reconstituted under Presidency Banks Act, After the First World War the Presidency Banks amalgamated as The Imperial Bank of India in In 1935, the Reserve bank of India constituted as the country s central bank under the RBI Act of When the country attained independence in 1947 Indian Banking was exclusively in the private sector, relatively small and extremely weak. It mainly characterized by the following: The banks largely confined to urban areas, extending loans mainly to trading sector dealing with agricultural produce. Virtually no banking services were available at rural and semi urban areas. 5

19 Asifulla A These institutions did not play their due role in the planned development of the country. Deposit mobilization was slow as public lacked confidence in banks because of frequent bank failures. The Government of India, concerned by frequent failures and the resultant miseries faced by small depositors and others enacted the Banking Companies Act 1949 and the title was changed as Banking Regulation Act, 1949 as per amendment in Nationalization of banks In the year 1955 Imperial Bank of India was nationalized to form State bank of India with the stated objective of extension of banking facilities on a large scale, more particularly in the rural and semi urban areas and for diverse other public purposes. The seven banks now forming subsidiaries of SBI nationalized in the year This brought one-third of the banking segment under the direct control of the Government of India. The first phase of financial reforms resulted in the nationalization of 14 major banks in 1969 and resulted in a shift from class banking to mass banking. This, in turn, resulted in a significant growth in the geographical coverage of banks. Every bank had to earmark a minimum percentage of its loan portfolio to sectors identified as priority sectors. The manufacturing sector also grew during the 1970s in protected environs and the banking sector was a critical source. The next wave of reforms saw the nationalization of 6 more commercial banks in 1980 taking the number of nationalized banks to 27. Since then the number of scheduled commercial banks increased four-fold and the number of bank branches increased eight-fold. Problems faced by the banks prior to Before , the financial sector characterized by segmented and under-developed financial markets as well as by the paucity of instruments. The structure of interest rates was complex and their levels regulated by the administration. The sector lacked 6

20 INTRODUCTION TO BANKING transparency, accountability and prudential norms, while information on debtors and the ability to recover doubtful assets was very weak, leading to an increasing number of non-performing assets ( 2008). Before 1991 banking sector in India was facing several problems such as: i. Eroding productivity and efficiency of public sector banks which led to continuous losses, ii. iii. iv. Increasing NPAs and deteriorated portfolio quality, Poor customer service and obsolete work technology, Inability to face competition effectively. In order to remove the above-mentioned deficiencies, Narasimham committee appointed in 1991 and it submitted its report within three months in November 1991 with measures to improve productivity and efficiency of the banking sector (Uppal and Kaur, 2007). The aim was to improve efficiency, productivity and profitability of the Indian financial sector. The recommendations among other things laid emphasis on revitalizing overall 3. Banking Sector Reforms ( ) In 1991, the liberalization wave changed the banking sector completely. Unprofitable branch expansion, non-performing priority sector lending (PSL) and loan melas had left large gaps in the banks balance sheets. To handle the crisis of late in 1980s, a programme of liberalization, privatization and globalization (LPG) initiated in July 1991, with the main aim of improvement in productivity, efficiency and competitiveness. In this context, the government decided to review the banking policy and the first Narsimham Committee was planned in 1991 which worked out like a road map for the banking sector reforms. The successful execution of its various recommendations has given a new dynamism to the banking sector since

21 MEANING OF BANK Asifulla A The name bank derives from the Italian word banco desk/bench, used during Renaissance by Florentines bankers, who used to make their transactions above a desk covered by a green tablecloth. However, there are traces of banking activity even in ancient times. In fact, the word traces its origin back to the Ancient Roman Empire, where moneylenders would set up their stalls in the middle of enclosed courtyards called macella on a long bench called a bancu, from which the words banco and bank are derived. As a money-changer, the merchant at the bancu did not so much invest money as merely convert the foreign currency into the only legal tender in Rome that of the Imperial Mint. A banker or bank is a financial institution whose primary activity is to act as a payment agent for customer and to borrow and lend money. A bank is like a reservoir into which flow the savings, the idle surplus money of households and from which loans are given an interest to businessman and others who need them for investment or productive uses. DEFINITIONS A Banking Company (or a bank) is defined as Any company which transacts the business of banking in India. [Section 5(1)] 2) Banking is defined as accepting, for the purpose of lending or investment, deposits of money from the public, repayable on demand or otherwise and withdraw able by cheque, draft, order or otherwise. [Section 5(2)] According to Japanese Banking Act, 1927: Bank means an institution which can perform an activity to give and receive the credits. According to Prof. Coucher : A bank is a financial institution which can accept the surplus savings from the individuals in the form of deposits and when the depositor demands the money, the institution can immediately pay the amount invested. 8

22 INTRODUCTION TO BANKING TYPES OF BANKS: Financial requirement in a modern economy are of a diverse nature. Hence, different types of banks have instituted to cater to the varying needs of the community. Banks in the organized sector classified into the following major forms: 1. Commercial banks: Commercial Banks are very renowned almost in every country because of the services they provide to individuals, commerce and industry. Amongst the banking institution in the organized sector, the commercial banks are the oldest institutions having a wide network of branches commanding utmost public confidence and having the lion s share in the total banking operations. A Commercial Bank defined as a financial institution that accepts deposits of money from the public and utilizes those deposits for lending activities. In simple words, Commercial Banks are Joint Stock Companies dealing in money and credit. The most distinctive function of a commercial bank is that it accepts deposits called demand deposits from the public, which can be withdrawn. Only, acceptance of deposits, however does not give it the status of a bank. Another crucial activity that Banks undertake is to make use of these deposits for proper lending. Commercial Banks occupy a dominant place in the money market, as such banks usually provides short-term loans and advances. The Indian Banking Regulation Act, 1949, governs the Commercial Banks in India. In fact, they form the biggest component of the banking structure of any country. Functions of Commercial Bank: Functions of commercial bank classified in two, they are; 1. Primary Function. 2. Secondary Function. 1. Primary Function: b. Raising of Funds: Fixed Deposit Account 9

23 Asifulla A Current Deposit Account Savings Deposit Recurring Deposit Other Accounts b) Lending of Money: Cash Credit Overdraft Loans c) Money Transfer. 2. Secondary Function: Discounting Of Bills Agency Services Issuing of Credit Instruments, Cheque and Circular Notes Execution of Standing Orders Purchase & Sale of Securities Payment & Collection of Dividend & Interest Remittance of Funds Bank Drafts Mail Transfer Telegraphic Transfer 2. Co-operative Banks: Co-operative Banks are essentially Co-operative Credit Societies organized by members to meet their short term and medium term financial requirements. Co-operative Banks are a group of financial institutions organized under the provisions of the Cooperative Societies Act. The main object of Co-operative Banks is to provide cheap credit to its member. They are based on the principles of self-reliance and mutual co-operative. Co-operative 10

24 INTRODUCTION TO BANKING Get Complete Book At Educreation Store 11

International Journal of Exclusive Management Research June 2011-Vol 1 Issue 2 ISSN

International Journal of Exclusive Management Research June 2011-Vol 1 Issue 2 ISSN GROWTH RATE AND GROWTH PATTERN OF SELECTED PUBLIC SECTOR S IN *M.KAVITHA * Research Scholar, Department of Commerce, Bharathiyar University, Coimbatore, India. ABSTRACT A good bank is not only the financial