Technological Developments in Banking Sector

Transcription

1 1 Technological Developments in Banking Sector 1.1 INTRODUCTION In a developing country like India, banking sector has played a major role in the overall development of the country. During the period of more than two centuries from the establishment of first joint stock bank in 1786 till the emergence of e-banking technologies, the banking sector in India underwent significant changes. Before looking at the emergence and use of e-banking technologies, it is essential to have a snapshot view of the major transformation that took place in the banking sector right from the inception of the first joint stock bank. Therefore, the purpose of this chapter is to have a glimpse of the changes that took place in the Indian banking sector and the technological developments in Indian banking sector. Significant changes in the Indian banking sector can be viewed under three distant phases as given below. 1. Pre-Nationalisation Period (Prior to 1969) 2. The Era of Nationalization and After (1969 to 1991) 3. Post Reform Period (After 1991) Pre-Nationalization Period (Prior to 1969). Organised banking in India is more than two centuries old. The banking system in India traces its root to the General Bank of India, which was established in 1786 as the first joint stock bank. In 1809, the Bank of Bengal, one of the three presidency banks established by East India Company, came into being. Two other presidency banks in Bombay and Madras were established in the years 1840 and 1843 respectively. In 1860, the concept of limited liability was introduced in banking. In view of limited liability, several joint stock banks such as Allahabad Bank Ltd, The Aliance Bank of Shimla Ltd, The Oundh Bank Ltd, The Punjab National Bank Ltd were established during 1860 to The Swadeshi Movement, which started in the early 1900s gave stimulus to the growth of indigenous joint stock banks. Thus during the period from 1900 to 1910, banks like The Peoples Bank of India Ltd, The Bank of India Ltd, The Bank of Baroda Ltd and The Central Bank of India Ltd were established. In 1921, the three presidency banks were merged to form the Imperial Bank of India. Until 1935, all the banks were in private sector, set up by individuals and/or industrial houses. There were no regulatory mechanism for the banking system and these private sector banks were at liberty to use the funds in the way they wanted which resulted in failure of many banks between 1900 and The Central Banking Enquiry Committee (CBEC) was constituted in 1929 to study the reasons for the failure of banks. Insufficient capital, poor liquidity of assets, combining non-banking activities with banking activities, irrational credit policy and incompetent and inexperienced directors were found 1

2 2 Internet Banking A Theoretical and Practical Exploration to be the reasons for the failure of banks. On the basis of the recommendations of CBEC, the RBI Act was passed in 1934 and in 1935 Reserve Bank of India was established. In 1949, the Banking Regulation Act was passed and it gave wide powers to RBI to regulate, supervise and develop the banking system in the country. In 1955, as per the recommendation of the All India Rural Credit Survey Committee, the State Bank of India Act, 1955 was passed and the Imperial Bank of India was renamed State Bank of India. Later in 1959, the State Bank of India (Subsidiary Bank) Act was passed enabling SBI to take over 8 princely state associated banks as the subsidiaries (State Bank of Bikaner and State Bank of Jaipur were two separate banks earlier and merged into one bank). Today, the legal framework of bank is based on Banking Regulation Act, 1949 and RBI Act, The Era of Nationalization and After (1969 to 1991). The Indian banking scene underwent significant changes during the period 1969 to The government of India, on 19th July 1969 nationalised 14 major Indian commercial banks to enable them to play more efficiently the role of a catalytic agent for the economic growth by extending banking facilities to the most deserving classes. One of the objectives of establishment of SBI and nationalization of 14 commercial banks was to satisfy the banking facilities and credit needs of the rural people. Though, they have made some efforts to improve their share in contributing to rural finance, it was far from satisfactory. It was in this context that Regional Rural Banks (RRBs) were started in Another wave of nationalization came in 1980, when 6 more banks were brought under state control. The Indian banking sector has undergone a metamorphosis since the nationalization of banks. It made a commendable progress in terms of branch expansion, mobilization of savings, deployment of credit, lending towards priority sectors and so on Post Reform Period (After 1991). Before 1991 Public Sector Banks in India were facing several problems such as accumulation of losses, mounting Non Performing Assets (NPAs), excessive bureaucratization, red-tapism, poor customer services and obsolete work technology, and disruptive tactics of trade unions of bank employees etc. It was in this context that a Committee on Financial System (Narasimhan Committee) was appointed in 1991 and it submitted its report in November The recommendations of the committee include, among others, free entry of private sector/foreign banks. The committee also felt that computerization and mechanization is a means to improve customer service efficiency. Rigorous use of technology started after the Rangarajan Committee recommendations pertaining to the branch automation. Since then the banking sector underwent dramatic changes. Rigorous use of technology increases efficiency, reduces costs, saves time, improves relationship with customers and processes transactions quickly. 1.2 EVOLUTION OF E-BANKING The transition from the brick and mortar structure to click and order model started with the emergence of Information Technology and its use in the financial sector. The use of IT in the banking sector traces its roots to the report of the Rangarajan Committee appointed in July 1983 on Mechanization in Banking Industry. The committee recommended computerization and installation of Advanced Ledger Posting Machines (ALPM) at the branch, regional and head offices of banks. The RBI advised all banks to go in for huge computerization at the branch level. This reduced error in calculations and the transactions of the customers became error free and they started getting printed account statements.

3 Technological Developments in Banking Sector 3 Indian banks made one step forward with the implementation of Total Branch Automation (TBA) in the late 1980s. Total Branch Automation means total automation of a particular branch with its own database. The main disadvantage of TBA was that no data centre was established and therefore customer s data was available only at the branch where the customers have account. Moreover, each branch needed to take the back up of their data and send the same data by using any storage device to the head office of the bank. Information Technology revolution in Indian banking industry gained momentum with the entry of new private sector banks, which came into existence as per the recommendations of the Narasimhan committee in These banks opted to have a single centralized database instead of having multiple databases for all their branches. Internet has provided a paradigm shift in the working of banks. With the advent of Internet it becomes easy for banks to share the databases and maintain a centralized database at a low cost. Internet facilitated banks to create their own web pages and customers can access these web pages through the web browsers by sitting at home. This kicked off online banking way back in The beginning of empowerment of banking customers for their own transactions started with the evolution of ATMs as a delivery channel. With the introduction of new technology in telecommunications like VSAT (Very Small Aperture Terminals) and VPNs (Virtual Private Network) through internet, most of the banks started to install Core Banking Solutions (CBS) for running their business. Under CBS a customer is no more considered the customer of a branch but he is the customer of a bank. CBS lets banks offer AAA (Anywhere, Anytime and Anyhow) services to their clientele. State Bank group brought all their branches under CBS by the end of 2009 and 85.9 per cent of the branches of all other nationalized banks are brought under CBS by the end of 2010 (Table 1.1). The emergence of self service banking technologies such as ATM, Online Banking and Mobile Banking ushered the concept of anytime and anywhere banking. The early adopters of technology in banking were the foreign banks and private sector banks, especially new generation banks. It has been an uphill task for Public Sector Banks to join the technology band wagon. Yet, they have managed to harness technology and most banks have now moved towards 100 per cent computerization and core banking. Among the Public Sector Banks, it is the State Bank Group that made a quantum leap in terms of the number of branches computerized. SBI group achieved almost 100 per cent computerization in 2006 while other nationalized banks could achieve only 68.5 per cent (Table 1.1). SBI group brought all its branches under Core banking solution in 2009 while other nationalized banks are yet to achieve this, but are on the verge of 100 per cent computerization and core banking. Table 1.1: Computerization in Public Sector Banks (Figures in Percentages) State Bank Group: Years Fully computerized branches (1+2) Branches under Core banking solution Branches already fully computerized Other Nationalized Banks: Fully computerized branches (1+2) Branches under Core banking solution Branches already fully computerized Source: Report on Trend and Progress of Banking in India Various years.

4 4 Internet Banking A Theoretical and Practical Exploration The use of technology in banking has resulted in availability of multiple delivery channels like ATMs, telebanking, internet banking, mobile banking, anywhere and anytime banking etc. Technology adoption in banks has shifted banking more of a capital intensive, fixed cost industry from a labour intensive, variable cost industry. Thus, banking is becoming more of a capital-intensive, fixed-cost industry and less of a labour-intensive, variable cost industry. With the rapid penetration of mobile phones in India, banks are now focusing to deliver banking service, via mobile phones, what is often referred to as Mobile banking. It is not an exaggeration to mention that traditional brick-and-mortar bank building and face to face interaction between bank s staff and their customers will soon become relics of the past, replaced by electronic communication The Concept of E-Banking. With the interlinking effect of Information Technology, the world is shrinking in such a way that time and distance has now become non-entities. IT has transformed every spectrum of human life including the provision of banking services. In the banking sector, technology and competition have increased the choice of customers regarding banking products and providers. As a result various electronic delivery channels are increasingly used by banks for delivering their products and services at the convenience of customers at low cost. Delivery of banking services to customers at their office or home with the help of electronic technology is termed as e-banking. E-banking has facilitated bank customers by providing anytime and anywhere banking service. The concept of e-banking is discussed in the following sections. E-banking is an umbrella term for the process by which a customer may perform banking transactions electronically without visiting a brick-and-mortar institution. The following terms all refer to one form or another of electronic banking: personal computer (PC) banking, internet banking, virtual banking, online banking, and phone banking. PC banking and internet or online banking is the most frequently used designations. It should be noted, however, that the terms used to describe the various types of e-banking are often used interchangeably (Dirk de Villiers, 2003 as cited in Ombati et al., 2010). According to Karjaluoto et al. (2002) electronic banking is a construct that consists of several distribution channels. Hiltunen et al. (2004) defines electronic banking as the delivery of banks information and services by banks to customers via different delivery platforms that can be used with different terminal devices such as a personal computer and a mobile phone with browser or desktop software, telephone or digital television. Electronic banking is a generic term encompassing internet banking, telephone banking, mobile banking etc. In other words, it is a process of delivery of banking services and products through electronic channels such as telephone, internet, cell phone etc. (Uppal, 2007). E-banking may be identified with three channels viz., ATM, Internet banking and Tele banking (Kapoor and Dhingra, 2007). E-banking means offering, supplying and delivering banking products and services through various electronic delivery channels via electronic devices (Gupta and Khanna, 2007). Nitsure (2006) stated the meaning of e-banking in simple words as e-banking implies provision of banking products and services through electronic delivery channels. E-banking has been around for quite some time in the form of Automatic Teller Machines (ATMs) and telephone transactions. In more recent times, it has been transformed by the internet a new delivery channel that has facilitated banking transactions for both customers and banks. E-banking is a brew of services that embody Internet banking, Mobile banking, ATM kiosks, Fund Transfer System, Real Time Gross Settlement (payment and allotment system), Credit/Debit/Smart/

5 Technological Developments in Banking Sector 5 Kisan Cards, Cash government services, as well as Data warehousing, Operational interpretation for Management Information System as well as Customer Relationship Management ( E-banking, 2011, July, 8 ). Dangwal et al. (2010) stated the meaning of E-banking in a broader way as the use of technology for accessing banking services electronically be it for paying bills, transferring funds, viewing accounts or obtaining information and advices. It refers to the electronic services that are made available to customers through phone, personal computer, television and internet. A perusal of the concept of e-banking as described in the literature reveals that the term e-banking, is an upper construct that encompasses an array of banking services delivered through electronic media, be it through phone, PC, TV or internet. Thus the term E-banking includes Real Time Gross Settlement (RTGS), National Electronic Fund Transfer (NEFT), Electronic Clearing Service (ECS), Cheque truncation, Automated Teller Machine (ATM), Tele banking, Internet banking and Mobile banking, among others. Though the terms multimedia banking, Internet banking, e-banking and online banking are often used in the literature interchangeably, the concept of e-banking is wider in scope and application Real Time Gross Settlement (RTGS). The advent Electronic Fund Transfer (EFT) facility has nearly done away with the time lag in making monetary transactions. The EFT from one account to another is made by one bank to another through RBI in three ways RTGS, NEFT and ECS. RTGS is a mechanism of transferring funds from one bank to another on a real time and on gross basis. A real time settlement means that payment transactions are settled as soon as they are processed. The system effects final settlement continuously, rather than periodically, at specified times, provided that the sending bank has sufficient covering balance or credit. Gross settlement means that the settlement of funds occurs on a transaction by transaction basis without netting debits against credits. The entries are made in the books of RBI and an entry once made is final and irrecoverable. Under RTGS, the minimum amount of fund transfer is 2 lakhs and there is no limit to the maximum amount. RTGS transactions are inter bank as well as between customers through bank accounts. The existing RTGS system, even with all upgrades, is not in a position to handle increasing volumes due to various limitations with regard to scalability, flexibility and adaptability to technological advancements. Further, there have been developments globally regarding features and functionalities. Therefore, RBI decided to replace the application to Next Generation RTGS (NG-RTGS), a higher level by using the latest technology and redefined business requirements. (RBI Bulletin, 2011 July, p. 1055). The growth of RTGS transactions during the period from to is depicted in Table 1.2. Table 1.2: Year-wise RTGS (Both Interbank and Customer) Transactions Years Volumes (000s) Growth Rate (%) Values ( Crores) Growth Rate (%) NA 4,066, , ,540, , ,481, , ,318, , ,279,

6 6 Internet Banking A Theoretical and Practical Exploration , ,453, , ,487, , ,930, ,684, ,425, AAGR Source: Compiled from RBI Annual Reports Various years. RTGS volumes registered a remarkable 1763 times increase in volumes from to with an AAGR of per cent. However, RTGS transactions in value terms registered 18 times increase with AAGR of per cent during the period up to The fast growth in volumes indicates the increasing popularity of RTGS among the banking customers National Electronic Fund Transfer (NEFT). NEFT, introduced in October 2005, is a nation-wide electronic payment system that uses a secure mode of transferring funds from one bank branch to another bank branch. NEFT uses the Public Key Infrastructure (PKI) technology to ensure end-to-end security and rides on the INdian FInancial NETwork (INFINET) to connect the bank branches for electronic transfer of funds. For being part of the NEFT funds transfer network, a bank branch has to be NEFT-enabled. There is no limit either minimum or maximum on the amount of funds that could be transferred using NEFT. The fund transfer takes place in hourly batches - there are eleven settlements from 9 am to 7 pm on week days and five settlements from 9 am to 1 pm on Saturdays. The NEFT system can be used only for remitting Indian Rupees between the participating bank branches in the country. Individuals, firms or corporates maintaining accounts with a bank branch can transfer funds using NEFT. Those who do not have a bank account (walk-in customers) can also deposit cash at the NEFTenabled branch with instructions to transfer funds using NEFT. Such customers have to furnish full details including complete address, telephone number, etc. But it is necessary for the beneficiary to have an account with the NEFT enabled destination bank branch in the country. The operation of NEFT system is described below. Step-1: An individual/firm/corporate intending to originate transfer of funds through NEFT has to fill an application form providing details of the beneficiary (like, name of the beneficiary, name of the bank branch where the beneficiary has an account, IFSC of the beneficiary bank branch, account type and account number). IFSC or Indian Financial System Code is an 11 digit alpha-numeric code that uniquely identifies a bank-branch participating in the NEFT system. The remitter authorizes his/her bank branch to debit his/her account and remit the specified amount to the beneficiary. Customers enjoying net banking facility offered by their bankers can initiate the funds transfer request online. Some banks offer the NEFT facility even through the ATMs. Step-2: The originating bank branch prepares a message and sends the message to its pooling centre (also called the NEFT Service Centre). Step-3: The pooling centre forwards the message to the NEFT Clearing Centre (operated by National Clearing Cell, Reserve Bank of India, Mumbai) to be included for the next available batch. Step-4: The Clearing Centre sorts the funds transfer transactions destination bank-wise and prepares accounting entries to receive funds from (debit) the originating banks and give the funds to (credit) the

7 Technological Developments in Banking Sector 7 destination banks. Thereafter, bank-wise remittance messages are forwarded to the destination banks through their pooling centre (NEFT Service Centre). Step-5: The destination banks receive the inward remittance messages from the Clearing Centre and pass on the credit to the beneficiary accounts (RBI, 2012, Jan 31). The difference between NEFT and RTGS is that in NEFT fund transfer takes place on a Deferred Net Settlement (DNS) basis which settles transactions in batches. But the RTGS transactions are processed continuously throughout the RTGS business hours. Table 1.3 portrays the year-wise EFT/ NEFT transactions during the period from to Table 1.3: Year-wise EFT/NEFT Transactions in Volume and Value Year Volume (000s) Growth Rate (%) Value ( Crores) ,125 Growth Rate (%) , , , , , , , , , , , , , , , , , , , , AAGR Source: RBI Annual Reports Various years. EFT/NEFT transactions in volumes registered around 825 times increase with AAGR of per cent and in value terms the increase is 256 times with AAGR of per cent. Being a one to one fund transfer mechanism, the magnificent increase in volumes indicates that more and more customers choose EFT/NEFT to transfer funds from one place to another Electronic Clearing Service (ECS). ECS is a mode of Electronic Fund Transfer from one bank account to another bank account through the clearing houses of RBI. This is normally for bulk transfers from one account to many accounts or viceversa in the form of ECS-credit and ECS-debit. ECS (Credit) is used when an institution is required to make bulk or repetitive payments in the form of dividend to shareholders, interest to investors, salary/ pension to employees etc. The institution (called ECS user) can initiate the transactions after registering themselves with an approved clearing house. The ECS user has to prepare a list of beneficiaries to whom payments are to be made and hand over to one of the approved clearing house. The clearing house makes a single debit to the account of the ECS user through the account of the sponsor bank (ECS user s

8 8 Internet Banking A Theoretical and Practical Exploration bank) and credits the accounts of the beneficiary s banks for making onward credit to the accounts of the individual beneficiaries. There is no value limit on the amount of individual transactions under this service. ECS (debit) is used when an institution is required to recover an amount, by raising a debit, at a prescribed frequency from many customers in the form of telephone or electricity charges, house tax, water tax, loan installments etc. The ECS user has to collect an authorisation which is called ECS mandate for raising such debits. The ECS user has to submit the data in specified form through the sponsor bank to the clearing house. The clearing house would pass on the debit to the destination account holders (customers) through the clearing system and credit the sponsor bank s account for onward credit to the account of the ECS user. The growth of ECS transactions in volumes and value terms during the period from to is exhibited in Table 1.4. Table 1.4 : Year-wise ECS (Credit) and ECS (Debit) Transactions Years Volume (000s) ECS (Credit) Value GR (%) ( Crores) GR (%) Volume (000s) ECS (Debit) GR (%) Value ( Crores) GR (%) ,300 10,228 7,897 2, , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , AAGR Source: Compiled from RBI Annual reports Various years. Notes: ECS (credit) for include transactions for refunds of oversubscribed IPOs by various companies as mandated by the stock exchange. It is vivid from Table 1.4 that ECS (Credit) recorded an increase of around 7.5 times in volumes with AAGR of per cent and 24 times in value terms with AAGR of per cent during the period. Similarly ECS (Debit) recorded an increase of 24 times in volumes with AAGR of per cent and around 56 times in value terms with AAGR of 67 per cent during the period. Since ECS is for making bulk payments, it is quite natural that the growth in value terms is much higher than the growth in volumes.

9 Technological Developments in Banking Sector Credit Cards and Debit Cards. Credit card is a mechanism by which the card holder can make purchases without immediate cash payments. It enables the card holders to avail credit facilities from the issuing banks for a specified period of time without any security. A debit card can be used to withdraw cash from a bank like an ATM card and it can also be used at stores to pay for goods and services in place of a cheque. Debit card allows the holder to spend only what is in his/her account. Table 1.5 shows the year-wise credit card and debit card transactions during the period from to Year Table 1.5: Year-wise Credit Cards/Debit Cards Transactions in Volume and Value Credit Cards Debit Cards Volume GR (%) Value GR (%) Volume GR (%) Value GR (%) ,179 17,663 37,757 4, , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , AAGR Source: RBI Annual Reports Various Years. The volume of credit card transactions has increased 5 times during the period with an AAGR of per cent and it increased nearly 8.7 times in value terms with an AAGR of 25 per cent. On the other hand, the volume of debit card transactions has shown an increase of nearly 16 times with AAGR of per cent and it has shown times increase in value terms registering an AAGR of per cent Cheque Truncation. Cheque truncation is the process of stopping the flow of physical cheque issued by a drawer at some point en-route to the drawee branch. Instead, an electronic image of the cheque is transmitted to the drawee branch along with relevant information. Images of cheques are taken using scanners. It thus obviates the need to move the physical instruments across branches. It speeds up the process of collection of cheques resulting in better service to customers, reduces the scope for clearing-related frauds or loss of instruments in transit, lowers the cost of collection of cheques, and removes reconciliation-related and logistics-related problems.

10 10 Internet Banking A Theoretical and Practical Exploration Automated Teller Machine (ATM). A major technological development, which has revolutionized the delivery channel in the banking sector, has been the Automated Teller Machines (ATMs). ATMs particularly off site ATMs, act as substitutes for bank branches in offering a means of anytime cash withdrawal to customers. ATM is a device used by bank customers to process account transactions. ATMs allow customers to do many branch banking functionalities like cash withdrawal, mini statement of transactions, application for cheque books etc. To operate an ATM, the customer should posses a valid ATM card issued by a bank and need to know a secret PIN (Personal Identification Number) code. The advent of ATM has made the concept of round the clock banking a reality. The branch business timings have lost significance to customers after the introduction of ATM and the long crowd of customers waiting at bank branches for their turn to collect cash is disappearing with the widespread usage of ATMs. ATMs were initially introduced as cash dispensers but now banks offer a number of Value Added Services (VAS) through ATMs such as purchase of mobile recharge cards and new internet connection, payment of donations to temple and for charity, payment of utility bills, purchase and sale of mutual funds, booking airline and railway tickets, payment of tax, money transfer and internet banking through ATM etc. HSBC was the first bank to introduce ATM in India in Later new private sector banks have taken the lead in introducing ATMs in a big way and the public sector banks also pursued the installation of ATMs all over the country. ATMs saw a period of inaction before they were accepted by Indian masses. For instance, in 1998 India had just 500 ATMs but now as per the data provided by the Ministry of Finance, Public Sector banks in India alone opened 28,039 ATMs between April 2006 and March 2010 ( Bank ATMs, 2010, July 01). The number of ATMs of scheduled commercial Banks in India is given in Table 1.6. There are 74,505 ATMs in India at the end of March 2011, of which 49,487 are owned by public sector banks. Table 1.6: Number of ATMs of Scheduled Commercial Banks in India at the end of March 2013 Bank Group On-site ATMs Off-site ATMs Total ATMs Off-site ATM as Percentage of Total ATM Public Sector Banks 40,241 (72) 29,411 (50) 69,652 (61) Private Sector Banks 15,236 (27) 27,865 (48) 43,101 (38) Foreign Banks 283 (1) 978 (2) 1,261 (1) Total of all Banks 55,760 (100) 58,254 (100) 1,14,014 (100) Source: Report on Trend and Progress of Banking in India, A cursory look at the table shows that of the total, Public Sector Banks own 61 per cent, Private Sector Banks own 38 per cent and foreign banks own remaining 1 per cent of the ATMs. Public sector banks dominate in both on-site and off-site ATMs. The proportion of off-site ATMs in private sector banks is high compared to on-site ATMs. However, the percentage of off-site ATM to total ATM is low in public sector banks compared to the rest.