ISSN No-2230-7850

Vol.1,Issue.IX/Sept;11pp.1-4

Research Paper

Technological Developments in Indian Banking Sector

Dr. B.S. Sawant,
Director, K.B.P. Institute of Management Studies and Research, Satara, Research Guide

Abstract: Banking sector plays a significant role in development of Indian economy. So banks need to optionally leverage technology to increase penetration, improve their productivity and efficiency, deliver cost-effective products and services, provide faster, efficient and convenient customer service and thereby, contribute to the overall growth and development of the country. Technology enables increased penetration of the banking system, increases cost effectiveness and makes small value transactions viable. Besides making banking products and services affordable and accessible, its simultaneously ensures viability and profitability of providers. Technology allows transactions to take place faster and offers unparallel convenience through various delivery channels. Technology enhances choices, creates new markets, and improves productivity and efficiency. Effective use of technology has a multiplier effect on growth and development.
In the area of payment systems, there have been significant advancements of technology on the customer transactions. India is one of the country that has 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 paper-based clearing system. CTS has 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 reengineering 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. RTGS for real time gross settlement. Keyboards: Technology, Effective, MICR, EFT, RTGS, Technological Development in Banks: Developments in the field of information technology (IT) strongly supports the growth and inclusiveness of the banking sector by facilitating inclusive economic growth .IT improves the front end operations with back end and helps in bringing down the transaction costs for the customers. Important Events in India Arrival of card-based payments- Debit, Credit card late 1980s and 1990s Introduction of Electronic Clearing Services (ECS) in late 1990s Introduction of Electronic Fund Transfer (EFT) in early 2000s Introduction of RTGS in March 2004 Introduction of National Electronic Fund Transfer(NEFT) as a replacement to Electronic Fund Transfer/Special Electronic Fund Transfer in 2005/2006 CTS in 2007 Computerization in Banks: Technology has charged the face of the Indian banking sector through computation while new private sector banks and foreign banks have an edge in this regard. Among the total number of public sector bank branches, 97.8 percent are fully computerized at end March 2010 whereas all branches of SBI are fully computerized.
Table 1: Computerization in Public Sector banks:
Category Fully computerized Branches (%) 2007 85.6 2008 93.7 2009 95.0 2010 97.8

Source: RBI, Annual Report 2009-10

Automated clearing House (ACH): In clearing house, computers are employed to handle cheques. The nature of work involved in clearing operations in voluminous, repetitive, routine in nature. It is complex to clear, exchange and settle the transactions among several banks. Computers are deployed in clearing house to speed up the process and clearing the operations quickly and efficiently which is voluminous work. Automated clearing house (ACH) is an electronic network for financial transaction. ACH processes large number of debit and credit transaction in batches. National Automated clearing house Association (NACHA): It helps to debit transfers for point-of-purchase (POP) check conversion. Both government and the commercial sectors use ACH payment. Business are also increasing using ACH to collect payment online from customers, rather than accepting credit or debit cards. Rules and regulations governing the ACH network are established by NACHA and Federal Reserve. The Federal Reserve banks are collectively the nation's largest automated clearing house operator. FEDACH is the Federal Reserve's centralized application software used to process ACH transactions. Electronic Clearing Services (ECS): ECS is a mode of electronic funds transfer from one bank account to another bank account using the services of a clearing house. This is used for bulk transfers from one account to many accounts or vice-versa. Types of ECS:There are two types of ECS called ECS (credit) and ECS (debit). 1. ECS (credit)- is used for affording credit to a large number of beneficiaries by raising a single debit to an account, such as dividend, interest, salary payment pension etc. 2. ECS (Debit)- is used for raising debits to a number of account of consumers/account holders for crediting a particular institution e.g. payment to utility companies like

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Technological Developments in Indian Banking Sector

Vol.1,Issue.IX/Sept; 11

telephone, electricity or charges such as house tax, water tax etc. [6][7][8][9][10]
Table 2: ECS transaction in Rs. Crores
Item ECS Credit ECS Debit 2005-06 32,324 12,986 2006-07 83,277 25,441 2007-08 7,82,222 48,937 2008-09 97,487 66,976 2009-10 1,17,833 69,819

Source: RBI, Annual Report 2009-10

National Electronic fund Transfer (NEFT): National Electronic Fund Transfer (NEFT) is an online system for transferring funds of Indian Financial Institution (especially loans). This facility is used mainly to transfer funds below Rs. 2,00,000/- The NEFT system in India lives with effect from 21 November 2005. NEFT was sent to cover all banks which were participating in the special electronic funds transfer (NEFT) clearing. NEFT was made on the structured financial messaging solution (SFMS) platform. Public key infrastructure (PKI) technique used in NEFT for maintaining security. Electronic Funds Transfer (EFT): Electronic Funds Transfer (EFT) is the electronic exchange or transfer of money from one account to another. The exchange takes place between a single financial or across multiple institutions, through computer based systems. RBI introduced EFT to help banks offering their customers money transfer service from account to account of any bank branch to any other bank branch. The EFT system presently covers all the branches of the 27 public sector banks and 55 scheduled commercial banks at the 15 centers viz:Ahmadabad, Bangalore, Bhubaneswar, Kolkata, Chandigarh, Chennai, Guwahati, Hyderabad, Japura, Kanpur, Mumbai, Nagpur, new Delhi, Patna, and Thriuvananthpuram.
Table 3: EFT/NEFT Transactions in Rs. Crores
Item EFT / NEFT 2005-06 61,288 2006-07 77,446 2007-08 1,40,326 2008-09 2,51,956 2009-10 4,11,088

Automated Teller Machine (ATM): Even through ATM originally developed for cash dispenses, now it includes many other bank related functions such asCash withdraw, Paying routing bills fees and taxes., Printing bank statement., Funds transfer., Purchasing online products, Train tickets reservations, Products from shopping mall, Donating to charities, Claque processing module, Adding pre-paid cell phone/mobile phone credit, Advertising channels for own or third party products and services, Pay premium.
Table 6: Growth in ATM Installation (2005 To 2009)
Year 2005 -06 2006-07 2007-08 2008-09 Number of ATMs 21110 25247 34547 43651

Source: Cyber Media DQ Estimates Research 50000

Number of ATMs Installed

s M T A f o . o N

40000 30000 20000 10000 0 2005 -06 2006-07 2007-08 2008-09 Number of ATMs

Graph1: Report on Trend and Progress of Banking in India 2008-09

ATMs installed In the country at end-March 2009, new private sector banks had the largest share in off-site ATMs, while nationalised banks has the largest share in on-site ATMs.
Table7: Branches and ATMs of Scheduled Commercial Banks
Bank Group Nationalised State Banks Old Private Banks New Private Banks Foreign Banks Total Rural 13,381 5,560 842 271 4 20,058 Semi-Urban 8,669 4,835 1,554 1,084 4 16,146 Urban 8,951 3,043 1,344 1,371 52 14,761 Metro-Politian 8,375 2,624 933 1,478 233 13,643 Total 39,376 16,062 4,673 4,204 293 64,608 On-site 10,233 7,146 1,830 5,166 270 24,624 Off-site 5,705 4,193 844 7,480 784 19,006 Total 15,938 11,339 2,674 12,646 1,054 43,651

Source: RBI, Annual Report 2009-10

Source: Report on Trend and Progress of Banking in India 2008-09

Cards Transaction: Debit card is a plastic card which provides an alternative payment method for cash when making transaction. Using debit card cardholder can see balance available on account. Debit card is mainly used for cash withdraw from ATM, at point of sale (POS), also on the internet for online purchase, funds transfer, paying bills, accessing detail account information, charging PIN etc. Bank provides debit card free of cost at the time of opening account. From 1st Jan 2011, RBI declared that for every transaction with debit card on ATM user has to enter password for every transaction. This is done for security purpose.
Table 4: Card based payment Transaction Value (Rupees Crores)
Item Credit Cards Debit Cards 2005- 06 33,886 5,897 2006- 07 41,361 8,172 2007- 08 57,985 12,521 2008- 09 65,356 18,547 2009-10 62,950 26,566

12000 10000 8000 6000 4000 2000 0

Number of ATMs Bank wise

On-site Off-site

Graph2: Showing Number of ATMs per Banks

Source: RBI, Annual Report 2009-10

Core Banking: Presently, a technological development is closely related to computerization in banks branches for adoption of the core banking solution (CBS). An important development in the percentage of branches of public sector banks implementing CBS. The percentages of such branches increased by 79.4 % at end March 2009 to 90% at the end of March-2010.
Table 5: Branches under Core Banking (in %)
Name of the Bank Public Sector Banks Nationalised Banks State Bank Group Branches under core banking solutions 90% 85.9% 100

Source: Report on Trend and Progress of Banking in India 2009-10, P-55

The use of electronic payment has witnessed manifold increase, partly reflecting increased adoption of technology. The growth of volume of ATMs indicates that customer most prefer ATMs for transactions. ATMs provide different kinds of services per customer. The volume of ECS credit and more significantly ECS debit continued to show an increasing trend during 2008-09 in line with the trend witnessed during past few years. Magnetic Ink Character Recognition (MICR): In India, MICR introduced in 1987 in the four metros cities. The MICR clearing is now in operation in 14 centers vizHyderabad, Bangalore, Ahmadabad, Kanpur, Japura, Nagpur, Baroda, Pune, Gauhati, Trivandrum. It is proposed to be extended to a total 22 centers were volume of clearing transactions in large. Recently the paper-based system still continue to dominated in terms of volume, and therefore are categorized as system wide important payment system(SWIPS), its share has;

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Technological Developments in Indian Banking Sector

Vol.1,Issue.IX/Sept; 11

however, been declining both in volume and value terms in recent years. Speed clearing, introduced in 2008, operating on the core banking infrastructure of banks has now been mode available as a part of MICR. Dearing at all the 66 MICR cheque processing centers(CPCS).
Table 8: Payment system indicators-annual turnover
Volume (000s) Item MICR Clearing MICR clearing 2007-08 1201045 237600 2008-09 1140492 233566 2009-10 1143164 230567 Value (Rupees in Crore) 2007-08 6028672 1867376 2008-09 5849642 2060893 2009-10 6664003 1878425

Source: RBI, annual report 2009-10

Real time gross settlement (RTGS): Real time means payment transaction is not subjected to any waiting period. In RTGS the transaction are settled as they are processed. Gross settlement means the transaction is settled on one to one basis without bunching or netting with any other transaction. RTGS is funds transfer system where transfer of money or securities takes place from one bank to another on a real time and on gross basis. Once processed, payment are final and irrevocable.
Table 9: Growth of RTGS in India
Item 2007-08 RTGS 5840 Volume (000s) 2008-09 13,366 2009-10 33,241 2007-08 2,73,18,330 Value (Rupees in Crore) 2008-09 3,22,79,881 2009-10 3,94,53,359

Annual RBI report 2009-10

INFINET: For working of e-banking, it requires various components like- communication channels, servers, connecting networks etc. Reserve Bank of India (RBI) having prime control on ebanking services. RBI monitor, control of e-banking by establishing and connecting various service providers in India. Following are the service some of providersINFINET stands for Indian Financial Network. There is a satellite based wide area network using VSAT (Very Small Aperture Terminal) technology set up by the RBI in June 1999. The hub and the Network Management System of the INFINET are located in the Institute for Development and Research in Banking Technology, (IDRBT) Hyderabad (an institute set up by the RBI). Services provided by INFINET: Among the major applications identified for porting on the INFINET in the initial phase are e-mail, Electronic Clearing Service - Credit and Debit, Electronic Funds Transfer and transmission of Inter-city Cheque Realisation advices. Later, other payment system related applications as well as Management Information System (MIS) applications are proposed to be operationalised.[31] BANKNET: BANKNET is a internet based communication network. It provides speed of financial transaction. BANKNET is set up in 1991 by the RBI, this backbone is meant to facilitate transfer of inter-bank (and inter-branch) messages within India by Public Sector banks who are members of this network. [31] Service Centers - At present, service centers are viz. Mumbai, Delhi, Calcutta, Madras, Nagpur, Bangalore , Pune, Ahmedabad, Kanpur, Lucknow, Chandigarh, Kochi, Jaipur, Bhopal, Patna, Bhubaneshwar, Thiruvananthapuram, Guwahati, Panaji Jammu. Society for Worldwide Inter-bank Financial Telecommunication (S.W.I.F.T): The S.W.I.F.T provides reliable and expeditious telecommunication facilities for exchange of financial message all over the world. The gateway is in Mumbai and efforts are on to other cities through leased lines/public data network. The majority of international interbank messages

use the SWIFT network. As of September Institute for Development and Research in Banking Technology (IDRBT): The main purpose of IDRBT is to adopt research and development as well as consultancy in the application of technology to the banking and financial sector in the country. Reserve Bank of India (RBI) established IDRBT in 1996. Structured Financial Messaging Solution (SFMS): Structured Financial Messaging Solution (SFMS) is helpful for inter-bank and intra-bank messaging. This messaging is useful for applications like Electronic Funds Transfer (EFT), Real Time Gross Settlement (RTGS), Delivery verses Payment (DVP), Centralised Funds Management System (CFMS). The SFMS was launched in India on December 14, 2001 by RBI. National Payment Corporation of India (NPCI) : NPCI consolidate and integrate the multiple systems with varying service levels to nation-wide uniform and standard business process for all retail payment systems. Also it helps to facilitate an affordable payment mechanism to benefit the common man across the country and help financial inclusion. Mobile Banking: Mobile banking (also known as M-Banking, mbanking, SMS Banking etc.) is a term used for performing balance checks, account transactions, payments, credit applications etc. via a mobile device such as a mobile phone or Personal Digital Assistant (PDA). Dmat Card: The demat account has to be treated virtually like a account with the difference being that instead of actual cash there are shares in the account. A beneficiary account is an account opened by the investors or broker with a Depository Participants (DP) of his choice, to hold shares in detmaterialised (demat) form and undertake scripless trading. The investors must open a demat account with a DP. Opening a demat account Conclusion: Use of technology in expanding banking is one of the key focus areas of banks. The banks in India are using Information Technology (IT) not only to improve their own internal processes but also to increase facilities and services to their customers. Efficient use of technology has facilitated accurate and timely management of the increased transaction volume of banks of that comes with larger customer base. By designing and offering simple, safe and secure technology, banks reach at doorstep of customer with delight customer satisfaction. Reference: 1. Bose Jayshree (2006),E-Banking in India, The paradigm Shift, PP. 22-23, The ICFAI Unversity Press 2. Brown, I. & Molla, A. (2005) Determinants of Internet and cell phone banking adoption in South Africa. Journal of Internet Banking and Commerce, Vol. 9, No. 4, pp. 1-9. 3. Committee on Payment and Settlement Systems of the central banks of the Group of Ten countries (March 1997). Real-Time Gross Settlement Systems. Bank for International Settlements. p. 14. 4. Daddihal V.S. Kulkarni P.K., Technology in Banks A Case Study of HDFC Bank, Professional Bankers, April 2998 Vol-VIII Issue-4, p-82 5. Gurusamy S. (2005), Merchant Banking and Financial Services. PP. 406-410, Nicole Imprints Pvt. Ltd. 6. "Evidence from the patent record on the

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development of cash dispensing technology". History of Telecommunications Conference, 2008. Histelcon 2008. IEEE 7.Martin, Andrew (January 4, 2010). "How Visa, Using Card Fees, Dominates a Market" . New York Times . http://www.nytimes.com/2010/01/05/your-money/creditand-debit-cards/05visa.html?em=&pagewanted=allRayudu C.S. (2010), E-commerece, E-Business, p- 269-270, Himalaya Publishing House 8.RBI, Annual Report 2009-10, P- 78 9.RBI Report on Trend and Progress of Banking in India 2009-10, P-55 10.Rayudu C.S. (2010), E-Commerce and E-Business, P274, Himalaya Publication House 11.Singh, B., and Malhotra, P. (2004). Adoption of Internet banking: An empirical investigation of Indian banking, Sector, Journal of Internet Banking and Commerce, Vol. 9, No. 2. 12.Sullivan, arthur; Steven M. Sheffrin (2003). Economics: Principles in action. Upper Saddle River, New Jersey 07458: Pearson Prentice Hall. pp. 261. ISBN 0-13-063085-3. 13.Rayudi C.S. (2010) , E-Business, E-Commerce, PP. 278278, Himalaya Publication House 14.Tiwari, Rajnish and Buse, (2007), The Mobile Commerce Prospects: A Strategic Analysis of Opportunities in the Banking Sector, Hamburg University Press (E-Book) 5.http://www.rbi.org.in/SCRIPTs/PublicationsView.aspx?id =154 16./www.banktech.com/payments-cards/216402747 http://en.wikipedia.org/wiki/Automated_Clearing_House 18. http:/ http://rbidocs.rbi.org.in/rdocs/ECS/DOCs/19631.doc 9.http://en.wikipedia.org/wiki/Electronic_funds_transfer 0.http://www.rbi.org.in/scripts/FAQView.aspx?Id=57 - 22k 21.http://www.theukcardsassociation.org.uk/misc//page/faqs/#question2 22.http://en.wikipedia.org/wiki/Credit_card 3.http://www.rbi.org.in/scripts/FAQView.aspx?Id=65 4.\http://en.wikipedia.org/wiki/Real_Time_Gross_Settleme nt 5.http://www.banknetindia.com/banking/bitINFINET.htm 6.http://en.wikipedia.org/wiki/Society_for_Worldwide_Int erbank_Financial_Telecommunication 27.http://www.swift.com 28.http://www.idrbt.ac.in/aboutus/aboutus.html 9.http://www.idrbt.ac.in/index_fromsm.html?sfms.html?inf inet 0.http://www.idrbt.ac.in/index_fromsm.html?nfs.html?infi net 1.http://en.wikipedia.org/wiki/National_Payments_Corpor ation_of_India 2.http://en.wikipedia.org/wiki/Electronic_Data_Interchang e

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