INDIAN

BANKING SYSTEM

What is bank?

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BANKING SYSTEM

Chapter:- 1
Introduction:
A bank is a financial institution that provides banking and other financial services to their
customers. A bank is generally understood as an institution which provides fundamental banking
services such as accepting deposits and providing loans. There are also nonbanking institutions
that provide certain banking services without meeting the legal definition of a bank. Banks are a
subset of the financial services industry. A banking system also referred as a system provided by
the bank which offers cash management services for customers, reporting the transactions of
their accounts and portfolios, throughout the day. The banking system in India should not only be
hassle free but it should be able to meet the new challenges posed by the technology and any
other external and internal factors. For the past three decades, Indias banking system has several
outstanding achievements to its credit. The Banks are the main participants of the financial
system in India. The Banking sector offers several facilities and opportunities to their customers.
All the banks safeguards the money and valuables and provide loans, credit, and payment
services, such as checking accounts, money orders, and cashiers cheques. The banks also offer
investment and insurance products. As a variety of models for cooperation and integration among
finance industries have emerged, some of the traditional distinctions between banks, insurance
companies, and securities firms have diminished. In spite of these changes, banks continue to
maintain and perform their primary roleaccepting deposits and lending funds from these
deposits.

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Definition of banks

According to Walter Leaf

A bank is a person or corporation which holds it out to receive from the public, deposits payable
on demand by cheque. Horace White has dened a bank, as a manufacture of credit and a
machine for facilitating exchange.

According to Prof. Kinley

A bank is an establishment which makes to individuals such advances of money as may be
required and safely made, and to which individuals entrust money when not required by them for
use.

In simple words
Bank is what bank does

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Types of banks

1. Central Bank
A central bank functions as the apex controlling institution in the banking and financial system of
the country. It functions as the controller of credit, bankers bank and also enjoys the monopoly
of issuing currency on behalf of the government. A central bank is usually control and quite often
owned, by the government of a country. The Reserve Bank of India (RBI) is such a bank within
an India.

2. Commercial Banks
It operates for profit. It accepts deposits from the general public and extends loans to the
households, the firms and the government. The essential characteristics of commercial banking
are as follows:
- Acceptance of deposits from public - For the purpose of lending or investment - Repayable on
demand or lending or investment. - Withdrawal by means of an instrument, whether a cheque or
otherwise.

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Another distinguish feature of commercial bank is that a large part of their deposits are demand
deposits withdraw able and transferable by cheque.

3. Development Banks
It is considered as a hybrid institution which combines in itself the functions of a finance
corporation and a development corporation. They also act as a catalytic agent in promoting
balanced and viable development by assuming promotional role of discovering project ideas,
undertaking feasibility studies and also provide technical, financial and managerial assistance for
the implementation of project. In India Industrial Development Bank on India (IDBI) is the
unique example of development bank. It has been designated as the principal institution of the
country for co-coordinating the working of the institutions engaged in financing, promoting or
development of industry.

4. Co-operative Banks
The main business of co-operative banks is to provide finance to agriculture. They aim at
developing a system of credit. Agriculture finance is a special field. The co-operative banks play
a useful role in providing cheap exit facilities to the farmers.
In India there are three wings of co-operative credit system namely
(i) Short term,
(ii) Medium-term,
(iii) Long term credit.
The former has a three tier structure consisting of state

5. Specialized Banks
These banks are established and controlled under the special act of parliament. These banks have
got the special status. One of the major bank is National Bank for Agricultural and Rural
development (NABARD) established in 1982, as an apex institution in the field of agricultural
and other economic activities in rural areas. In 1990 a special bank named small industries

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development Bank of India (SIDBI) was established. It was the subsidiary of Industrial
development Bank of India. This bank was established for providing loan facilities, discounting
and rediscounting of bills, direct assistance and leasing facility.

6. Indigenous Bankers
That unorganized unit which provides productive, unproductive, long term, medium term and
short term loan at the higher interest rate are known as indigenous bankers. These banks can be
found everywhere in cities, towns, mandis and villages.

7. Rural Banking
A set of financial institution engaged in financing of rural sector is termed as Rural Banking.
the policy of financing of these banks has been designed in such a way so that these institution
can play catalyst role in the process of rural development.

8. Saving Banks
These banks perform the useful services of collecting small savings commercial banks also run
saving bank to mobilize the savings of men of small means. Different countries have different
types of savings bank viz. Mutual savings bank, Post office saving, commercial saving banks etc.

9. Export - Import Bank

These banks have been established for the purpose of financing foreign trade. They concentrate
their working on medium and long-term financing. The Export-Import Bank of India (EXIM
Bank) was established on January 1, 1982 as a statutory corporation wholly owned by the central
government.

10. Foreign Exchange Banks

These banks finance mostly to the foreign trade of a country. Their main function is to discount,
accept and collect foreign bulls of exchange. They also buy and self-foreign currencies and help
businessmen to convert their money into any foreign currency they need. Over a dozen foreign
exchange banks branches are working in India have their head offices in foreign countries.

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11. International Banks

The basic list of those International Banks within India which help the banking sector of India to
develop in International market.

Types of banking
Banking is described as the business carried on by an individual at a bank. Today, several forms
of banking exist, giving consumers a choice in the way they manage their money most people do
a combination of at least two banking types. However, the type of banking a consumer uses
normally based on convenience. These are different types of banking through which consumer
can attach to it-

(A) Walk-in-Banking
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It is still a popular type of banking. As, in the past, it still involves bank tellers and specialized
bank officers. Consumers must walk into a bank to use this service normally, in order to
withdraw money or deposit it; a person must fill out a slip of paper with the account and specific
monetary amount and show a form of identification to a bank letter. The advantage of walk in
Banking is the face to face connection between the banker and a letter. Also unlike drive thru and
ATM banking, a person can apply for a loan and invest money during a walk in.

(B) Drive thru Banking

It is probably the least popular form of banking today, but is still used enough by consumers to
create a need for it. It allows consumers to stay in their while and drive up to a machine equipped
with container, chute and intercom. This machine is connected to a bank and is run by one or two
bank letters. A person can withdraw or deposit money at a drive thru. He must fill out a slip with
his account and specific monetary amount and put it in the container. The container travels
through the chute to the bank letter, which will complete the bankers request. This is where the
intercom comes into play. The bank teller and banker use it to communicate and discuss the
specific banking request.

(C) ATM Banking

It is very popular because it gives a person 24 hour access to his bank account. Walk in and drive
thru banking does not offer this perk. In order to use an ATM, a person must have an ATM card
with personal identification number (PIN) and access to an ATM machine. Any ATM machine
can be used, but charges apply if the ATM machine is not affiliated with the bank listed on the
ATM card. By sliding an ATM card into an ATM machine, it is activated and then through
touching buttons on the machine, a consumer is able to withdraw or deposit money.

(D)Online Banking
It allows a person to get on the internet and sign into their bank. This process is achieved with
the use of a PIN, different from the one used for the ATM card. By going website of a bank and
entering it, a consumer can get into his account, withdraw money, deposit money, pay bills,
request loans and invest money. Online banking is growing in popularity because of its
convenience.

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These different types of banking give a consumer the power of choice and also give them a
comfortable banking system that gives them a convenient choice.

Chapter:-2
Functions of banks

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I. Accepting Deposits:
The most important function of commercial banks is to accept deposits from public. This is the
primary functions of a commercial bank. Banks receives the idle savings of people in the form of
deposits and finances the temporary needs of commercial and industrial firms.
A commercial bank accept deposit from public on various account, important deposit account
generally kept by bank are

(i) Saving Bank Deposits This type of deposits suit to

those who just want to keep their small savings in a bank and might need to
withdraw them occasionally. One or two withdrawals up to a certain limit of total
deposits are allowed in a week. The rate of interest allowed on saving bank
deposits is less than that on fixed deposits. Depositor is given a pass book and a
cheque book. Withdrawals are allowed by cheques and withdrawal form.

(ii) Current Deposits This type of account are generally kept by

businessmen and industrialists and those people who meet a large number of monetary

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transactions in their routine. These deposits are known as short term deposits or demand
deposits. They are payable demand without notice. Usually no interest is paid on these deposits
because the bank cannot utilize these deposits and keep almost cent per cent reserve against
them. Overdraft facilities are also available on current account.

(iii) Fixed Deposits These are also known as time deposits. In this
account a fixed amount is deposited for a fixed period of time. Deposits are payable after the
expiry of the stipulated period. Customers keep their money in fixed deposits with the bank in
order of earn interest. The banks pay higher interest on fixed deposits. The rates depend upon the
length of the period and state of money market.
Normally the withdrawals are not allowed from fixed deposits before the stipulated date. If it
happens, the depositor entails an interest penalty.

( iv ) Other Deposits Banks also provide deposit facilities to

different type of customers by opening different account. They also open. Home Safe Account
for housewife or very small savers.

The other accounts are

Indefinite Period Deposit a/c,
Recurring Deposit a/c
Retirement Scheme etc.

II. Advancing of Loans:

The second main function of the commercial bank is to advance loans. Money is lent to
businessmen and trade for short period only. These banks cannot lend money for long period
because they must keep themselves ready to meet the short term deposits. The bank advances
money in any one of the following forms

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(i) Overdrafts: Customers of good standings are allowed to overdraw from their
current account. But they have to pay interest on the extra amount they have withdrawn. The
banks allow overdrafts to their customers just to provide temporary accommodation save the
extra amount withdrawn is payable within a period. The amount allowed in overdraft varies
from customer to customer depending on this financial condition.

(ii) Loans: Loans are granted by the banks on securities which can be easily
disposed-off in the market, e.g. Government securities or shares of approved concerns. When the
bank has satisfied itself regarding the soundness of the party, the loan is advanced. A borrower
seldom wants the whole amount of his loan in cash, so he opens the current account with the
bank (and the loan amount) and thus a deposit is created in the books of the name in the bank.

(iii) Cash Credit: It is an arrangement by which a bank allows his customers

to borrow money up to a certain limit against certain tangible securities as Government securities
or shares of approved concerns etc. In this case interest in charged on the actual amount
withdrawn by the customer and not on the limit allowed to him.

(iv) Discounting Bills: It is another important way of giving loans.

The banks purchase bills and immediately pay case for these bills after deducting the discount
(interest). After the maturity of the bills, the banks get back its full value. Thus these bills are
good liquid assets and moreover this investment is also very safe.

III. Agency Services:

Modern Banks render service to the individual or to the business institutions as an agent. Banks
usually charge little commission for doing these services. These services are as follows-
(i) A bank collects cheques, bills and promissory notes and receives their payments.
(ii) A bank collects dividend or interest on stock and shares. It also collects subscriptions and
insurance premium.

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(iii) A bank also buys and sells securities on behalf of its customers. It also not charges anything
from the customers for this but gets some commission from the stock broker.
(iv) A bank acts as trustee or an executor on behalf of its customers in the administration of a
will or of settlement.
(v) Lastly a bank helps in the transfer of funds from one bank or branch to another.

IV. Other Services:

A modern bank now a day serves its customers in many other ways:
(i) A bank issues personal and commercial letters of credit. Through these letters of credit
customers are able to benefit themselves out of the superior credit of the bank.
(ii) A bank also helps in the transaction of foreign exchange business.
(iii) A bank has Safe Deposit Vaults. It undertakes the safe custody of valuables and important
documents. The bank acts as bailey of these goods or documents.

Importance of banks
Banks play an important role in the economic growth of a country. In the modern set up, banks
are not to be considered dealers in money but as the leaders of development. The importance of
bank for a countrys economy can be explained in following ways-
Banks by playing attractive interest rate on deposits try to promote thrift and savings in
an economy. The investment of these savings in productive channel results in capital
formation.

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The scattered small savings in the country can be put to optimum use by commercial
banks. Banks utilize this amount by giving loans to industrial houses and the
government. By providing funds to the entrepreneurs, bank help in increasing
productivity of capital.
Banks help in remitting money from one place to another. The cheque, bank draft, letter
of credit, bills, hundies enable traders to transfer large sums of money from one place
to another.
By their ability to create credit, the banks have placed at the disposal of the nation a
large amount of money. The bank can increase the supply of money through credit
creation
With the growth of banking activity, employment opportunity in the country has
increased to a considerable extent.
The banks help in capital formation in the country. A high rate of saving and investment
promote capital formation.
Money deposited in the bank and other precious items are now absolutely safe. For
keeping valuables, banks are providing locker facilities. Now people are free from any
type of risks.

Chapter:- 3
INDIAN BANKING SYSTEM

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The banking system of a country plays an important role in the economic development of any
country. Banking system comprises of the banking institutions functioning in the country.
Banking system comprises from the central bank to all banking institutions which are
functioning and providing financial facilities to any developmental sector like agriculture,
industries, trade, housing etc.
Under the Indian banking structure central bank in the name of the Reserve Bank of India which
regulates, directs and controls the banking institutions. Separate institutions are functioning to
meet the financial requirement of the different sectors of the economy. Indigenous bankers and
moneylenders do dominant in the unorganized sector. Regional Rural Banks are meeting the
requirement of the rural population. Cooperatives are working to meet the requirement of
medium, short and long-term credit for agriculture sector. Development banks are meeting the
business and industrial requirements. Thus, we can say that the structure of Indian banking
system has an international level banking system which can meet the economic requirements of
globalized world.
The Indian banking structure has a wide and comprehensive form. Apex institutions in the form
of banking institutions are playing important role in the country. The chief regulator of banking
system in our country is the Reserve bank of India. Industrial Development Bank of India is an
apex body in the industrial sector. National Bank of Agriculture and Rural Development has been

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working as an apex institution for the agriculture and rural development. Import-Export Bank of
India is an Apex body of international trade. National Housing Bank is an apex institution in
field of housing construction. Thus these four apex institutions are accelerating the banking
system by providing refinance facilities to commercial banks and other financial institutions
along with other banking services.

.1 Reserve Bank of India (RBI)

The Indian Banking structure has a wide and comprehensive form. Apex Institutions in the form
of banking institutions are playing important role in the country. The chief regulator of banking
system in our country is the Reserve Bank of India. The Reserve Bank of India (RBI) was
established in April 1935 with a share capital of Rs. 5 Crore on the basis of the recommendations
of the Hilton Young Commission. The share capital was divided into shares of Rs. 100 each fully
paid which was entirely owned by private shareholders in the beginning. The Government held
shares of nominal value of Rs. 2,20,000.
The Reserve Bank of India was set up as a private shareholder bank under the Reserve Bank of
India Act, 1934 and it started functioning as the central bank since 1st April 1935.

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Objectives of RBI:
The following were the objectives of RBI when it was set up:
To manage adequate money and credit in the country
To maintain the stability of rupee internally and externally
Balanced and well managed banking development in the country
To develop well organized money market
To provide adequate agriculture credit
Ti manage public debt
To seek international monetary co-operation
Centralization of cash reserves of commercial banks
To set up Government banks
To set up Government banks
Publication of data

Functions of RBI:
RBI is an apex banking institution of the country. It carries on several functions as a central
bank. According to RBI Act, 1934, the principal function of RBI is to issue notes and maintain
reserves, currency and credit to maintain monetary stability in the general interest of the nation.
As a central banking authority RBI carries on the following functions:
1. RBI regulates issue of bank notes above one rupee denomination
2. Undertakes distribution of all currency notes and coins on behalf of the government
3. Acts as the banker to the Government of India and the State governments, Commercial and
Cooperative banks
4. Formulates and administers the monetary policy
5. Maintain exchange value of rupee
6. Represent India at the International Monetary Fund (IMF)
7. RBI acts as a banker for all the commercial banks. All scheduled banks come under the direct
control of RBI. All commercial as well as schedule bank has to keep a minimum reserve with the
RBI. They have to submit weekly reports to RBI about their transactions. By performing 3
functions, the RBI helps the member banks significantly. They are given below such
It acts as the lender of the last resort.
It is the custodian of cash reserves of commercial banks.
It clears, transfers the transaction. It acts as the central clearing house.

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8. Regulation of banking system
9. Credit Control

2 Industrial Development Bank of India

(IDBI)

This is an apex institution providing long-term finance to industrial sector. It was set us as a
subsidiary of the RBI in 1964. In February, 1976 it was segregated from the RBI. At present its
whole of the share capital is owned by the Government of India. IDBI provides financial
assistance to industrial concerns by way of variety of products and services which include project
finance, equipment finance, asset credit, equipment lease, technology up gradation fund scheme,
refinance for medium scale industries and bill finance. It provides as well as for expansion,
diversification and modernization of existing industrial enterprises. In response to the changing
financial needs of industries, IDBI has also designed other products to meet the short term
funding, core working capital and other short term requirements of industrial units. It also offers
fee-based services in the area of merchant banking, corporate advisory services, foreign
exchange services etc. IDBI has also set up subsidiaries and associates to offer banking products
& services, capital market and trusteeship services, as also registrar and transfer services
structured to meet customized client requirements.
For meeting fund requirements thereof as well as towards its various other business operations,
IDBI raises resources directly from the market (at market-related interest rates) from retail as
well as institutional investors both within India and abroad, through a variety of investor-

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friendly instruments. IDBIs resources raising efforts have brought it closer to all sections of
society.

3 Small Industries Development Bank of

India (SIDBI)

Small Industries Development Bank of India (SIDBI) was established in April 1990 under an
Indian Parliament wholly-owned subsidiary of Industrial Development Bank of India (IDBI)
SIDBIs stature provides that it should serve as the principal financial institution for:
Promotion
Financing
Development if industry in the small scale sector and
coordinating the functions of other institutions engaged in similar activities
The Small Scale industry (SSI) sector, which is vibrant and dynamic sub-sector of the Indias
industrial economy, comprises the area of SIDBIs business. The contribution of the SSIs in
term of production, employment and export earnings has been significant. The objectives of
Government policy have been to impart vitality and growth impetus to the sector by removing
bottlenecks that affect the growth potential. In the liberalized era and emerging economic
scenario, the sector is assured of continued support.

4. National Bank for Agriculture and Rural

Development (NABARD)

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In order to meet the credit requirement of agriculture and rural development the NABARD was
set up in 1982 with the merger of Agriculture Credit Department and Agriculture \Refinance
and development Corporation of the RBI. The bank provides short term and long term credit to
agriculture and non-agriculture activities namely hand weaving, artisans etc. and coordinate the
activities. It provides refinance facilities on the loan given by commercial banks and cooperative
for the agriculture and rural development.
Main Function of NABARD
Refinancing to Cooperative Banks Financing to Rural Banks Loan facilities for
purchase of Shares Refinance of Rural Development loans
Long term Loan Facilities Technical Assistance and Advice

5. Export-Import Bank of India (EXIM)

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The Export-Import Bank of India (EXIM Bank) was set in January, 1982 with its headquarters in
Mumbai. It Perform the normal banking functions connected with import and export of goods,
and several other functions. These major functions include financing of exports from and imports
to India, financing joint ventures in foreign countries and financing the export and import of
machinery and equipment on lease basis. It also undertakes purchasing, discounting and
negotiating of exports bills and thus encourages the exporters.

6. National Housing Bank (NHB)

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The National Housing Bank (NHB) was established on 9th July 1988 under an Act of the
Parliament viz. the National Housing Bank Act, 1987 to function as a principal agency to
promote Housing Finance Institutions and to provide financial and other support to such
institutions. The Act, inter alia, empowers NHB to:
Issue Directions to housing finance institutions to ensure their growth on sound lines Make
a loan and advances and render any other form of financial assistance to scheduled banks and
housing finance institutions or to any authority established be or under any Central, State of
Provincial Act and engaged in slum improvement and Formulate schemes for the purpose of
mobilization of resource and extension of credit for housing

Chapter:- 4
Evolution of Indian banking
Pre-independence & post-independence
Banking in India originated in the last decades of the 18th century. The first banks were The
General Bank of India which started in 1786, and the Bank of Hindustan, both of which are now
defunct. The oldest bank in existence in India is the State Bank of India, which originated in the
Bank of Calcutta in June 1806, which almost immediately became the Bank of Bengal. This was
one of the three presidency banks, the other two being the Bank of Bombay and the Bank of
Madras, all three of which were established under charters from the British East India Company.
For many years the Presidency banks acted as quasi-central banks, as did their successors. The

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three banks merged in 1921 to form the Imperial Bank of India, which, upon India's
independence, became the State Bank of India.
Indian merchants in Calcutta established the Union Bank in 1839, but it failed in 1848 as a
consequence of the economic crisis of 1848-49. The Allahabad Bank, established in 1865 and
still functioning today, is the oldest Joint Stock bank in India.(Joint Stock Bank: A company that
issues stock and requires shareholders to be held liable for the company's debt) It was not the
first though. That honor belongs to the Bank of Upper India, which was established in 1863, and
which survived until 1913, when it failed, with some of its assets and liabilities being transferred
to the Alliance Bank of Shimla.
When the American Civil War stopped the supply of cotton to Lancashire from the Confederate
States, promoters opened banks to finance trading in Indian cotton. With large exposure to
speculative ventures, most of the banks opened in India during that period failed. The depositors
lost money and lost interest in keeping deposits with banks. Subsequently, banking in India
remained the exclusive domain of Europeans for next several decades until the beginning of the
20th century. Foreign banks too started to arrive, particularly in Calcutta, in the 1860s. The
Compote d'Escompte de Paris opened a branch in Calcutta in 1860, and another in Bombay in
1862; branches in Madras and Pondicherry, then a French colony, followed. HSBC established
itself in Bengal in 1869. Calcutta was the most active trading port in India, mainly due to the
trade of the British Empire, and so became a banking center.
The Bank of Bengal, which later merged with the Bank of Bombay and the Bank of Madras to
form the Imperial Bank of India in 1921.
The first entirely Indian joint stock bank was the Oudh Commercial Bank, established in 1881 in
Faizabad. It failed in 1958. The next was the Punjab National Bank, established in Lahore in
1895, which has survived to the present and is now one of the largest banks in India.
Around the turn of the 20th Century, the Indian economy was passing through a relative period
of stability. Around five decades had elapsed since the Indian Mutiny, and the social, industrial
and other infrastructure had improved. Indians had established small banks, most of which
served particular ethnic and religious communities.
The presidency banks dominated banking in India but there were also some exchange banks and
a number of Indian joint stock banks. All these banks operated in different segments of the
economy. The exchange banks, mostly owned by Europeans, concentrated on financing foreign

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trade. Indian joint stock banks were generally undercapitalized and lacked the experience and
maturity to compete with the presidency and exchange banks. This segmentation let Lord Curzon
to observe, "In respect of banking it seems we are behind the times. We are like some old
fashioned sailing ship, divided by solid wooden bulkheads into separate and cumbersome
compartments."
The period between 1906 and 1911, saw the establishment of banks inspired by the Swadeshi
movement. The Swadeshi movement inspired local businessmen and political figures to found
banks of and for the Indian community. A number of banks established then have survived to the
present such as Bank of India, Corporation Bank, Indian Bank, Bank of Baroda, Canara Bank
and Central Bank of India.
The fervor of Swadeshi movement lead to establishing of many private banks in Dakshina
Kannada and Udupi district which were unified earlier and known by the name South Canara
( South Canara ) district. Four nationalized banks started in this district and also a leading private
sector bank. Hence undivided Dakshina Kannada district is known as "Cradle of Indian
Banking". During the First World War (1914-1918) through the end of the Second World War
(1939-1945), and two years thereafter until the independence of India were challenging for
Indian banking. The years of the First World War were turbulent, and it took its toll with banks
simply collapsing despite the Indian economy gaining indirect boost due to war-related economic
activities. At least 94 banks in India failed between 1913 and 1918

Post-independence
The partition of India in 1947 adversely impacted the economies of Punjab and West Bengal,
paralyzing banking activities for months. Indias independence marked the end of a regime of the
Laissez- faire for the Indian banking. The Government of India initiated measures to play an
active role in the economic life of the nation, and the Industrial Policy Resolution adopted by the
government in 1948 envisaged a mixed economy. This resulted into greater involvement of the
state in different segments of the economy including banking and finance. The major steps to
regulate banking included:
in 1948, the Reserve Bank of India, India's central banking authority, was nationalized, and it
became an institution owned by the Government of India.

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in 1949, the Banking Regulation Act was enacted which empowered the Reserve Bank of
India (RBI) "to regulate, control, and inspect the banks in India."
The Banking Regulation Act also provided that no new bank or branch of an existing bank
could be opened without a license from the RBI, and no two banks could have common
directors.
However, despite these provisions, control and regulations, banks in India except the State Bank
of India, continued to be owned and operated by private persons. This changed with the
nationalization of major banks in India on 19 July 1969.

Nationalization
The RBI was nationalized on January 1, 1949 in terms of the Reserve Bank of India (Transfer to
Public Ownership) Act, 1948
By the 1960s, the Indian banking industry had become an important tool to facilitate the
development of the Indian economy. At the same time, it had emerged as a large employer, and a
debate had ensued about the possibility to nationalize the banking industry. Indira Gandhi, the-
then Prime Minister of India expressed the intention of the GOI in the annual conference of the
All India Congress Meeting in a paper entitled "Stray thoughts on Bank Nationalization." The
paper was received with positive enthusiasm. Thereafter, her move was swift and sudden, and the
GOI issued an ordinance and nationalized the 14 largest commercial banks with effect from the
midnight of July 19, 1969.Jayaprakash Narayan, a national leader of India, described the step as
a "masterstroke of political sagacity." Within two weeks of the issue of the ordinance, the

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Parliament passed the Banking Companies (Acquisition and Transfer of Undertaking) Bill, and it
received the presidential approval on 9 August 1969.
A second dose of nationalization of 6 more commercial banks followed in 1980. The stated
reason for the nationalization was to give the government more control of credit delivery. With
the second dose of nationalization, the GOI controlled around 91% of the banking business of
India. Later on, in the year 1993, the government merged New Bank of India with Punjab
National Bank. It was the only merger between nationalized banks and resulted in the reduction
of the number of nationalized banks from 20 to 19. After this, until the 1990s, the nationalized
banks grew at a pace of around 4%, closer to the average growth rate of the Indian economy.

Liberalization
In the early 1990s, the then Narsimha Rao government embarked on a policy of liberalization,
licensing a small number of private banks. These came to be known as New Generation tech-
savvy banks, and included Global Trust Bank (the first of such new generation banks to be set
up), which later amalgamated with Oriental Bank of Commerce, Axis Bank(earlier as UTI
Bank), ICICI Bank and HDFC Bank. This move, along with the rapid growth in the economy of
India, revitalized the banking sector in India, which has seen rapid growth with strong
contribution from all the three sectors of banks, namely, government banks, private banks and
foreign banks.
The next stage for the Indian banking has been set up with the proposed relaxation in the norms
for Foreign Direct Investment, where all Foreign Investors in banks may be given voting rights
which could exceed the present cap of 10%,at present it has gone up to 74% with some
restrictions.
The new policy shook the Banking sector in India completely. Bankers, till this time, were used
to the 4-6-4 method (Borrow at 4%;Lend at 6%;Go home at 4) of functioning. The new wave
ushered in a modern outlook and tech-savvy methods of working for traditional banks. All this
led to the retail boom in India. People not just demanded more from their banks but also received
more.
Currently (2007), banking in India is generally fairly mature in terms of supply, product range
and reach-even though reach in rural India still remains a challenge for the private sector and
foreign banks. In terms of quality of assets and capital adequacy, Indian banks are considered to

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have clean, strong and transparent balance sheets relative to other banks in comparable
economies in its region. The Reserve Bank of India is an autonomous body, with minimal
pressure from the government. The stated policy of the Bank on the Indian Rupee is to manage
volatility but without any fixed exchange rate-and this has mostly been true.
With the growth in the Indian economy expected to be strong for quite some time-especially in
its services sector-the demand for banking services, especially retail banking, mortgages and
investment services are expected to be strong. One may also expect , takeovers, and asset sales.
In March 2006, the Reserve Bank of India allowed Warburg Pincus to increase its stake in Kodak
Mahindra Bank (a private sector bank) to 10%. This is the first time an investor has been allowed
to hold more than 5% in a private sector bank since the RBI announced norms in 2005 that any
stake exceeding 5% in the private sector banks would need to be vetted by them. In recent years
critics have charged that the non-government owned banks are too aggressive in their loan
recovery efforts in connection with housing, vehicle and personal loans. There are press reports
that the banks' loan recovery efforts have driven defaulting borrowers to suicide.

Chapter:- 5
EVOLUTION of online banking
The Rangarajan Committee report in early 1980s was the first step towards computerization of
banks. Banks started exploring the idea of 'Total Bank Automation (TBA)'. Although titled 'Total
Bank Automation,' TBA was in most cases confined to branch automation. It was only in the
early 1990s that banks started thinking about tying- up disparate branches together to facilitate
information sharing. At the same time, private banks entered the banking arena with radically
different strategies. Given the huge IT budgets at their disposal and with almost no legacy IT
equipment to worry about; private banks hastened the adoption of technology. The philosophy
for private banks was very clear: to provide a whole new range of financial products and services
at minimal costs. And technology made this possible. Says K.N.C. Nair, Head (IT), Federal
Bank, The new generation banks showed the way and others had no option but to follow the
tech infusion to retain and attract profitable customers." The improved connectivity and falling

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costs offered by leased lines and VSATs provided a booster to inter-branch automation. Confirms
Naresh Wadhwa, Vice President-West, Cisco Systems (India), "With the improved services and
lowered costs of service providers such as Dot and VSNL, it became more feasible for banks to
network their branches. This gave banks an impetus to network all the branches and set up
centralized databases. With these developments it became possible for operations such as MIS to
be truly automated and centralized." With centralized infrastructure and numerous connectivity
options, banks started exploring multiple delivery channels like ATM, Net-banking, mobile
banking, and Tele-banking thus driving down cost per transaction.

Online banking

Online banking (or Internet banking) allows customers to conduct financial transactions on a
secure website operated by their retail or virtual bank, credit union or building society.

We need to be able to manage our finances from anywhere in the world. Rich online banking
services are much more important than a physical location. Since I have been doing all of my
banking online with quite a few different online banks as I looked for the best solution, Ive had
a chance to really experiment with what works and what doesnt work for us.

Here is a checklist of things to look for in an online bank. Some items you may be familiar with.
Others might be new to you if it isnt something your current bank offers.

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FEATURES OF ONLINE BANKING

1. Bill Pay Service - One of the biggest reasons for going with an online
bank is to get really good bill payment services. Different banks handle bill payment different
ways. Here are some things to think about:
A. How many bills are you allowed paying per month?
B. What are the fees for going over the limit?
C. Can the bill payment send physical checks to merchants who arent set up to take electronic
payments?
D. Do checks come from your account or from a third party service? For privacy reasons, it might
be better to be able to pay someone without giving them your bank account number on the check.
On the other hand, if the checks actually come from your account, the money doesnt get taken
out until the check is cashed.
E. Can you set up reoccurring payments?

2. Electronic Bill Notification With electronic bills, your

merchant (Credit Card Company, gas company, electric company, etc.) sends an electronic bill to
your bank. You can set it up to pay automatically or notify you for approval. This can be
particularly good for people who are on the road because it reduces the amount of physical mail
you have to somehow get read or forwarded to you.

3. Online Check Images Most banks will show you an image of

the check, which makes it really easy to balance your account if you cant remember what a
particular payment was for. (Ideally, you should minimize the number of physical checks you
write to reduce fraud.)

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4. Online Deposit Slip Images Most banks just record

the total with no image. It will let you see an image of each deposit slip. Having the images
available can be very helpful if you ever have to prove something for tax purposes or need to
remember where that $2581 deposit came from.

5. Reporting Tools Most banks offer basic reporting tools that will let
you see how much you have spent in each category youve created. This may not be an issue if
you use desktop money management software, but it still can be handy if you are traveling and
want to see how much youve paid on your mortgage over the past 12 months.

6. Linked Accounts Can you link your bank account with a brokerage
account? Can you add your minor children as custodial accounts and manage them all centrally?
If you and your spouse both set them up IRAs, is it easy to view them both alongside the rest of
your finances, or do you have to have a separate login for each IRA to keep them on separate
SSNs? These are small things that many banks dont support, but it starts getting really
complicated when you have to manage a bunch of accounts instead of having a single place to
manage all of your money.

7. Convenient Deposit Methods - Since you may not be

anywhere near the physical location of your bank, make sure you understand how to deposit
money. Payroll can be set up on direct deposit, but there will be times when you need to deposit
checks. Does the bank provide postage paid envelopes and deposit slips? Some banks work with
FedEx or UPS stores to allow you to send in a deposit overnight for free.

8. Low ATM Fees and Convenient

Locations If you need to get cash, will the bank refund the ATM
fees? Are there only certain ATMs that are free, and if so, are they located

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near places you normally go? Are the ATMs available nationwide so you can
use them on vacation? What are the fees for using the ATM internationally
and how is the exchange rate handled?

9. Integration with Desktop Software If you

use Microsoft Money, Quicken or something similar, youll want to make sure your bank
supports it. Make sure you understand if downloading transactions require you to login and
manually download a file, or if your money management software can directly connect and
download new transactions. If you are using Quicken on a Mac, make sure the bank is paying
Quickens extortion fee so the files will work with Mac users.

10. Many Account Types Some banks only offer basic

checking and savings accounts. Ideally you want a bank that makes it easy to open money
market accounts, IRAs, health savings accounts, etc. If you have to go to another institution to
open a different type of account, it is more difficult to manageespecially if you are on the road.
You want to be able to easily open a CD to take advantage of a higher interest rate, easily open
an IRA to help reduce your tax liability, etc.

11. Free Money Transfers Be sure to consider how easy it is

to move money in and out of the account. You should be able to set up links with your accounts
from other institutions to transfer money back and forth as necessary. Make sure you understand
what type of fees is associated with these transfers. Good banks should allow a certain number of
transfers per month with no fee.

12. Security Balanced with Convenience-

Some banks spend so much effort trying to keep things secure that youll find yourself
automatically logged out of their website while you try to balance your account. You want
security but you dont want it to get in the way of you doing your banking. Also check into what
type of additional security features are available. For example, some banks will offer you an
RSA keychain with a number that changes every 60 seconds. In addition to your password, you
will need the number from that key in order to get access to your account.

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13. Ease of Use This is something that most banks seem to struggle with.
Right now I have my personal account with one online bank and my business accounts with
another. I dread using the business accounts and I absolutely love using my personal account. At
first I thought I was just more familiar with the bank where my personal accounts are, but I
finally realize that it comes down to the ease of use. One is ok and the other is superb, but it
makes a big difference.

Advantages of online banking:

Convenience: Unlike your corner bank, online banking sites never close;
they're available 24 hours a day, seven days a week and they're only a mouse click away.

Ubiquity: If you're out of state or even out of the country when a money
problem arises, you can log on instantly to your online bank and take care of business, 24/7.

Transaction speed: Online bank sites generally execute and

confirm transactions at or quicker than ATM processing speeds.

Efficiency: You can access and manage all of your bank accounts, including
IRAs, CDs, even securities, from one secure site.

Effectiveness: Many online banking sites now offer sophisticated tools,

including account aggregation, stock quotes, rate alerts and portfolio managing programs to
help you manage all of your assets more effectively. Most are also compatible with money
managing programs such as Quicken and Microsoft Money.

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Disadvantages of online banking:

Start-up may take time: In order to register for your

bank's online program, you will probably have to provide ID and sign a form at a bank
branch. If you and your spouse wish to view and manage your assets together online, one of
you may have to sign a durable power of attorney before the bank will display all of your
holdings together.

Learning curve: Banking sites can be difficult to navigate at first.

Plan to invest some time and/or read the tutorials in order to become comfortable in your
virtual lobby.

Bank site changes: Even the largest banks periodically

upgrade their online programs, adding new features in unfamiliar places. In some cases, you
may have to re-enter account information.

The trust thing: For many people, the biggest hurdle to online
banking is learning to trust it. Did my transaction go through? Did I push the transfer button
once or twice? Best bet: always print the transaction receipt and keep it with your bank
records until it shows up on your personal site and/or your bank statement.

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How Does Online Banking Work?

Online banking provides many identical services that a traditional bank does with the biggest
difference are in teller availability: Human tellers leave; electronic tellersthe websitesare
available virtually all day, every dayweekends and holidays, included.

Online Banking Structure:

Online banking mirrors traditional banking procedures in many instances, and in some, actually
improves security and reduces both banks and customers costs.

In electronic form, online banking still allows:

1. Deposits to the account, whether via payroll deposits or funds transfers?

2. Bill payments via automatic payment schedules or individually ordered payments. Most bill
pay users opt for the bank-generated checks, but payments can be ordered in a one off situation
or scheduled regularly.

3. Statement formats can be electronic or paper; most that prefer online banking choose the
electronic statements for convenience and reduced paper use.

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4. Wire transfers to accounts within and without the banks structure, though some banks charge
additional transaction fees for wire transfers.

5. Differing services depending on the individual financial institute.

Online Actions
All online banking transactions are initiated by creating an online account identity.
Account login name and password creation is followed by choosing and answering security
questions. Its not recommended that security questions and answers be common or known by
others; they should have unique answers, whether historically true or not.

For example, if a user chooses a security question, What is the name your first elementary
school, choose an answer that is not the actual name or the actual elementary school. Use
instead the name of another school or anything else that is easily remembered.

Provide an email address that is not tied to an Internet Service Provider. If the user changes ISPs,
that email address will be lost. Instead, use a free email address that can last for as long as the
user chooses.

Once the security aspects are in place and verified, look around the banks website and note
important areas, such as:

1. Account activity

2. Statement delivery change areas

3. Customer Service options

4. Bill pay procedures, if any

5. And any other area provided on the website.

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Online banking often reduces funds availability delays and hastens resolution to disputes and
inquiries. While some complaints and problems do require human intervention, Customer
Service Agents are available for longer during a calendar day than local branch personnel are.

Online banking differs from traditional banking when physical checks or cash is deposited;
human interaction via a drive thru lane or at the counter is required. Cashier checks, traveler
checks, and money orders cannot be purchased from the institution via online banking, but
because all transactions allowed are electronic, tracking and accountability are easily provided.

OPPORTUNITIES IN ONLINE BANKING:

Is There a Future in Online Banking?

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By this point, no one can dismiss online banking as a fad. However, it is worth considering
whether the trend towards online financial transactions is going to slow or reverse in the years to
come. There will continue to be people who resist online banking in favor of offline transactions
just as there are people who prefer to keep their money in mattresses instead of putting it in
banks. Whether these people will exert serious influence on the movement towards online
banking can be examined by looking at the needs of modern consumers, and the interests of the
banks themselves.

The Move to Online Business

The global connectivity provided by the internet, combined with the fallout from the global
financial crisis has encouraged a growing number of entrepreneurs to start their own businesses
online. As an increasing number of people look to save themselves from unemployment or
augment otherwise insufficient salaries by finding new ways to make money online, they will
require new ways to send, receive, and invest their online funds.

The Rise of Mobile Banking

As handheld mobile devices become more sophisticated, users are experimenting with more
sophisticated transactions. Moving beyond ringtone downloads; consumers can now shop online
and purchase software upgrades and augmentations through app stores. In addition to this buying
and selling, anyone with a web browser on their phone can access their banks online banking
site to move and manage their money in more locations than ever before.

Staffing Solutions
As banks consolidate and grow larger, they are looking for more ways to cut costs, and reducing
the number of full-time employees on their payroll is an attractive option. Encouraging

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customers to do their banking online allows banks to close smaller branches in outlying locations
and use economies of scale to develop customer assistance centers in locations where the labor
market is more favorable.

Physical Footprints
Online banking is also more attractive to banks because a reduced physical footprint means
reduced costs in other areas. In addition to saving the money that would normally be associated
with operating and maintaining physical branches, no longer having to print and mail paper
statements to customers would be a huge savings for banks. As an added bonus, banks have been
able to take advantage of current pro-environment sentiment by marketing online banking as a
green alternative.

By appealing to more mobile customers and more cost-conscious financial service providers
alike, online banking continues to be an attractive option for everyone involved. However, when
discussing the internet it is dangerous to assume that everything is going to be moved online;
there will always be individuals, industries, and transactions that are grounded in the real world
with no desire to change the way they do business.

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Growth of Internet
The increase in the growth of internet usage will definitely help the cause of growth of online
banking in India. The following chart shows the growth of internet in India during the past
decade or so

Why Banks Encourage Online Banking?

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OVERVIEW
Online banking has enjoyed increased popularity, and some banks actually require it. From
standard, brick-and-mortar institutions to cloud managed institutions, online banking offers
flexibility and convenience for all involved.

BANK ADVANTAGES:
Each visit to a bank costs the institution money, whether in bank teller wages and benefits
to security costs to maintenance costs. Online banking reduces those costs and increases
the banks profit margin.
Online banking reduces the need for the number of physical locations and services
offered within each. Because Customer Service Departments are united into fewer
locations, asset sharing within those locations further reduce bank costs.
CUSTOMER ADVANTAGES:

Online security of financial data has evolved tremendously since the early days of online
banking, and often transactions can be even more secure than those conducted in a drive
thru lane.

Online banking transactions require not only a secure login but also require secured
password entry. In-person transactions are based on account information and a photo ID,
both of which can be obtained under the radar. Online banking transactions also track
the Internet Protocol (IP) address of the computer used in the transaction. The IP can be
traced to the method or mode of Internet access, often through an Internet Service
Provider who always notes activity, computer, and actions performed under that IP
address assigned to the ISP account holder. Whether a dynamic or changing IP address or
a static or unchanging IP address is used, the ISP always records what IP address is
assigned to what ISP account at any time.

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Comprehensive Help sections on banks websites often reduce on-location inquiries,
further reducing overhead costs for banking institutions. Additional service enrollment or
dis-enrollment, address updates, and account status and verification are all time saving
activities for both the bank and the banking customer.

Online Bill Pay processes reduce stolen or counterfeit checks which cost banks billions of
dollars every month. Each online bill pay transaction allows for a grace period from the
payment order date to the actual check delivery date, which also allows the account
holder additional time to preview activity and account status.

DEVELOPMENT:
Increasingly, more and more people are switching to electronic platforms for executing financial
transactions. The wider usage of cell phone and internet certainly seems to be playing a role in
blurring physical boundaries, and unlocking a whole new world of opportunities for banks in
tapping newer customer segments and in recording greater volume of transactions.

If latest RBI data on retail electronic payment systems is anything to go by, electronic banking is
set to become the catalyst for change in the way money moves. Provisional data show that in
FY09 to January, a total of 5,587.85 lakh transactions were executed through the electronic
channel, a rise of 234.76 lakh transactions over the previous fiscal.

This growth was facilitated by the introduction of real-time gross transfer (RTGS) and national
electronic funds transfer (NEFT), which enabled fund transfers among account holders of the
same bank as well as inter-bank transfers.
The growth has also been aided by banks' efforts to offer innovative services and tighten security
measures, and the increase in awareness of services available. RBI outlining guidelines on
mobile banking, setting up of the National Payments Corporation of India and passage of the
Payments and Settlement Act too have given a positive thrust to the growth in electronic
payments. The impact of all these measures is likely to be felt in the current fiscal, which may
well mean FY10 could become a watershed year for e-banking. While opinions of industry
players differ on whether FY10 will indeed prove to be a tipping point, there seems to be
consensus that the year would mark a critical phase in the evolution of the payments and
settlement systems in India. "FY10 will certainly herald an important phase for electronic
banking in India and an upsurge in internet and ATM transactions," says Ashvin Parekh, partner
and national industry leader, financial services, Ernst & Young. "At the same time, traditional
fund transfer will continue to hold its own. We are going to witness a co-existence of these two
systems. In the regulatory space, there will be huge changes. As and when India Pay, which will

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eventually settle credit card and ATM transactions, comes into the picture, we could witness a
gradual shift away from Visa and MasterCard." The implementation of core banking solutions by
all public sector banks has not only helped banks rationalize their costs, but has also allowed
them to explore new ways of optimally utilizing their resources. Core banking, which facilitates
linking up of a bank's branches across the country, has enabled banks to improve their efficiency.

"Now, decisions can be taken remotely and the activities too can be undertaken in a centralized
location. This means that branches need not spend time on processing transactions and other
back office operations, and rather utilize the time and resources to function as selling outlets.
Centralized operations benefit from economies of scale and help in reducing bank costs,"
explains Janmejaya Sinha, managing director of India operations, Boston Consulting Group.

Opportunities in e-banking: ARE WE

READY?
It has always been a chicken-and-egg dilemma in business. Either firm waits for the
market to mature until customers are ready for the products and services. Or, firms can go ahead
and offer the products and services, hoping that their customers will catch on soon.

The same is true for new products and services that have emerged and continue to emerge
in the world of electronic banking (e-banking). Banking executives interviewed by Business
World Online have different ways of resolving the issue. Some would go ahead with new ideas,
wanting to take the first-mover advantage. Others would wait in the sidelines, but armed
nevertheless just in the case the market takes up suddenly increases.

Whether first-movers or latecomers, there is one partner in the e-banking game that is not
waiting for the chicken to lay the egg, or wait for the egg to hatch into a chick. Technology
providers are always up on their toes, like chicken ready to catch the early worm.

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Chapter:- 6
CHALLENGES OF ONLINE BANKING
Information technology analyst firm, the Meta Group, recently reported that "financial
institutions who don't offer home banking by the year 2000 will become marginalized." By the
year of 2002, a large sophisticated and highly competitive Internet Banking Market will develop
which will be driven by

Demand side pressure due to increasing access to low cost electronic services.

Emergence of open standards for banking functionality.

Growing customer awareness and need of transparency.

Global players in the fray

Close integration of bank services with web based E-commerce or even

disintermediation of services through direct electronic payments (E- Cash).

More convenient international transactions due to the fact that the Internet along with
general deregulation trends eliminates geographic boundaries.

Move from one stop shopping to 'Banking Portfolio' i.e. unbundled product purchases.

MAIN CONCERNS IN INTERNET

BANKING:
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In a survey conducted by the Online Banking Association, member institutions rated security as
the most important issue of online banking. There is a dual requirement to protect customers'
privacy and protect against fraud. Banking Securely: Online Banking via the World Wide Web
provides an overview of Internet commerce and how one company handles secure banking for its
financial institution, clients and their customers. Some basic information on the transmission of
confidential data is presented in Security and Encryption on the Web. PC Magazine Online also
offers a primer: How Encryption Works. A multi-layered security architecture comprising
firewalls, filtering routers, encryption and digital certification ensures that your account
information is protected from unauthorized access:

Firewalls and filtering routers ensure that only the legitimate Internet users are allowed to
access the system.

Encryption techniques used by the bank (including the sophisticated public key
encryption) would ensure that privacy of data flowing between the browser and the
Infinity system is protected.

Digital certification procedures provide the assurance that the data you receive is from
the Infinity system.

Security concerns:
Security fears have served as deterrents to online growth. Of particular concern are threats of
pharming and phishing. Phishing is an internet fraud, through which innocent people are enticed
to divulge their personal information like user ID and passwords, which are later on used by
scammers in unauthorized ways.
The most common method of phishing is sending emails claiming to be from your bank or other
financial institutions which are dealing that already has your personal information and you will
be asked to confirm the details by clicking a particular link (URL) provided in this fake email.
This URL will take you to a fake website which will be similar to your genuine website, and the
information provided by the customer in the forms provided in the fake website will be gathered

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and used for committing fraud in their accounts or withdraw funds unauthorized from these
accounts.

Pharming is another internet fraud, whereby as many as users as possible are redirected before
they reach the legitimate online banking websites they intend to visit and they are lead to
malicious ones. The bogus sites, to which victims are redirected without their knowledge or
consent, will likely look the same as genuine site. But when users enter their login name or
password, the information is captured by criminals.

FURTHER PROBLEMS RELATING TO

NET BANKING IN INDIA
Given that India is the IT and tech services outsourcing hotspot of the world, it's surprising that
Internet banking has not really taken off. Despite the advent of a very tech-savvy and vast
consumer class in recent years, a mix of industry issues and unique challenges continue to thwart
the expansion of net banking in India. Technology challenges, IT practices, certain cultural
issues, industry lethargy, and workplace constraints have affected widespread acceptance of
Internet banking.

Low Broadband Internet

Penetration

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India has one of the lowest broadband connectivity penetration rates in Asia as compared to
Japan, Taiwan, Korea and Singapore. While the bigger cities such as Mumbai, Delhi, Chennai,
and Bangalore have relatively better broadband penetration rates, PC users in smaller cities and
towns still use dial-up options to connect to the Internet. Slow connectivity speeds often dampen
the online banking experience for many customers eager to use such services.

Banks' Ambivalent Commitment

Levels
Internet banking did take off in India at the turn of the millennium but soon faltered due to lack
of takers. In the middle of this decade, multinational and domestic private banks started offering
net banking services as a competitive differentiator. Only recently, state-owned and public sector
banks have started doing likewise. However, banks' ambivalent commitment levels and their
reluctance to allocate huge budgets for net banking branding initiatives, as well as a lack of
industry advocacy efforts, have resulted in poor acceptance levels of Internet banking by
customers.

Customers' Preference for Traditional

Branches
There are thousands of highly active traditional bank branches in India's crowded cities and
major towns. Office workers take longer lunch breaks to finish banking activities and
transactions at these branches rather than conduct them online. Most customers prefer the
personal touch and customized service offered by staff in brick-and-mortar bank branches. Many

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Indians are also averse to calling call centers and banks' customer contact lines to address issues
related to online bank accounts.

Fear of Online Threats/Scams

Ubiquitous and prevalent online threats about hackers, identity theft, stolen passwords, viruses,
worms and spyware tend to make customers wary just like in any other country. Conservative
Indian bank customers used to years of saving in an erstwhile mixed-socialist economy are
always fearful of losing hard-earned savings in online scams. These customers are also not sure
about the efficacy of banks' websites and their commitment to allocate funds for reliable
encryption mechanisms and robust back-end technologies and systems.

Other Problems

Workplace constraints and corporate policies about using external websites or pursing personal
activities such as online banking have affected its expected fast-paced acceptance among the
growing affluent class in India. Cultural issues, such as parents giving priority use of the home
PC to their children rather than using it themselves, stifle the potential growth of home access to
Internet banking services. Public sector banks with vast customer bases also don't tend to invest
money in training personnel for e-banking initiatives, resulting in poor customer service levels.

Internet Banking in India Guidelines

Reserve Bank of India had set up a Working Group on Internet Banking to examine different
aspects of Internet Banking (I-banking). The Group had focused on three major areas of I-
banking, i.e. (i) technology and security issues, (ii) legal issues and (iii) regulatory and
supervisory issues. RBI has accepted the recommendations of the Group to be implemented in a
phased manner. Accordingly, the following guidelines are issued for implementation by

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banks. Banks are also advised that they may be guided by the original report, for a detailed
guidance on different issues.

I. Technology and Security

Standards:
a. Banks should designate a network and database administrator with clearly defined roles
as indicated in the Groups report.
b. Banks should have a security policy duly approved by the Board of Directors. There
should be a segregation of duty of Security Officer / Group dealing exclusively with
information systems security and Information Technology Division which actually
implements the computer systems. Further, Information Systems Auditor will audit the
information systems.
c. Banks should introduce logical access controls to data, systems, application software,
utilities, telecommunication lines, libraries, system software, etc. Logical access control
techniques may include user-ids, passwords, smart cards or other biometric technologies.
d. At the minimum, banks should use the proxy server type of firewall so that there is no
direct connection between the Internet and the banks system. It facilitates a high level of
control and in-depth monitoring using logging and auditing tools. For sensitive systems, a
state full inspection firewall is recommended which thoroughly inspects all packets of
information, and past and present transactions are compared. These generally include a
real time security alert.
e. All the systems supporting dial up services through modem on the same LAN as the
application server should be isolated to prevent intrusions into the network as this may
bypass the proxy server.
f. PKI (Public Key Infrastructure) is the most favored technology for secure Internet
banking services. However, as it is not yet commonly available, banks should use the
following alternative system during the transition, until the PKI is put in place:
1. Usage of SSL (Secured Socket Layer), which ensures server authentication and
use of client side certificates issued by the banks themselves using a Certificate
Server.

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2. The use of at least 128-bit SSL for securing browser to web server
communications and, in addition, encryption of sensitive data like passwords in
transit within the enterprise itself. (Para 6.4.5)
g. It is also recommended that all unnecessary services on the application server such as
FTP (File Transfer Protocol), telnet should be disabled. The application server should be
isolated from the e-mail server. (Para 6.4.6)
h. All computer accesses, including messages received, should be logged. Security
violations (suspected or attempted) should be reported and follow up action taken should
be kept in mind while framing future policy. Banks should acquire tools for monitoring
systems and the networks against intrusions and attacks. These tools should be used
regularly to avoid security breaches. The banks should review their security infrastructure
and security policies regularly and optimize them in the light of their own experiences
and changing technologies. They should educate their security personnel and also the
end-users on a continuous basis.
i. The information security officer and the information system auditor should undertake
periodic penetration tests of the system, which should include:
1. Attempting to guess passwords using password-cracking tools.
2. Search for back door traps in the programs.
3. Attempt to overload the system using DDoS (Distributed Denial of Service) &
DoS (Denial of Service) attacks.
4. Check if commonly known holes in the software, especially the browser and the
e-mail software exist.
j. The penetration testing may also be carried out by engaging outside experts (often called
Ethical Hackers).
k. Physical access controls should be strictly enforced. Physical security should cover all the
information systems and sites where they are housed, both against internal and external
threats.
l. Banks should have proper infrastructure and schedules for backing up data. The backed-
up data should be periodically tested to ensure recovery without loss of transactions in a
time frame as given out in the banks security policy. Business continuity should be

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ensured by setting up disaster recovery sites. These facilities should also be tested
periodically.
m. All applications of banks should have proper record keeping facilities for legal purposes.
It may be necessary to keep all received and sent messages both in encrypted and
decrypted form.
n. Security infrastructure should be properly tested before using the systems and
applications for normal operations. Banks should upgrade the systems by installing
patches released by developers to remove bugs and loopholes, and upgrade to newer
versions which give better security and control.

II. Legal Issues

a. Considering the legal position prevalent, there is an obligation on the part of banks not
only to establish the identity but also to make enquiries about integrity and reputation of
the prospective customer. Therefore, even though request for opening account can be
accepted over Internet, accounts should be opened only after proper introduction and
physical verification of the identity of the customer.
b. From a legal perspective, security procedure adopted by banks for authenticating users
needs to be recognized by law as a substitute for signature. In India, the Information
Technology Act, 2000, in Section 3(2) provides for a particular technology (viz., the
asymmetric crypto system and hash function) as a means of authenticating electronic
record. Any other method used by banks for authentication should be recognized as a
source of legal risk.
c. Under the present regime there is an obligation on banks to maintain secrecy and
confidentiality of customers accounts. In the Internet banking scenario, the risk of banks
not meeting the above obligation is high on account of several factors. Despite all
reasonable precautions, banks may be exposed to enhanced risk of liability to customers
on account of breach of secrecy, denial of service etc., because of hacking/ other
technological failures. The banks should, therefore, institute adequate risk control
measures to manage such risks.
d. In Internet banking scenario there is very little scope for the banks to act on stop-payment
instructions from the customers. Hence, banks should clearly notify to the customers the

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timeframe and the circumstances in which any stop-payment instructions could be
accepted.
e. The Consumer Protection Act, 1986 defines the rights of consumers in India and is
applicable to banking services as well. Currently, the rights and liabilities of customers
availing of Internet banking services are being determined by bilateral agreements
between the banks and customers. Considering the banking practice and rights enjoyed
by customers in traditional banking, banks liability to the customers on account of
unauthorized transfer through hacking, denial of service on account of technological
failure etc. needs to be assessed and banks providing Internet banking should insure
themselves against such risks.

III. Regulatory and Supervisory

Issues:
As recommended by the Group, the existing regulatory framework over banks will be extended
to Internet banking also. In this regard, it is advised that:
1. Only such banks which are licensed and supervised in India and have a physical presence
in India will be permitted to offer Internet banking products to residents of India. Thus,
both banks and virtual banks incorporated outside the country and having no physical
presence in India will not, for the present, be permitted to offer Internet banking services
to Indian residents.
2. The products should be restricted to account holders only and should not be offered in
other jurisdictions.
3. The services should only include local currency products.
4. The in-out scenario where customers in cross border jurisdictions are offered banking
services by Indian banks (or branches of foreign banks in India) and the out-in scenario
where Indian residents are offered banking services by banks operating in cross-border
jurisdictions are generally not permitted and this approach will apply to Internet banking
also. The existing exceptions for limited purposes under FEMA i.e. where resident

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Indians have been permitted to continue to maintain their accounts with overseas banks
etc. will, however, are permitted.
5. Overseas branches of Indian banks will be permitted to offer Internet banking services to
their overseas customers subject to their satisfying, in addition to the host supervisor, the
home supervisor.
Given the regulatory approach as above, banks are advised to follow the following instructions:
a. All banks, who propose to offer transactional services on the Internet, should obtain prior
approval from RBI. Banks application for such permission should indicate its business
plan, analysis of cost and benefit, operational arrangements like technology adopted,
business partners, third party service providers and systems and control procedures the
bank proposes to adopt for managing risks. The bank should also submit a security policy
covering recommendations made in this circular and a certificate from an independent
auditor that the minimum requirements prescribed have been met. After the initial
approval the banks will be obliged to inform RBI any material changes in the services /
products offered by them.
b. Banks will report to RBI every breach or failure of security systems and procedure and
the latter, at its discretion, may decide to commission special audit / inspection of such
banks.
c. The guidelines issued by RBI on Risks and Controls in Computers and
Telecommunications vide circular DBS.CO.ITC.BC. 10/ 31.09.001/ 97-98 dated
4th February 1998 will equally apply to Internet banking. The RBI as supervisor will
cover the entire risks associated with electronic banking as a part of its regular
inspections of banks.
d. Banks should develop outsourcing guidelines to manage risks arising out of third party
service providers, such as, disruption in service, defective services and personnel of
service providers gaining intimate knowledge of banks systems and mutualizing the
same, etc., effectively.
e. With the increasing popularity of e-commerce, it has become necessary to set up Inter-
bank Payment Gateways for settlement of such transactions. The protocol for
transactions between the customer, the bank and the portal and the framework for setting
up of payment gateways as recommended by the Group should be adopted.

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f. Only institutions who are members of the cheque clearing system in the country will be
permitted to participate in Inter-bank payment gateways for Internet payment. Each
gateway must nominate a bank as the clearing bank to settle all transactions. Payments
affected using credit cards, payments arising out of cross border e-commerce transactions
and all intra-bank payments (i.e., transactions involving only one bank) should be
excluded for settlement through an inter-bank payment gateway.
g. Inter-bank payment gateways must have capabilities for both net and gross settlement. All
settlement should be intra-day and as far as possible, in real time.
h. Connectivity between the gateway and the computer system of the member bank should
be achieved using a leased line network (not through Internet) with appropriate data
encryption standard. All transactions must be authenticated. Once, the regulatory
framework is in place, the transactions should be digitally certified by any licensed
certifying agency. SSL / 128 bit encryption must be used as minimum level of security.
Reserve Bank may get the security of the entire infrastructure both at the payment
gateways end and the participating institutions end certified prior to making the facility
available for customers use.
i. Bilateral contracts between the payee and payees bank, the participating banks and
service provider and the banks themselves will form the legal basis for such transactions.
The rights and obligations of each party must be clearly defined and should be valid in a
court of law.
j. Banks must make mandatory disclosures of risks, responsibilities and liabilities of the
customers in doing business through Internet through a disclosure template. The banks
should also provide their latest published financial results over the net.
k. Hyperlinks from banks websites often raise the issue of reputational risk. Such links
should not mislead the customers into believing that banks sponsor any particular product
or any business unrelated to banking. Hyperlinks from banks websites should be
confined to only those portals with which they have a payment arrangement or sites of
their subsidiaries or principals. Hyperlinks to banks websites from other portals are
normally meant for passing on information relating to purchases made by banks
customers in the portal. Banks must follow the minimum recommended security

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precautions while dealing with request received from other websites, relating to
customers purchases.
2. The Reserve Bank of India has decided that the Groups recommendations as detailed in these
circulars should be adopted by all banks offering Internet banking services, with immediate
effect. Even though the recommendations have been made in the context of Internet banking,
these are applicable, in general, to all forms of electronic banking and banks offering any form of
electronic banking should adopt the same to the extent relevant.
3. All banks offering Internet banking are advised to make a review of their systems in the light
of this circular and report to Reserve Bank the types of services offered, extent of their
compliance with the recommendations, deviations and their proposal indicating a time frame for
compliance. The first such report must reach us within one month from the date of this circular.
Banks not offering any kind of I-banking may submit a nil report

SOLUTIONS:
Here are some simple tips to prevent you from falling into the trap of cyber criminals.
Remember, a simple ignorance or oversight can make a huge dent in your hard- earned savings.

Securing your account: Avoid online banking on

unsecured wife systems and operate only from PCs at home. Never reveal password to
anyone. Do not even write it on a piece of paper on diary. Just memories it. It should be
alphanumeric and change it frequently.

Never reply to queries from bank online about account or personal details. The personal
information should not be kept in a public computer or in emails.

Phishing: A person's personal details are obtained by fraudsters posing as

bankers, who float a site similar to that of the person's bank. They are asked to provide all
personal information about themselves and their account to the bank on the pretext of
database up gradation. The number and password are then used to carry out transactions
on their behalf without their knowledge. Phishing involves using a form of spam to

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fraudulently gain access to people's online banking details. As well as targeting online
banking customers, phishing emails may target online auction sites or other online
payment facilities. Typically, a phishing email will ask an online banking customer to
follow a link in order to update personal bank account details. If the link is followed, the
victim downloads a program which captures his or her banking login details and sends
them to a third party.

Spam: Spam is an electronic 'junk mail' or unwanted messages sent to your

email account or mobile phone. These messages vary, but are essentially commercial and
often annoying in their sheer volume. They may try to persuade you to buy a product or
service, or visit a website where you can make purchases; or they may attempt to trick
you into divulging your bank account or credit card details.

Nigerian Scam: Nigerian or Frauds 409 or 419 are basically the

lottery scam in which some overseas persons are involved to cheat innocent persons or
organizations by promising to give a good amount of money at nominal fee charges.
Their intention is to steal money in the form of fee against the lottery prize.

Spyware: Spyware such as Trojan horse is generally considered to be

software that is secretly installed on a computer and takes things from it without the
permission or knowledge of the user. Spyware may take personal information, business
information, bandwidth; or processing capacity and secretly gives it to someone else.

"Trojan Horse" scheme unfolds when malicious software (malware) embeds to a consumer's
computer without the consumer being aware of it. Trojans often come in links or as attachments
from unknown email senders. After installation the software detects when a person accesses
online banking sites and records the username and password to transmit to the offender. People
using public computers, in places like Internet cafes, are often susceptible to Trojans like
malware or spyware.

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Check sites URL: Always check the URL of your bank's web
site. Fraudsters can lure you to enter your user ID and password at a fake website that
resembles your bank. If you see anything other than the bank's genuine URL, it has to be
fake.

Never enter your user ID or password or such sensitive information without ascertaining that you
are on the right website. Always type the Web address of your bank into the browser address
space. Never click on the link in the email.

Fool-proof password: Change your online banking

password at regular intervals. Also, avoid easy-to-guess passwords, like first names,
birthdays, kid's or spouse's name and telephone numbers. Try to have an alpha-numeric
password, one that combines alphabets and numbers.

If you have several bank accounts, never use the same online banking password for all. Never
select the option on browser that stores or retains user name and password. As it can easily be
cracked by cyber criminals. Also, never paste your password, always type it in. This little amount
of `finger exercise' will go a long way in safety.

Always check 'last logged': Most banks have a

'last logged in' panel on their websites. If your bank has it, check the panel whenever you
log in. If you notice irregularities (like you are logging in after two days, but the panel
says you logged in that morning!), report the matter immediately to your bank and
change your password right away.

Always log out when you exit the online banking portal. Close the browser to ensure that your
secure session is terminated. Never exit simply by closing the browser.

Keep your system up to date: Regularly

check for security updates for your computer operating system. Most security updates are
aimed at reducing risks to your computer; these may be data-related or otherwise. Make

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sure that your operating system and browser have the latest security patches installed.
And, always install these only from trusted websites.

Install a personal firewall to prevent hackers from gaining unauthorized access to your computer,
especially if you connect to the Internet through a cable or a DSL modem.

Public access can be injurious: Don't

leave the PC unattended after keying in information while transacting on the website.
Avoid accessing your bank online at cyber cafes or on a share or public computer. Also,
avoid locations that offer online connections through wireless networks (Wi-Fi), where
privacy and security are minimal.

Follow Bank instructions: Banks say that

appropriate up gradations are carried out from time to time by their IT departments for
risk mitigation. They issue instructions to the customers to manage their accounts through
virtual keyboards by way of which the characters typed by them are not identified by
hackers. SMS alerts are also an important tool since any transaction carried out on
account is reported to the account holder through an SMS.

Protection: Learn the ways to protect yourself from online banking

fraud schemes. Detect Trojans that appear on your PC in the form of viruses, spyware or
malware through Antivirus Software, anti-Spyware, and Adware. Also, learn to keep
your cards, documents and passwords safe, and monitor your accounts to safeguard
yourself from bank fraud committed through identity theft.

Chapter:- 7

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DATA ANALYSIS
A survey was conducted on online banking in India for the primary data among 100
people. The analysis of this survey or data is as follows:-

Q. What kind of banking do you

prefer?

Poll result

15%
25% traditional
online
both

60%

POLL out of 100: traditional 15 ; Online 60 ; both 25

FINDINGS: This shows us the preference of the people towards the type of banking. They
prefer to use the services of both the online and traditional banking rather than a particular type.

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Q. Do you think online banking is

better than traditional banking?

POLL

YES
27%
NO
CAN'T SAY
55%
18%

POLL out of 100: Yes - 69; No - 22; Cant Say 9

FINDINGS: The people understand that online banking is better than the traditional banking
because of its nature. While a few of the people are still not fully convinced.

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Q. Do you feel your account is

secured in online banking?

POLL
44

28 28

YES NO CANT SAY

Poll out of 100: Yes - 44; No - 28; Cant Say 28

FINDINGS: Majority of the people think that their Account is secured, but not all. Their
security concern should be eradicated. This will attract customers.

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Q. How frequently do you use

banking services?

POLL OF 100

20
28 WEEKLY
MONTHLY
REGULARLY
RARELY

44

POLL out of 100: Weekly - 20; Monthly - 44; regularly - 10; rarely 28

FINDINGS: Most of the people do not need the services of banks regularly or maybe there is no
need. They may transact with the bank on monthly basis for most of the time.

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Q. How happy are you with services

of online banking provided by your
bank?

POLL OF 100
COMPLETELY
12% 19% PARTIALLY
35% FAIRLY
35%
NOT AT ALL

POLL out of 100: Completely - 20; partially - 36; fairly - 36; Not at all - 12

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FINDINGS: The satisfaction level of people with the online banking services of their banks has
a mixed review. This may be due to multiple reasons.

Q. What type of transaction do you

make in online banking?

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Column1
CHECK
20% BALANCES
PAYMENTS
44% TRANSFER OF
8% FUNDS
OTHER

28%

POLL out of 100: Check balances - 44; Payments - 28; Transfer of fund - 8; other -20

FINDINGS: The utility of the online banking is service is not used to the extent is should be and
it is being majorly used for the purpose of checking the balance in the account. The reason for
this is the low volume of transaction among the people.

ONLINE BANKING IN INDIA

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Q.1 WHICH BANK DO YOU HAVE AN ACCOUNT?

(1 Private sector bank; 2 Public sector bank; 3 Other)

Q.2 WHAT KIND OF BANKING DO YOU PREFER?

(1 Traditional; 2 Online; 3 Both)

Q.3 DO YOU THINK ONLINE BANKING IS USEFUL?

(1 Yes; 2 No; 3 Cant say)

Q.4 HOW FREQUENTLY DO YOU USE BANKING SERVICES?

(1 Weekly; 2 Monthly; 3 Regularly; 4 Rarely)

Q.5 HOW FREQUENTLY DO YOU VISIT YOUR BANK BRANCHE PER MONTH?
(1 1 to 3; 2 3 to 8; 3 8 to 12; 4 More than 12)

Q.6 DO YOU THINK ONLINE BANKING IS BETTER THAN TRADITIONAL BANKING?

(1 Yes; 2 No; 3 Cant Say)

Q.7 DO YOU FEEL ONLINE BANKING HAS A GROWTH POTENTIAL IN INDIA?

(1 Yes; 2 No; 3 Cant Say)

Q.8 WHAT TYPE OF TRANSACTION DO YOU MAKE IN ONLINE BANKING?

(1 Check balances; 2 Make payments; 3 Transfer funds; 4 Other)

Q.9 DO YOU FEEL YOUR ACCOUNT IS COMPLETELY SECURED IN ONLINE BANKING?

(1 Yes; 2 No; 3 Cant Say)

Q.10 ARE YOU HAPPY WITH THE SERVICES OF ONLINE BANKING PROVIDED BY YOUR
BANK?

(1 Completely; 2 Partially; 3 Fairly; 4 Not at all)

Q.11 DO YOU FEEL MOBILE BANKING IS BETTER THAN ONLINE BANKING?

(1 - yes; 2 No ; 3 Cant say )

Q.12 FOR ME ONLINE BANK IS

NAME: PHONE:

EMAIL ID:

CONCLUSION

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The face of banking is changing rapidly. Competition is going to be tough and

with financial liberalization under the WTO, banks in
India will have to benchmark themselves against the best in the world.
For a strong and resilient banking and financial system, therefore, banks
need to go beyond peripheral issues and tackle significant issues like
improvements in profitability, efficiency and technology, while achieving
economies of scale through consolidation and exploring available cost-
effective solutions. These are some of the issues that need to be addressed if
banks are to succeed, not just survive, in the changing milieu.

Over the last three decades the role of banking in the process of financial
intermediation has been undergoing a profound transformation, owing to
changes in the global financial system. It is now clear that a thriving and
vibrant banking system requires a well-developed financial structure with
multiple intermediaries operating in markets with different risk profiles.
Taking the banking industry to the heights of international excellence will
require a combination of new technologies, better processes of credit and
risk appraisal, treasury management, product diversification, internal control
and external regulations and not the least, human resources. Fortunately, we
have a comparative advantage in almost all these areas. Our professionals
are at the forefront of technological change and financial developments all
over the world. It is time to harness these resources for development of
Indian banking in the new century

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BIBLOGRAPHY

Www. Indian banking system.com

www.RBI.com

www.services of banks.com

www.problems of online banking.com

www.onlinebanking.net

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