modern aspects of indian banking

8/9/2019 Modern aspects of Indian banking

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@NLS

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Modern Aspects of Banking

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What is Banking?

The Origin of Banking is in “Money Lending”

– Money Lending is “Self Financed” by the money

lender

– Banking is “Financed from a part of the

community”

Economic concept is “Channelising the Community

savings into productive activities”

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Legal Definition

Definition of Banking flows from Section 5 ofBanking Regulation Act 1949 – 5 (10)(b) "banking" means the accepting, for the

purpose of lending or investment, of deposits ofmoney from the public, repayable on demand orotherwise, and withdrawable by cheque, draft, order orotherwise. Cheque related service is part of this definition

– The word draft used in this definition is ambiguous but can berelated to third party remittances on the instructions of thecustomer

– Loans and Cash Credit also comes under this basic definition

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Ancillary Services

Traditionally bankers have been associated

with

– Remittance services DDs,MTs,TTS,

Traveller’s cheques, Gift Cheques etc

Bills collection/discounting, Hundis

collection/discounting Letters of Credit and Letters of Guarantee

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Banking has changed

The philosophy of Banking has changed

– From being an institutional mechanism to

channelize public saving into productive

economic needs

– To Managing Financial Risk for profits

– From priority advances to consumer finances

Emphasis has shifted from funded business

to non funded “Services”

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Banking has changed

What Mahatma Gandhi said…

– “A customer is the most important visitor on our premises.

He is not dependent on us. We are dependent on him.

He is not an interruption in our work. He is the purpose of it.He is not an outsider in our business. He is part of it.

We are not doing him a favor by serving him. He is doing us

a favor by giving us an opportunity to do

…..Mohandas Karamchand Gandhi

– Today’s bankers are not customer oriented. They are

EPS and Market Capitalization oriented.

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Transformation (TechnologyRelated)

With the development of “Computing” as atechnology – HOs of Banks deployed computing for “Account

Reconciliation” Inter branch accounting and Salary management

– Administrative offices deployed word processing in theform of electronic computers

– Branch level and transaction level use of computersfirst came in the form of Automatic Ledger posting machines (ALPM)

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Transformation of Banking..2

ALPM addressed small computing requirements at counterlevel in a SB/CA level – Could post a debit/credit, calculate the balance and print out

statements More a customized electronic typewriter

– Had a microprocessor and memory capabilities

Desktop Computers and Branch level network

Clearing house computerization through MICR cheques

Now the CBS system – Anywhere, anytime Banking with ATMs, Internet Banking, Mobile

Banking etc

Truncated Cheques/Cheques in E Form?

Digital Wallets, Mobile Wallets, Airtel Money?

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What is E Banking?


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Concept of E Banking

We understand that Internet Banking and

Mobile Banking is part of E Banking.

– May be Core Banking and ATM Banking also areeasily recognizable as parts of E Banking

– But

What is the legal definition?

– Is there a legal definition?

– Should there be a legal definition?

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What distinguishes E Banking?

Traditional Banking used “Paper” as the means of – Recording of transactions

– Exchange of material instructions between the Banker andCustomer

– Account opening was a contract under Indian Contract Actusing paper based offer and acceptance documents

Interaction with the customer was face to face – With the ledger clerk initiating a transaction

– branch manager who authenticates a transaction – the cashier who dispenses cash

E Banking uses an electronic document or an electronic device foreither record keeping or for interaction

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What distinguishes E Banking

It encompasses – Records in electronic form

Account opening is still a paper based contract

Internet Banking details are often only in electronic form – Hardware both at the Bank and the Customer end

– Hardware in an intermediary place such as the ATM

– Network that connects the customer with the back end

system – All applications that run at the Bank , Customer end

and at the Intermediary level in ATMs

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Legal Definition?

There is no separate definition.

The derived definition – E Banking means

“Banking” with the use of electronic documents. Or – “accepting, for the purpose of lending or investment, of

deposits of money from the public, repayable ondemand or otherwise, and withdrawable by cheque,draft, order or otherwise using electronic documents in

the process” Use of electronic documents implies use of electronic

devices

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Is “Electronic Document” defined?

Sec 2(t) of ITA 2008 – "Electronic Record" means data, record or data generated,

image or sound stored, received or sent in an electronic formor micro film or computer generated micro fiche; "Data" means

– a representation of information, knowledge, facts, concepts or instructionswhich are being prepared or have been prepared in a formalised manner,and is intended to be processed, is being processed or has beenprocessed in a computer system or computer network, and

– may be in any form (including computer printouts magnetic or opticalstorage media, punched cards, punched tapes) or stored internally in thememory of the computer;

"Electronic Form" with reference to information means – any information generated, sent, received or stored in media, magnetic,

optical, computer memory, micro film, computer generated micro fiche orsimilar device;

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What is “Electronic” Data?

The essential feature of “Data” in electronic

form is that

– Data is stored and read in “Binary” language.

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Legal Definition of E Banking

E Banking means – “accepting,

for the purpose of lending or investment,

– of deposits of money

from the public, – repayable

on demand or otherwise, and

– withdrawable by cheque, draft, order or otherwise

– using electronic documents binary expressions in the processof recording transactions and exchanging material instructionsbetween the Banker and the Customer”

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Origin of E Banking

1982: Working group on the feasibility of introducingMICR/OCR technology for cheque processing (Chairman Dr Y.B.Damle)

1984: Committee on Mechanization in the Banking Industry(Chairman: Dr C.Rangarajan)

1987: Committee on Communication Netwok for Banks andSWIFT implementation (Chairman TNA Iyer)

1988: Committee on Computerization in Banks ( Chairman Dr CRangarajan)

1994: Committee on Technology Issues relating to PaymentSystem etc 9Chairman W.S.Saraf)

1995: Committee on legislation on Electronic Fund Transferand other Electronic payments (Chairperson: Smt K.S.Shere)

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Growth of E Banking

Digitization of Banking operations – Inter Bank reconciliation

– Backend processing of Cheques

– Clearing of Cheques

– Intra Bank/Inter Bank file transfer systems (BANKNET/INFINET)

– Inter Bank information exchange system (SWIFT)

– Interconnectivity of ATMs (Shared Payment Network Systems) Branch Level

– ALPM

– Branch level Server Client System

– Core Banking System

Customer Interaction

– ATMs – Internet

– Mobiles

– Credit/Debit Cards

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Advent of Internet banking

Originated in 1997-ICICI bank

– Now extended as a service by most banks

– Viewing of Account transactions – Funds transfer within the bank (NEFT)

– Fund transfer outside the banks (RTGS)

–

Bill payments Virtual Banking scenario

Anywhere, Anytime Banking

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E Banking and Virtual Banking

Physical Existence – Virtual Banking Involves a Bank which may not have a physical

existence

– E Banking is a mode of transaction with a physical Bank

Currency – Virtual Bank may use Virtual Currency and not use physical

currency at all (eg: Linden Dollars, Game points, E bidcoupons)

– E Banking Is a mirror of physical banking and hence

represents physical currency whose records are kept inelectronic form In India only Physical Society Banks can offer Internet Banking

All other bank like transactions need to be classified as E Commerceand not E Banking.

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Card Banking

Credit Cards – Identity for request for credit

Debit Cards – Identity for request for payment out of account

Conforms to BR Act definition of “or otherwise” (used in withdrawal means)

Prepaid stored value cards – Is a bank branch in itself with the functions of a ledger clerk and passing officer

combined. Cashier is outside the domain

Virtual Cards – Short life

– customized – self created

ATM Cards – Access control for identification

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Card Banking

Storage of Information – Magnetic Stripe or Chip

– Elementary identity particulars or more It is a data storage device or “Media” as per ITA 2008

The card swiping device reads the data and transmitsthe data.

– It is a “Computer” as per ITA 2008

– RFID tagged/Near field communication contactless cards

– EMV standard with Microprocessor Chip

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Social Media/E Mail Banking

Facebook/Twitter

– Send a message to the facebook page

– Send a message to a Twitter account – Send payment to an e-mail address

Receiving Bank issues a payment authorization

with a Pin acceptable at an ATM

Customer ID is linked to the social media account/E Mail

account

Transmission of instruction is through the Internet

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App based banking

Bank specific App

– Linked to a Bank

Multi bank App (Wallet)

– Is a Bank in itself.

Apps that enable peripheral interaction with the core

banking system

Apps that are capable of carrying out full fledged

transactions of money transfers in and out.

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Pockets-ICICI Bank

Split & Share that allows customers to split and track

expenses and share them with friends on Facebook.

It also allows one to send reminder on pending

payments.

The app also allows one to make a payment to

friend, recharge prepaid mobile, book movie tickets.

One does not need to know bank account details oftheir friends to make a transfer, users can create a

coupon which can be redeemed by their friends.

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Hashtag banking-Kotak (Jifi)

Jifi customers can receive account updates on

Twitter as a Direct Message (DM) by simply tweeting

to @KotakJifi with predefined hashtags.

– The bank’s dedicated Twitter handle @kotaksyncwill send out these messages

Jifi is a zero interest current account with no

minimum balance conditions, – initial payment of just Rs. 5,000/-.

– All balances over Rs. 25,000/- automatically move into term

deposits

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Technological Overview

Electronic Documents held in a data base

server

Transaction applications are hosted in anapplication server

Access is through an authentication gateway

or Firewall

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E Banking architecture

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Authentication Domain Server/

Application server

Database

Bank Employees