Summary

“Bank is a lawful organization, which accepts deposits that can be withdrawn on demand. It also
lends money to individuals and business houses that need it.” Banks also render many other
useful services – like collection of bills, payment of foreign bills, safe-keeping of jewellery and
other valuable items, certifying the credit-worthiness of business, and so on. Banks accept
deposits from the general public as well as from the business community. Any one who saves
money for future can deposit his savings in a bank. Businessmen have income from sales out of
which they have to make payment for expenses. They can keep their earnings from sales safely
deposited in banks. Banks give two assurances to the depositors : a. Safety of deposits, and b.
Withdrawal of deposits, whenever needed On deposits, Banks give interest, which adds to the
original amount of deposits. It is a great incentive to the depositors. It promotes saving habits
among the public. On the basis of deposits banks also grant loans and advances to farmers,
traders and businessmen for productive purposes. Thereby banks contribute to the economic
development of the country and well being of the people in general. Banks charge interest on
loans. The rate of interest is generally higher than the rate of interest allowed on deposits. Banks
also charge fees for the various other services, which they render to the business community and
public in general. Interest received on loans and fees charged for services which exceed the
interest allowed on deposits are the main sources of income for banks from which they meet their
administrative expenses. The activities carried on by banks are called banking activities.
‘Banking’ as an activity involves acceptance of deposits and lending or investment of money. It
facilitates business activities by providing money and certain services that help in exchange of
goods and services. Therefore, banking is an important auxiliary to trade. It not only provides
money for the production of goods and services but also facilitates their exchange between the
buyer and seller. You may be aware that there are laws which regulate the banking activities in
our country. Depositing money in banks and borrowing from banks are legal transactions. Banks
are also under the control of government. Hence they enjoy the trust and confidence of people.
Banks depend a great deal on public confidence.

Page 1
Chapter – 1

Page 2
INTRODUCTION

Banking in India in the modern sense originated in the last decades of the 18th century.
The first banks were Bank of Hindustan (1770-1829) and The General Bank of India, established
1786 and since defunct.

The largest bank, and the oldest still in existence, 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
Bombayand the Bank of Madras, all three of which were established under charters from
the British East India Company. The three banks merged in 1921 to form the Imperial Bank of
India, which, upon India's independence, became the State Bank of India in 1955. For many
years the presidency banks acted as quasi-central banks, as did their successors, until the Reserve
Bank of India was established in 1935.

In 1969 the Indian government nationalised all the major banks that it did not already
own and these have remained under government ownership. They are run under a structure know
as 'profit-making public sector undertaking' (PSU) and are allowed to compete and operate
as commercial banks. The Indian banking sector is made up of four types of banks, as well as the
PSUs and the state banks, they have been joined since 1990s by new private commercial banks
and a number of foreign banks.

Banking in India was generally fairly mature in terms of supply, product range and
reach-even though reach in rural India and to the poor still remains a challenge. The government
has developed initiatives to address this through the State bank of India expanding its branch
network and through the National Bank for Agriculture and Rural Development with things
like microfinance.

Page 3
OBJECTIVES OF STUDY

The banking services in india took place with an aim to achieve following major objectives.

 The main objective is social welfare.

 It controls private monopolies

 Banking reduces regional imbalance

 It develops banking habits among people.

Page 4
Chapter – 2

Page 5
HISTORY OF BANKING IN INDIA

There are three different phases in the history of banking in India.

1) Pre-Nationalization Era.

2) Nationalization Stage.

3) Post Liberalization Era.

1) Pre-Nationalization Era:

In India the business of banking and credit was practices even in very early times. The
remittance of money through Hundies, an indigenous credit instrument, was very popular. The
hundies were issued by bankers known as Shroffs, Sahukars, Shahus or Mahajans in different
parts of the country.
The modern type of banking, however, was developed by the Agency Houses of Calcutta and
Bombay after the establishment of Rule by the East India Company in 18th and 19th centuries.
During the early part of the 19th Century, ht volume of foreign trade was relatively small. Later
on as the trade expanded, the need for banks of the European type was felt and the government
of the East India Company took interest in having its own bank. The government of Bengal took
the initiative and the first presidency bank, the Bank of Calcutta (Bank of Bengal) was
established in 180. In 1840, the Bank of Bombay and IN 1843, the Bank of Madras was also set
up.
These three banks also known as “Presidency Bank”. The Presidency Banks had their
branches in important trading centers but mostly lacked in uniformity in their operational
policies. In 1899, the Government proposed to amalgamate these three banks in to one so that it

Page 6
could also function as a Central Bank, but the Presidency Banks did not favor the idea. However,
the conditions obtaining during world war period (1914-1918) emphasized the need for a unified
banking institution, as a result of which the Imperial Bank was set up in1921. The Imperial Bank
of India acted like a Central bank and as a banker for other banks. The RBI (Reserve Bank of
India) was established in 1935 as the Central Bank of the Country. In 1949, the Banking
Regulation act was passed and the RBI was nationalized and acquired extensive regulatory
powers over the commercial banks.
In 1950, the Indian Banking system comprised of the RBI, the Imperial Bank of India,
Cooperative banks, Exchange banks and Indian Joint Stock banks.

2) Nationalization Stages:
After Independence, in 1951, the All India Rural Credit survey, committee of
Direction with Shri. A. D. Gorwala as Chairman recommended amalgamation of the Imperial
Bank of India and ten others banks into a newly established bank called the State Bank of India
(SBI). The Government of India accepted the recommendations of the committee and introduced
the State Bank of India bill in the Lok Sabha on 16 th April 1955 and it was passed by Parliament
and got the president’s assent on 8th May 1955. The Act came into force on 1st July 1955, and the
Imperial Bank of India was nationalized in 1955 as the State Bank of India.The main objective of
establishing SBI by nationalizing the Imperial Bank of India was “to extend banking facilities on
a large scale more particularly in the rural and semi-urban areas and to diverse other public
purposes.”In 1959, the SBI (Subsidiary Bank) act was proposed and the following eight state-
associated banks were taken over by the SBI as its subsidiaries.

Name of the Bank Subsidiary with effect from

1. State Bank of Hyderabad 1st October 1959
2. State Bank of Bikaner 1st January 1960
3. State Bank of Jaipur 1st January 1960

Page 7
4. State Bank of Saurashtra 1st May 1960
5. State Bank of Patiala 1st April 1960
6. State Bank of Mysore 1st March 1960
7. State Bank of Indore 1st January 1968
8. State Bank of Travancore 1st January 1960

With effect from 1st January 1963, the State Bank of Bikaner and State Bank of Jaipur
with head office located at Jaipur. Thus, seven subsidiary banks State Bank of India formed the
SBI Group. The SBI Group under statutory obligations was required to open new offices in rural
and semi-urban areas and modern banking was taken to these unbanked remote areas On 19th
July 1969, then the Prime Minister, Mrs. Indira Gandhi announced the nationalization of 14
major scheduled Commercial Banks each having deposits worth Rs. 50 crore and above. This
was a turning point in the history of commercial banking in India. Later the Government
Nationalized six more commercial private sector banks with deposit liability of not less than Rs.
200 crores on 15th April 1980, viz.
i) Andhra Bank.
ii) Corporation Bank.
iii) New Bank if India.
iv) Oriental Bank of Commerce.
v) Punjab and Sind Bank.
vi) In 1969, the Lead Bank Scheme was introduced to extend banking facilities to
everycorner of the country. Later in 1975, Regional Rural Banks were set up to
supplement the activities of the commercial banks and to especially meet the credit
needs of the weaker sections of the rural society.
Nationalization of banks paved way for retail banking and as a result there has been an alt round
growth in the branch network, the deposit mobilization, credit disposals and of course
employment.
The first year after nationalization witnessed the total growth in the agricultural loans and the
loans made to SSI by 87% and 48% respectively. The overall growth in the deposits and the
advances indicates the improvement that has taken place in the banking habits of the people in
the rural and semi-urban areas where the branch network has spread. Such credit expansion

Page 8
enabled the banks to achieve the goals of nationalization, it was however, achieved at the coast
of profitability of the banks.

Consequences of Nationalization:
 The quality of credit assets fell because of liberal credit extension policy.
 Political interference has been as additional malady.
 Poor appraisal involved during the loan meals conducted for credit disbursals.
 The credit facilities extended to the priority sector at concessional rates.
 The high level of low yielding SLR investments adversely affected the profitability of the
banks.
 The rapid branch expansion has been the squeeze on profitability of banks emanating
primarily due to the increase in the fixed costs.
 There was downward trend in the quality of services and efficiency of the banks.

3) Post-Liberalization Era---Thrust on Quality and Profitability:

By the beginning of 1990, the social banking goals set for the banking industry made most of
the public sector resulted in the presumption that there was no need to look at the fundamental
financial strength of this bank. Consequently they remained undercapitalized. Revamping this
structure of the banking industry was of extreme importance, as the health of the financial sector
in particular and the economy was a whole would be reflected by its performance.
The need for restructuring the banking industry was felt greater with the initiation of the real
sector reform process in 1992. the reforms have enhanced the opportunities and challenges for
the real sector making them operate in a borderless global market place. However, to harness the
benefits of globalization, there should be an efficient financial sector to support the structural
reforms taking place in the real economy. Hence, along with the reforms of the real sector, the
banking sector reformation was also addressed.
The route causes for the lackluster performance of banks, formed the elements of the banking
sector reforms. Some of the factors that led to the dismal performance of banks were.
 Regulated interest rate structure.
 Lack of focus on profitability.
 Lack of transparency in the bank’s balance sheet.

Page 9
  Lack of competition.
 Excessive regulation on organization structure and managerial resource.
 Excessive support from government.

Against this background, the financial sector reforms were initiated to bring about a paradigm
shift in the banking industry, by addressing the factors for its dismal performance.In this context,
the recommendations made by a high level committee on financial sector, chaired by M.
Narasimham, laid the foundation for the banking sector reforms. These reforms tried to enhance
the viability and efficiency of the banking sector. The Narasimham Committee suggested that
there should be functional autonomy, flexibility in operations, dilution of banking strangulations,
reduction in reserve requirements and adequate financial infrastructure in terms of supervision,
audit and technology. The committee further advocated introduction of prudential forms,
transparency in operations and improvement in productivity, only aimed at liberalizing the
regulatory framework, but also to keep them in time with international standards. The emphasis
shifted to efficient and prudential banking linked to better customer care and customer services.
Private Sector Banks
Private banking in India was practiced since the begining of banking system in India. The first
private bank in India to be set up in Private Sector Banks in India was Indus Ind Bank. It is one
of the fastest growing Bank Private Sector Banks in India.
The first Private Bank in India to receive an in principle approval from the Reserve Bank of
India was Housing Development Finance Corporation Limited, to set up a bank in the private
sector banks in India as part of the RBI's liberalization of the Indian Banking Industry. It was
incorporated in August 1994 as HDFC Bank Limited with registered office in Mumbai and
commenced operations as Scheduled Commercial Bank in January 1995.
ING Vaysya, yet another Private Bank of India was incorporated in the year 1930. Bangalore has
a pride of place for having the first branch inception in the year 1934. With successive years of
patronage and constantly setting new standards in banking, ING Vaysya Bank has many credits
to its account.

Page 10
Entry of Private Sector Banks:
There has been a paradigm shift in mindsets both at the Government level in the banking
industry over the years since Nationalization of Banks in 1969, particularly during the last
decade (1990-2000). Having achieved the objectives of Nationalization, the most important issue
before the industry at present is survival and growth in the environment generated by the
economic liberalization greater competition with a view to achieving higher productivity and
efficiency in January 1993 for the entry of Private Sector banks based on the Nationalization
Committee report of 1991, which envisaged a larger role for Private Sector Banks.
The RBI prescribed a minimum paid up capital of Rs. 100 crores for the new bank and the
shares are to be listed at stock exchange. Also the new bank after being granted license under the
Banking Regulation Act shall be registered as a public limited company under the companies
Act, 1956.

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Subsequently 9 new commercial banks have been granted license to start banking operations.
The new private sector banks have been very aggressive in business expansion and is also
reporting higher profile levels taking the advantage of technology and skilled manpower. In
certain areas, these banks have even our crossed the other group of banks including foreign
banks.

Page 11
Current scenario
Currently (2007), overall, banking in India is considered as 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. Even in terms of quality of assets and capital adequacy, Indian banks
are considered to have clean, strong and transparent balance sheets-as compared 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-without any stated 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. M&As, takeovers, asset sales and much more action (as it is
unraveling in China) will happen on this front in India.
In March 2006, the Reserve Bank of India allowed Warburg Pincus to increase its stake in Kotak
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. Currently, India
has 88 scheduled commercial banks (SCBs) - 28 public sector banks (that is with the
Government of India holding a stake), 29 private banks (these do not have government stake;
they may be publicly listed and traded on stock exchanges) and 31 foreign banks.
They have a combined network of over 53,000 branches and 17,000 ATMs. According to a
report by ICRA Limited, a rating agency, the public sector banks hold over 75 percent of total
assets of the banking industry, with the private and foreign banks holding 18.2% and 6.5%
respectively.

Page 12
Chapter – 3

Page 13
BANKING IN INDIA

Overview of Banking:
Banking Regulation Act of India, 1949 defines Banking as “accepting, for the
purpose of lending or of investment of deposits of money from the public, repayable on demand
or otherwise or withdrawable by cheque, draft order or otherwise.” The Reserve Bank of India
Act, 1934 and the Banking Regulation Act, 1949, govern the banking operations in India.

Organizational Structure of Banks in India:

In India banks are classified in various categories according to differ rent criteria. The following
charts indicate the banking structure:

Reserve Bank of India

Commercial Banks Co-operative Banks Development Banks

Nationalized Private Short-term Long-term

credit credit

Agricultural Urban EXIM Industrial Agricultural

Credit Credit

Broad Classification of Banks in India:

1) The RBI: The RBI is the supreme monetary and banking authority in the country and has
the responsibility to control the banking system in the country. It keeps the reserves of all
scheduled banks and hence is known as the “Reserve Bank”.
2) Public Sector Banks:

Page 14
  State Bank of India and its Associates (8)
 Nationalized Banks (19)
 Regional Rural Banks Sponsored by Public Sector Banks (196)
(3) Private Sector Banks:
 Old Generation Private Banks (22)
 Foreign New Generation Private Banks (8)
 Banks in India (40)
(4) Co-operative Sector Banks:
 State Co-operative Banks
 Central Co-operative Banks
 Primary Agricultural Credit Societies
 Land Development Banks
 State Land Development Banks

(5) Development Banks: Development Banks mostly provide long term finance for setting
up industries. They also provide short-term finance (for export and import activities)
 Industrial Finance Co-operation of India (IFCI)
 Industrial Development of India (IDBI)
 Industrial Investment Bank of India (IIBI)
 Small Industries Development Bank of India (SIDBI)
 National Bank for Agriculture and Rural Development (NABARD)
 Export-Import Bank of India
Role of Banks:
Banks play a positive role in economic development of a country as repositories
of community’s savings and as purveyors of credit. Indian Banking has aided the economic
development during the last fifty years in an effective way. The banking sector has shown a
remarkable responsiveness to the needs of planned economy. It has brought about a considerable
progress in its efforts at deposit mobilization and has taken a number of measures in the recent
past for accelerating the rate of growth of deposits. As recourse to this, the commercial banks

Page 15
opened branches in urban, semi-urban and rural areas and have introduced a number of attractive
schemes to foster economic development.
The activities of commercial banking have growth in multi-directional ways as well as multi-
dimensional manner. Banks have been playing a catalytic role in area development, backward
area development, extended assistance to rural development all along helping agriculture,
industry, international trade in a significant manner. In a way, commercial banks have emerged
as key financial agencies for rapid economic development.
By pooling the savings together, banks can make available funds to specialized institutions
which finance different sectors of the economy, needing capital for various purposes, risks and
durations. By contributing to government securities, bonds and debentures of term-lending
institutions in the fields of agriculture, industries and now housing, banks are also providing
these institutions with an access to the common pool of savings mobilized by them, to that extent
relieving them of the responsibility of directly approaching the saver. This intermediation role of
banks is particularly important in the early stages of economic development and financial
specification. A country like India, with different regions at different stages of development,
presents an interesting spectrum of the evolving role of banks, in the matter of inter-mediation
and beyond.
Mobilization of resources forms an integral part of the development process in India. In this
process of mobilization, banks are at a great advantage, chiefly because of their network of
branches in the country. And banks have to place considerable reliance on the mobilization of
deposits from the public to finance development programmes. Further, deposit mobalization by
banks in India acquired greater significance in their new role in economic development.
Commercial banks provide short-term and medium-term financial assistance. The short-term
credit facilities are granted for working capital requirements. The medium-term loans are for the
acquisition of land, construction of factory premises and purchase of machinery and equipment.
These loans are generally granted for periods ranging from five to seven years. They also
establish letters of credit on behalf of their clients favouring suppliers of raw
materials/machinery (both Indian and foreign) which extend the banker’s assurance for payment
and thus help their delivery. Certain transaction, particularly those in contracts of sale of
Government Departments, may require guarantees being issued in lieu of security earnest money
deposits for

Page 16
release of advance money, supply of raw materials for processing, full payment of bills on the
assurance of the performance etc. Commercial banks issue such guarantees also.
The Role of Reserve Bank of India (RBI) – Banker’s Bank:

The Reserve Bank of India (RBI) is the central bank of India and was
established on April 1, 1935 in accordance with the provisions of the Reserve Bank of India Act,
1934. Since its inception, it has been headquartered in Mumbai. Though originally privately
owned, RBI has been fully owned by the Government of India since nationalization in 1949.
RBI is governed by a central board (headed by a Governor) appointed by the Central
Government. The current governor of RBI is Dr.Y.Venugopal Reddy (who succeeded Dr.
Bimal Jalan on September 6, (2003). RBI has 22 regional offices across India.The Reserve
Bank of India was set up on the recommendations of the Hilton Young Commission. The
commission submitted its report in the year 1926, though the bank was not set up for nine years.
Main Objective:
Monetary Authority
 Formulates, implements and monitors the monetary policy.
 Objective: maintaining price stability and ensuring adequate flow of credit to productive
sectors.
Regulator and supervisor of the financial system
 Prescribes broad parameters of banking operations within which the country’s banking
and financial system functions.
 Objective: maintain public confidence in the system, protect depositors’ interest and
provide cost-effective banking services to the public. The Banking Ombudsman Scheme
has been formulated by the Reserve Bank of India (RBI) for effective redressal of
complaints by bank customers
Manager of Exchange Control
 Manages the Foreign Exchange Management Act, 1999.
 Objective: to facilitate external trade and payment and promote orderly development and
maintenance of foreign exchange market in India.
Issuer of currency
 Issues and exchanges or destroys currency and coins not fit for circulation.

Page 17
  Objective: to give the public adequate quantity of supplies of currency notes and coins
and in good quality.

Developmental role
 Performs a wide range of promotional functions to support national objectives.
Related Functions
 Banker to the Government: performs merchant banking function for the central and the
state governments; also acts as their banker.
 Banker to banks: maintains banking accounts of all scheduled banks.
 Owner and operator of the depository (SGL) and exchange (NDS) for government bonds.
There is now an international consensus about the need to focus the tasks of a central bank upon
central banking. RBI is far out of touch with such a principle, owing to the sprawling mandate
described above.

Supervisory Functions:
In addition to its traditional central functions, the Reserve bank has certain non-monetary
functions of the nature of supervision of banks and promotion of sound banking in India. The
Reserve Bank Act, 1934, and the Banking Regulation Act, 1949 have given the RBI wide powers
of supervision and control over commercial and cooperative banks, relating to licensing and
establishments, branch expansion, liquidity of their assets, management and methods of working,
amalgamation, reconstruction and liquidation. The RBI is authorized to carry out periodical
inspections of the banks and to call for returns and necessary information from them. The
nationalization of 14 major Indian scheduled banks in July 1969 has imposed new
responsibilities on the RBI for directing the growth of banking and credit policies towards more
rapid development of the economy and realization of certain desired social objectives. The
supervisory functions of the RBI have helped a great deal in improving the standard of banking
in India to develop on sound lines and to improve the methods of their operation.

Promotional Functions:
With economic growth assuming a new urgency since Independence, the range of the
Reserve Bank’s functions have steadily widened. The Bank now performs a variety of

Page 18
developmental and promotional functions, which, at one time, were regarded as outside the
normal scope of central banking. The Reserve Bank was asked to promote banking habit, extend
banking facilities to rural and semi-urban areas, and establish and promote new specialized
financing agencies. Accordingly, the Reserve bank has helped in the setting up of the IFCI and
the SFC: it set up the Deposit Insurance Corporation of India in 1963 and the Industrial
Reconstruction Corporation of India in 1972. These institutions were set up directly or indirectly
by the Reserve Bank to promote saving habit and to mobilize savings, and to provide industrial
finance as well as agricultural finance. As far back as 1935, the RBI set up the Agricultural
Credit Department to provide agricultural credit. But only since 1951 the Bank’s role in this field
has become extremely important. The Bank has developed the co-operative credit movement to
encourage saving, to eliminate money-lenders from the villages and to route its short term credit
to agriculture. The RBI has set up the Agricultural Refinance and Development Corporation to
provide long-term finance to farmers.
Co-operative Banks:
The Co-operative bank has a history of almost 100 years. The Co-operative banks
are an important constituent of the Indian Financial System, judging by the role assigned to
them, the expectations they are supposed to fulfill, their number, and the number of offices they
operate. The co-operative movement originated in the West, but the importance that such banks
have assumed in India is rarely paralleled anywhere else in the world. Their role in rural
financing continues to be important even today, and their business in the urban areas also has
increased phenomenally in recent years mainly due to the sharp increase in the number of co-
operative banks.
While the co-operative banks in rural areas mainly finance agricultural based activities
including farming, cattle, milk, hatchery, personal finance etc. along with some small scale
industries and self-employment driven activities, the co-operative banks in urban areas mainly
finance various categories of people for self-employment, industries, small scale units, home
finance, consumer finance, personal finance, etc. Some of the co-operative banks are quite
forward looking and have developed sufficient core competencies to challenge state and private
sector banks.
According to NAFCUB the total deposits & lendings of Co-operative Banks is much more than
Old Private Sector Banks & also the New Private Sector Banks. This exponential growth of Co-

Page 19
operative Banks is attributed mainly to their much better local reach, personal interaction with
customers, their ability to catch the nerve of the local clientele. Though registered under the Co-
operative Societies Act of the Respective States (where formed originally) the banking related
activities of the co-operative banks are also regulated by the Reserve Bank of India. They are
governed by the Banking Regulations Act 1949 and Banking Laws (Co-operative Societies) Act,
1965.
There are two main categories of the co-operative banks.
(a) Short term lending oriented co-operative Banks – within this category there are three sub
categories of banks viz state co-operative banks, District co-operative banks and Primary
Agricultural co-operative societies.
(b) Long term lending oriented co-operative Banks – within the second category there are
land development banks at three levels state level, district level and village level.

Features of Cooperative Banks

Co-operative Banks are organized and managed on the principal of co-operation, self-help, and
mutual help. They function with the rule of “one member, one vote”. Function on “no profit, no
loss” basis. Co-operative banks, as a principle, do not pursue the goal of profit maximization.
Co-operative bank performs all the main banking functions of deposit mobilization, supply of
credit and provision of remittance facilities. Co-operative Banks provide limited banking
products and are functionally specialists in agriculture related products. However, co-operative
banks now provide housing loans also.

UCBs provide working capital loans and term loan as well.

The State Co-operative Banks (SCBs), Central Co-operative Banks (CCBs) and Urban Co-
operative Banks (UCBs) can normally extend housing loans upto Rs 1 lakh to an individual. The
scheduled UCBs, however, can lend upto Rs 3 lakh for housing purposes.

The UCBs can provide advances against shares and debentures also. Co-operative bank do
banking business mainly in the agriculture and rural sector. However, UCBs, SCBs, and CCBs
operate in semi urban, urban, and metropolitan areas also.

Page 20
The urban and non-agricultural business of these banks has grown over the years. The co-
operative banks demonstrate a shift from rural to urban, while the commercial banks, from urban
to rural. Co-operative banks are perhaps the first government sponsored, government-supported,
and government-subsidized financial agency in India. They get financial and other help from the
Reserve Bank of India NABARD, central government and state governments. They constitute
the “most favoured” banking sector with risk of nationalization. For commercial banks, the
Reserve Bank of India is lender of last resort, but co-operative banks it is the lender of first resort
which provides financial resources in the form of contribution to the initial capital (through state
government), working capital, refinance.
Co-operative Banks belong to the money market as well as to the capital market. Primary
agricultural credit societies provide short term and medium term loans. Land Development
Banks (LDBs) provide long-term loans. SCBs and CCBs also provide both short term and term
loans. Co-operative banks are financial intermediaries only partially. The sources of their funds
(resources) are (a) central and state government, (b) the Reserve Bank of India and NABARD,
(c) other co-operative institutions, (d) ownership funds and, (e) deposits or debenture issues. It is
interesting to note that intra-sectoral flows of funds are much greater in co-operative banking
than in commercial banking. Inter-bank deposits, borrowings, and credit from a significant part
of assets and liabilities of co-operative banks. This means that intra-sectoral competition is
absent and intra-sectoral integration is high for co-operative bank.

Some co-operative banks are scheduled banks, while others are non-scheduled banks. For
instance, SCBs and some UCBs are scheduled banks but other co-operative bank are non-
scheduled banks. At present, 28 SCBs and 11 UCBs with Demand and Time Liabilities over Rs
50 crore each included in the Second Schedule of the Reserve Bank of India Act.
Co-operative Banks are subject to CRR and liquidity requirements as other scheduled and non-
scheduled banks are. However, their requirements are less than commercial banks. Since 1966
the lending and deposit rate of commercial banks have been directly regulated by the Reserve
Bank of India. Although the Reserve Bank of India had power to regulate the rate co-operative
bank but this have been exercised only after 1979 in respect of non-agricultural advances they
were free to charge any rates at their discretion. Although the main aim of the co-operative bank

Page 21
is to provide cheaper credit to their members and not to maximize profits, they may access the
money market to improve their income so as to remain viable.

Chapter – 4

Page 22
 PRODUCTS AND SERVICES OFFERED BY BANKS

Broad Classification of Products in a bank:

The different products in a bank can be broadly classified into:
 Retail Banking.
 Trade Finance.

Page 23
  Treasury Operations.
Retail Banking and Trade finance operations are conducted at the branch level while the
wholesale banking operations, which cover treasury operations, are at the hand office or a
designated branch.

Retail Banking:
 Deposits
 Loans, Cash Credit and Overdraft
 Negotiating for Loans and advances
 Remittances
 Book-Keeping (maintaining all accounting records)
 Receiving all kinds of bonds valuable for safe keeping

Trade Finance:
 Issuing and confirming of letter of credit.
 Drawing, accepting, discounting, buying, selling, collecting of bills of exchange,
promissory notes, drafts, bill of lading and other securities.

Treasury Operations:
 Buying and selling of bullion. Foreign exchange
 Acquiring, holding, underwriting and dealing in shares, debentures, etc.
 Purchasing and selling of bonds and securities on behalf of constituents.
The banks can also act as an agent of the Government or local authority. They insure, guarantee,
underwrite, participate in managing and carrying out issue of shares, debentures, etc.
Apart from the above-mentioned functions of the bank, the bank provides a whole lot of other
services like investment counseling for individuals, short-term funds management and portfolio
management for individuals and companies. It undertakes the inward and outward remittances
with reference to foreign exchange and collection of varied types for the Government.
Common Banking Products Available:

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 Some of common available banking products are explained below:
1) Credit Card: Credit Card is “post paid” or “pay later” card that draws from a credit line-
money made available by the card issuer (bank) and gives one a grace period to pay. If the
amount is not paid full by the end of the period, one is charged interest.
A credit card is nothing but a very small card containing a means of identification, such as a
signature and a small photo. It authorizes the holder to change goods or services to his account,
on which he is billed. The bank receives the bills from the merchants and pays on behalf of the
card holder.
These bills are assembled in the bank and the amount is paid to the bank by the card holder
totally or by installments. The bank charges the customer a small amount for these services. The
card holder need not have to carry money/cash with him when he travels or goes for purchasing.
Credit cards have found wide spread acceptance in the ‘metros’ and big cities. Credit cards are
joining popularity for online payments. The major players in the Credit Card market are the
foreign banks and some big public sector banks like SBI and Bank of Baroda. India at present
has about 3 million credit cards in circulation.
2) Debit Cards: Debit Card is a “prepaid” or “pay now” card with some storedvalue. Debit
Cards quickly debit or subtract money from one’s savings account,or if one were taking out cash.
Every time a person uses the card, the merchant who in turn can get the money transferred to his
account from the bank of the buyers, by debiting an exact amount of purchase from the card. To
get a debit card along with a Personal Identification Number (PIN).
When he makes a purchase, he enters this number on the shop’s PIN pad. When the card is
swiped through the electronic terminal, it dials the acquiring bank system – either Master Card or
Visa that validates the PIN and finds out from the issuing bank whether to accept or decline the
transaction. The customer never overspread because the amount spent is debited immediately
from the customers account. So, for the debit card to work, one must already have the money in
the account to cover the transaction. There is no grace period for a debit card purchase. Some
debit cards have monthly or per transaction fees.
Debit Card holder need not carry a bulky checkbook or large sums of cash when he/she goes at
for shopping. This is a fast and easy way of payment one can get debit card facility as debit
cards use one’s own money at the time of sale, so they are often easier than credit cards to
obtain.

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The major limitation of Debit Card is that currently only some 3000-4000 shops country wide
accepts it. Also, a person can’t operate it in case the telephone lines are down.
3) Automatic Teller Machine: The introduction of ATM’s has given the customers the
facility of round the clock banking. The ATM’s are used by banks for making the customers
dealing easier. ATM card is a device that allows customer who has an ATM card to perform
routine banking transaction at any time without interacting with human teller. It provides
exchange services. This service helps the customer to withdraw money even when the banks ate
closed. This can be done by inserting the card in the ATM and entering the Personal
Identification Number and secret Password.
ATM’s are currently becoming popular in India that enables the customer to withdraw their
money 24 hours a day and 365 days. It provides the customers with the ability to withdraw or
deposit funds, check account balances, transfer funds and check statement information. The
advantages of ATM’s are many. It increases existing business and generates new business. It
allows the customers.
 To transfer money to and from accounts.
 To view account information.
 To order cash.
 To receive cash.

Advantages of ATM’s:
To the Customers
 ATM’s provide 24 hrs., 7 days and 365 days a year service.
 Service is quick and efficient
 Privacy in transaction
 Wider flexibility in place and time of withdrawals.
 The transaction is completely secure – you need to key in Personal Identification Number
(Unique number for every customer).
To Banks
 Alternative to extend banking hours.
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  Crowding at bank counters considerably reduced.
 Alternative to new branches and to reduce operating expenses.
 Relieves bank employees to focus an more analytical and innovative work.
 Increased market penetration.
ATM’s can be installed anywhere like Airports, Railway Stations, Petrol Pumps,
Big Business arcades, markets, etc. Hence, it gives easy access to the customers, for obtaining
cash.The ATM services provided first by the foreign banks like Citibank, Grind lays bank and
now by many private and public sector banks in India like ICICI Bank, HDFC Bank, SBI, UTI
Bank etc. The ICICI has launched ATM Services to its customers in all the Metropolitan Cities
in India. By the end of 1990 Indian Private Banks and public sector banks have come up with
their own ATM Network in the form of “SWADHAN”. Over the past year upto 44 banks in
Mumbai, Vashi and Thane, have became a part of “SWADHAN” a system of shared payments
networks, introduced by the Indian Bank Association (IBA).
4) E-Cheques: The e-cheques consists five primary facts. They are the consumers, the
merchant, consumer’s bank the merchant’s bank and the e-mint and the clearing process. This
chequring system uses the network services to issue and process payment that emulates real
world chaquing. The payer issue a digital cheques to the payee ant the entire transactions are
done through internet. Electronic version of cheques are issued, received and processed. A
typical electronic cheque transaction takes place in the following manner:
 The customer accesses the merchant server and the merchant server presents its goods to
the customer.
 The consumer selects the goods and purchases them by sending an e-cheque to the
merchant.
 The merchant validates the e-cheque with its bank for payment authorisation.
 The merchant electronically forwards the e-cheque to its bank.
 The merchant’s bank forwards the e-cheque to the clearing house for cashing.
 The clearing house jointly works with the consumer’s bank clears the cheque and
transfers the money to the merchant’s banks.
 The merchant’s bank updates the merchant’s account.
 The consumer’s bank updates the consumer’s account with the withdrawal information.

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The e-chequing is a great boon to big corporate as well as small retailers. Most major banks
accept e-cheques. Thus this system offers secure means of collecting payments, transferring
value and managing cash flows.

5) Electronic Funds Transfer (EFT): Many modern banks have computerised their
cheque handling process with computer networks and other electronic equipments. These banks
are dispensing with the use of paper cheques. The system called electronic fund transfer (EFT)
automatically transfers money from one account to another. This system facilitates speedier
transfer of funds electronically from any branch to any other branch. In this system the sender
and the receiver of funds may be located in different cities and may even bank with different
banks. Funds transfer within the same city is also permitted. The scheme has been in operation
since February 7, 1996, in India.
The other important type of facility in the EFT system is automated clearing houses. These are
the computer centers that handle the bills meant for deposits and the bills meant for payment. In
big companies pay is not disbursed by issued cheques or issuing cash. The payment office directs
the computer to credit an employee’s account with the person’s pay.
6) Telebanking: Telebanking refers to banking on phone services.. a customer can access
information about his/her account through a telephone call and by giving the coded Personal
Identification Number (PIN) to the bank. Telebanking is extensively user friendly and effective
in nature.
 To get a particular work done through the bank, the users may leave his instructions in
the form of message with bank.
 Facility to stop payment on request. One can easily know about the cheque status.
 Information on the current interest rates.
 Information with regard to foreign exchange rates.
 Request for a DD or pay order.
 D-Mat Account related services.
 And other similar services.
7) Mobile Banking: A new revolution in the realm of e-banking is the emergence of
mobile banking. On-line banking is now moving to the mobile world, giving everybody with a

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mobile phone access to real-time banking services, regardless of their location. But there is much
more to mobile banking from just on-lie banking. It provides a new way to pick up information
and interact with the banks to carry out the relevant banking business. The potential of mobile
banking is limitless and is expected to be a big success. Booking and paying for travel and even
tickets is also expected to be a growth area.
According to this system, customer can access account details on mobile using the Short
Messaging System (SMS) technology6 where select data is pushed to the mobile device. The
wireless application protocol (WAP) technology, which will allow user to surf the net on their
mobiles to access anything and everything. This is a very flexible way of transacting banking
business.
Already ICICI and HDFC banks have tied up cellular service provides such as Airtel, Orange,
Sky Cell, etc. in Delhi and Mumbai to offer these mobile banking services to their customers.
8) Internet Banking: Internet banking involves use of internet for delivery of banking
products and services. With internet banking is now no longer confirmed to the branches where
one has to approach the branch in person, to withdraw cash or deposits a cheque or request a
statement of accounts. In internet banking, any inquiry or transaction is processed online without
any reference to the branch (anywhere banking) at any time.
The Internet Banking now is more of a normal rather than an exception due to the fact that it is
the cheapest way of providing banking services. As indicated by McKinsey Quarterly research,
presently traditional banking costs the banks, more than a dollar per person, ATM banking costs
27 cents and internet banking costs below 4 cents approximately. ICICI bank was the first one to
offer Internet Banking in India.
Benefits of Internet Banking:
 Reduce the transaction costs of offering several banking services and diminishes the need
for longer numbers of expensive brick and mortar branches and staff.
 Increase convenience for customers, since they can conduct many banking transaction 24
hours a day.
 Increase customer loyalty.
 Improve customer access.
 Attract new customers.
 Easy online application for all accounts, including personal loans and mortgages

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Financial Transaction on the Internet:
Electronic Cash: Companies are developing electronic replicas of all existing payment system:
cash, cheque, credit cards and coins.
Automatic Payments: Utility companies, loans payments, and other businesses use on
automatic payment system with bills paid through direct withdrawal from a bank account.
Direct Deposits: Earnings (or Government payments) automatically deposited into bank
accounts, saving time, effort and money.
Stored Value Cards: Prepaid cards for telephone service, transit fares, highway tolls, laundry
service, library fees and school lunches.

9) Demat: Demat is short for de-materialisation of shares. In short, Demat is a process

where at the customer’s request the physical stock is converted into electronic entries in the
depository system.
In January 1998 SEBI (Securities and Exchange Board of India) initiated DEMAT
ACCOUNTANCY System to regulate and to improve stock investing. As on date, to trade on
shares it has become compulsory to have a share demat account and all trades take place through
demat.

How to Operate DEMAT ACCOUNT?

One needs to open a Demat Account with any of the branches of the bank. After
opening an account with any bank, by filling the demat request form one can handover the
securities. The rest will be taken care by the bank and the customer will receive credit of shares
as soon as it is confirmed by the Company/Register and Transfer Agent. There is no physical
movement of share certification any more. Any buying or selling of shares is done via electronic
transfers.

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1) If the investor wants to sell his shares, he has to place an order with his broker and give a
“Delivery Instruction” to his DP (Depository Participant). The DP will debit hi s account
with the number of shares sold by him.
2) If one wants to buy shares, he has to inform his broker about his Depository Account
Number so that the shares bought by him are credited in to his account.
3) Payment for the electronic shares bought or sold is to be made in the same way as in the
case of physical securities.

Chapter – 5
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BANKING SERVICES

Banking covers so many services that it is difficult to define it. However, these basic
services have always been recognized as the hallmark of the genuine banker. These are…
 The receipt of the customer’s deposits
 The collection of his cheques drawn on other banks

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  The payment of the customer’s cheques drawn on himself
There are other various types of banking services like:
1) Advances – Overdraft, Cash Credit, etc.
2) Deposits – Saving Account, Current Account, etc.
3) Financial Services – Bill discounting etc.
4) Foreign Services – Providing foreign currency, travelers cheques, etc.
5) Money Transmission – Funds transfer etc.
6) Savings – Fixed deposits, etc.
7) Services of place or time – ATM Services.
8) Status – Debit Cards, Credit Cards, etc.

Customer Services in Commercial Banks:

Customer service is the service provided in support of a bank’s core products.
Customer service often includes answering questions; handling complaints. Customer service
can occur on site (as when an onstage employee helps a customer or answers a question) or it can
occur over the phone or the Internet. Quality customer service is essential to building cordial
customer relationship.
Banking being a service industry, a lot depends on efficient and prompt customer service.
Customer service is the most important duty of the banking operations. Prompt and efficient
service with smile will develop good public relations reduce complaints and increase business.

Why is Customer Service Important?

 Changing customer expectations: Today the customer is more demanding and more
sophisticated than he or she was thirty years ago.
 The increased importance of customer service: With changing customer expectations,
competitors are seeing customer service as a competitive weapon with which they
differentiate their products and services.

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  The need for a relationship strategy: To ensure that a customer service strategy that
will create a value preposition for customers should be formulated implemented and
controlled. It is necessary to give it a central role and not one that is subsumed in the
various elements of the marketing mix.
The customer is the kingpim in growth organizations like commercial banks. Only those
institutions which work according to his dictates will flourish. Quality, Consistency and
Durability at low price are the final expectations of a customer. Quality will have to be
unambiguous, of world class quality. Quality cannot be of minimum acceptable standards.
Customer responsiveness must be quick and also competent. Speed, performance and cost will
be the new values “mantra” for success.
The ten key areas of customer’s services to be attended timely and regularly are:
i. Submission of statement of A/Cs to customers
ii. Updating of savings pass books.
iii. Teller system efficiency.
iv. Cleanliness and Upkeep of premises.
v. Intermediate Credit for institution cheques/land bills.
vi. Advance intimation to customers for rewards of Term Deposits Receipts on maturity.
vii. Advance for Debit/credit to accounts.
viii. Punctuality of staff.
ix. Handling of complaint register.
x. Maintain a complaint register.
Customer’s dissatisfaction in the banking industry is neither recent nor unknown. This is mainly
due to delays in handling transactions across the counter in collections, update of passbooks
supply of statements of accounts, etc.
Failure to provide prompt and efficient customer service is likely to lead to reduction in the
number of customers and they may have to face closure. To event such situation the following
improvements in the customer services may be carried out:
1) Personal relations of the bank employee with customers will improve customer
satisfaction. 1 service with smile should be the motto of every bank employee.
2) Rapid customer services should be provided through automation of work and
simplification of procedures.

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3) ATM’s may be introduced in all the branches of the banks, based upon the volume of
transactions. This shall facilitate non-stop banking.
4) Credit Cards Services, Debit Card Services, which should be provided to the customers,
must a link service with all the banks and branches if possible to facilitate the customer
and the business organizations.
5) E-mail service made freely available at all banking centers.
6) Foreign Exchange transactions are to be extended to all the branches to facilitate trade
and industries.
7) All the customers are not homogenous in their needs. Hence need based schemes may be
introduced.
8) Totally deregulated interest rate structure should be there.
9) The banking staff must be trained to understand the customer’s psychology, so they may
provide customer service in a qualified manner.
10) Educating the customers will increases better utilisation of banking services.

Chapter – 6
Page 35
 NEW TREND SERVICES OF BANKS
Online banking

The service industries are mostly customer driven and their survival in competitive
environment largely depends on quality of the service provided by them. In this context, quality
of service furnished by banking sector is very important and profitability of their business is
closely connected to the quality of service they render (Zahorik and Rust,1992; Rust et al., 1994;
Rust et al., 1996).

Page 36
Businesses seeking to improve profitability are, thus, advised to monitor and make
improvements to their service quality on an ongoing basis (Gerrard and Cunningham,2005).
Technology plays a vital role in improving the quality of services provided by the business units.

One of the technologies which really brought information revolution in the society is Internet
Technology and is rightly regarded as the third wave of revolution after agricultural and
industrial revolution.

Advent and adoption of internet by the industries has removed the constraint of time, distance
and communication making globe truly a small village. Financial sector being no exception,
numerous factors such as competitive cost, customer service, increase in education and
income level of customers, etc. influence banks to evaluate their technology and assess their
electronic commerce and internet banking (i-banking) strategies. Internet banking allows
banking from anywhere, anytime and is used for transactions, payments, etc. over the internet
through a bank, a credit union or society’s secure website. So, basically, in i-banking a client has
one-to-one interaction with the bank’s website, and in such a situation it is essential on the part
of bank to provide high- quality services over the internet. So, in contrast to traditional
banking, i-banking involves non-human interactions between customers and online bank
information system. Customer satisfaction, customer retention and new customer acquisition
are the key factors in i-banking system. This becomes more important since the acquisition
costs in online banking exceed that of traditional offline business by 20%–40% (Reibstein,
2002). Providing i-banking is increasingly becoming a ‘need to have’ than a ‘nice to
have’service. The i-banking, thus, now is more of a norm rather than an exception in many
developed countries due to the fact that it is the cheapest way of providing banking services
(Arunachalam and Sivasubramanian, 2007).

Internet banking is a new delivery channel for banks in India. The i-banking channel is both an
informative and a transactional medium. However, i-banking has not been popularly adopted in
India as expected (Ravi et al., 2007). Malhotra and Singh (2007) carried out a study to find the i-
banking adoption by the banks in India. The study suggests that larger banks or banks with
younger age, private ownership and lower branch intensity possess high probability of adoption
of this new technology. Banks with lower market share also perceive i-banking technology as a
means to increase the market share by attracting more and more customers through this new

Page 37
channel of delivery. However, the service quality in i-banking from customers needs thorough
analysis to find out the determinants for success and growth of new channel of delivery in India
so that useful guidelines for bankers can be extracted. To this end, this study aims at determining
the service quality of banks operative in India with regards to i-banking and identifying the
important parameters crucial for service quality from customer’s perspective. The study also
explores the importance of parameters across the demographic profile of the respondents.

Development of i-banking in India

The financial reforms that were initiated in the early 1990s and the globalisation and
liberalisation measures brought in a completely new operating environment to the banks. The
bankers are now offering innovative and attractive technology-based services and products such
as ‘Anywhere Anytime Banking’, ‘Tele-Banking’, ‘Internet Banking’,‘Web Banking’, etc. to
their customers to cope with the competition. The process started in the early 1980s when
Reserve Bank of India (RBI) set up two committees in quick succession to accelerate the pace of
automation of operations in the banking sector. A high-level committee was formed under the
chairmanship of Dr. C. Rangarajan, then Governor of RBI, to draw up a phased plan for
computerisation and mechanisation in the banking industry over a five-year time frame of 1985–
1989. The focus by this time was on customer service and two models of branch automation
were developed and implemented. Having gained experience in the earlier mode of
computerisation, the second Rangarajan committee constituted in 1988 drew up a detailed
perspective plan for computerisation of banks and for extension of automation to other areas
such as funds transfer, e-mail, BANKNET, SWIFT, ATMs, i-banking, etc. The Government of
India enacted the Information Technology Act, 2000 (generally known as IT Act, 2000), with
effect from 17 October 2000 to provide legal recognition to electronic transactions and other
means of electronic commerce. RBI had set up a ‘Working Group’ on i-banking to examine
different aspects of i-banking. The Group had focused on three major areas of i- banking such as
(1) technology and security issues, (2) legal issues and (3) regulatory and supervisory issues. RBI
had accepted the recommendations of the ‘Working Group’, and accordingly issued guidelines

Page 38
on ‘internet banking in India’ for implementation by banks. The ‘Working Group’ has also
issued a report on i-banking covering different aspects of i-banking.

Internet banking in India is currently at a nascent stage. While there are scores of companies
specialising in developing i-banking software, security software and website designing and
maintenance, there are few online financial service providers. ICICI bank is the first one to have
introduced i-banking for a limited range of services such as access to account information,
correspondence and, recently, funds transfer between its branches. ICICI is also getting into
e-trading, thus offering a broader range of integrated services to the customer. Several finance
portals for provision of non-banking financial services, e-trading and e-broking have come up.
Commercial applications such as Electronic Bill Presentment (EBP) and Procurement systems
may not be introduced in India immediately, but are likely to have a greater impact than the retail
applications. The corporate sector is adequately computerised and has already recognised the
important role of e-commerce in future. Increasingly, companies are setting up websites even
where there are no immediate tangible benefits to them from doing s

Status of e-banking in India

In Indian context, many publications throw light over the importance of i-banking and also its
prospects for the Indian banking industry. Unnithan and Swatman (2001) studied the drivers for
change in the evolution of the banking sector, and the move towards electronic banking by
focusing on two economies, Australia and India. The study found that Australia is a country with
internet-ready infrastructure as far as telecommunication, secure protocols, PC penetration and
consumers’ literacy are concerned. India, by comparison, is overwhelmed by weak
infrastructure, low PC penetration, developing security protocols and consumer reluctance in
rural sector. Although many major banks have started offering i-banking services, the slow pace
will continue until the critical mass is achieved for PC, internet connections and telephones.
However, the upsurge of IT professionals with growing demands is pressuring the government
and bureaucracy in the country to support and develop new initiatives for a faster spread of i-
banking.

Rao and Prathima (2003) provided a theoretical analysis of i-banking in India, and found that as
compared to the banks abroad, Indian banks offering online services still have a long way

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to go. For online banking to reach a critical mass, there has to be sufficient number of users and
the sufficient infrastructure in place. Various authors have found that i-banking is fast becoming
popular in India (Gupta, 1999; Pegu, 2000; Dasgupta, 2002). However, it is still in its
evolutionary stage. By the year 2006–2007, a large sophisticated and highly competitive i-
banking market will develop. Almost all the banks operating in India are having their websites,
but only a few banks provide transactional i-banking. A survey carried out by Malhotra and
Singh (2006) shows that only 48% of the commercial banks operating in India as on March-end
2005 offers i-banking.

In India, comparatively less number of studies have been conducted on the current status of i-
banking and customer satisfaction compared to other countries. Thus, there is a lot of scope for
the research to present new ideas concerning i-banking in India which may be useful to the
Indian banking industry. There are a series of papers that observe that i-banking has
revolutionised the banking industry and the banking industry is under pressure to offer new
products and services. However, to succeed in today’s electronic markets a strategic and focused
approach is required.

The internet users in India

The role of internet is becoming inevitable to corporate and society. Across the world,
governments and corporate are increasingly working towards the better utilisation of the internet.
The internet which was initially perceived as a communication media is now metamorphosing
into a powerful business media (Sakkthivel, 2006).

According to the Internet & Online Association of India (IOAI), the Indian internet population is
currently over 25 million and is expected to grow to 100 million by 2007 (Survey by New Media
Review, 2005). In July 2005, Internet World Stats reported that there were 39,200,000 internet
users in India representing 3.6% of the population. (Internet World Stats, August 2005).
Even with millions of web users in its cities, the internet penetration rate for India remains well
below 5%. Despite India’s technology outsourcing power, the country’s internet penetration rate
is low. JuxtConsult, a research firm based in New Delhi, surveyed urban internet users in April
2005 by talking to

Page 40
30,000 Indian web users about their lifestyle and their web use. There are about 17.5 million
urban dwellers in India who use the internet consistently with an additional 5.2 million who use
it occasionally.

Among the urban users surveyed by JuxtConsult, about one half are involved in business in some
way, and students make up 20% of the total. Three out of four users have a car and 50% have a
credit card. Urban internet users in India by occupation in April 2005 (as a % of total) are as
follows:

• senior executive: 22%

• junior executive: 22%

• student: 20%

• self-employed: 10%

• businessman/industrialist: 03%

• small businessman/traders: 03%

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• housewife: 02%

• other: 18%.

Over 50% of web users in Indian metropolitan areas are between the ages of 19 and 30, with an
additional 22% between 31 and 40. Users under the age of 18 are rare (e-Marketer, August
2005).

• 13–18: 03%

• 19–24: 29%

• 25–30: 32%

• 31–40: 22%

• 42–55: 11%

• 55+: 03%.

Thus, in India, slowly but steadily, the Indian customer is moving towards i-banking. A number
of banks have either adopted i-banking or are on the threshold of adopting it. The banks started i-
banking initially with simple functions such as getting information about interest rates, checking
account balances and computing loan eligibility. Then, the services are extended to online bill
payment, transfer of funds between accounts and cash management services for corporate.
Recently, banks have started to facilitate payment of e-commerce transactions by directly
debiting bank accounts or through credit cards. It will add to the revenues of the bank.

Page 42
Service quality in the context of i-banking

The definition of quality is contextual one and differs from person to person. In general, the
quality is basically classified into five categories, viz. transcendent, product led, process or
supply led, customer led and value led. The definition of service quality is based on customer-led
quality definition where quality is defined as satisfying customer’s requirements (Deming, Juran,
Feigenbaum and Ishikawa), relying on the ability of the organisation to determine customers’
requirements and then meet these requirements. Basically, service quality in i-banking can be
viewed from two perspectives:

• customer perspective

• bank perspective

Customer perspective

From the perspective of the customer, the service quality differentiates sought quality and
perceived quality. Sought quality is the level of quality customers explicitly or implicitly demand
and expect from service providers. The sought quality (customer expectations) is created due to
several factors – primarily, the expectations are formed during a previous personal experience of
a customer with a service, and the customer is influenced by the experiences of the other users
and by the image of an organisation. Perceived quality means the overall impression a customer
has and experiences about the level of quality after service realisation. The potential difference
between the sought quality and the perceived quality gives the service provider an opportunity to
measure customer satisfaction based on formulating the precise and actual criteria according to
which the customers are assessing the services.

Providers perspective

From the provider perspective, there are target quality and delivered quality. The focus of
process- or supply-led quality definition is rather internal than external, and it is defined as
conformance to requirements. It lays emphasis on the importance of the management and the
supply-side quality, and there is an important role of the process in determining the quality of

Page 43
outcome (Ghobadian, 1994). Achieving the quality of conformance between the planned
(target) quality level and the real quality delivered to customers depends on the service quality
management system in an organisation.

E-service quality dimensions in i-banking

Researchers have paid much attention to the close relationships between service quality and
customer satisfaction (Parasuraman et al., 1988). Oliver suggests that service quality is a more
specific judgement which can lead to a broad evaluation of customer satisfaction (Oliver,
1993). Regarding the particular service quality dimensions that influence the formation of
customer satisfaction, Johnston (1995, 1997) has found that the causes of dissatisfaction and
satisfaction are not necessarily the same. Some service quality attributes may not be critical for
consumer satisfaction but can significantly lead to dissatisfaction when they are performed
poorly. The same author has further classified all dimensions into enhancing (satisfiers), hygiene
(dissatisfiers) and dual factors. Enhancing factors are those which will lead to customer
satisfaction if they are delivered properly, but will not necessarily cause dissatisfaction if absent.
In contrast, hygiene factors will lead to customer dissatisfaction if they fail to deliver, but will
not result in satisfaction if they are present. Dual factors are those that will have an impact on
both satisfaction and dissatisfaction. Johnston (1995) identified attentiveness, responsiveness
care and friendliness as the main sources of satisfactions (satisfiers) in banking services,
and integrity, reliability, availability and functionality as the main sources of dissatisfaction
(dissatisfiers).

Yang et al. (2004) identified five online service quality dimensions (responsiveness, reliability,
competence, access and security) and their relationships with the customer satisfaction.
Wolfinbarger and Gilly (2002) observed that reliability and fulfilment are the strongest
predictors for customer satisfaction. Liu and Arnett (2000) identified five critical
dimensions of online service quality in relations to customer satisfaction in the website. Among
these, the quality of information that is relevant, accurate, timely, customised and complete are
given priority for the customer satisfaction in the online service. The study by Khalil and Pearson

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(2007) has found that trust significantly affects attitude towards i-banking acceptance. To
encourage i-banking adoption, banks need to develop strategies that improve the customer’s trust
in the underlying technology. The other factors include quick response, assurance, follow-up and
empathy. Security, correct transaction, customer control on transaction (personalisation), order
tracking facilities and privacy are other important factors in the online service that affect the
customer satisfaction.

Joseph et al. (1999) investigated the influence of internet on the delivery of banking services.
They found six underlying dimensions of e-banking service quality such as convenience and
accuracy, feedback and complaint management, efficiency, queue management, accessibility and
customisation. Jun and Cai (2001) identified 17 service quality dimensions of i-banking service
quality. These are reliability, responsiveness, competence, courtesy, credibility, access,
communication, understanding the customer, collaboration, continuous improvement, content,
accuracy, ease of use, timeliness, aesthetics, security and divers features. They also suggested
that some dimensions such as responsiveness, reliability and access are critical for both
traditional and internet banks. Jayawardhena (2004) transforms the original SERVQUAL scale
to the internet context and develops a battery of 21 items to assess service quality in e-banking.
By means of an Exploratory Factor Analysis (EFA) and a Confirmatory Factor Analysis (CFA),
these 21 items are condensed to five quality dimensions: access, website interface, trust,
attention and credibility.

Types of Internet Banking:

Financial institution Internet offerings can be broadly classified into three groups with distinct
risk profiles:

Informational— this is the basic level of Internet banking. Typically, the bank has
marketing information about the bank products and services on a stand-alone server. The risk is
relatively low, as informational systems typically have no path between the server and the

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bank's internal network. This level of Internet banking can be provided by the bank or
outsourced. While risk to a bank is relatively low, the server or website may be vulnerable to
alternation. Appropriate controls therefore must be in place to prevent unauthorized alternations
to the bank's server or website. Offers information about the bank's products and services
("brochure ware") and is low risk

Communicative— this type of Internet banking system allows some interaction between the
bank's systems and the customer. The interaction may be limited to electronic mail, account
inquiry, loan applications, or static file updates. Because these servers may have a path to the
bank's internal networks, the risk is higher with this configuration than with informational
systems. Appropriate controls need to be in place to prevent, monitor, and alert management of
any unauthorized attempt to access the bank's internal networks and computer systems. Virus
controls also become much more critical in this environment. Offers account-related
information and possibly offers updates to static data (such as addresses). Since access is
permitted to the bank's main systems, the risk is material.

Transactional— this level of Internet banking allows customers to execute transactions. Since a
path typically exists between the server and the bank's or outsourcer's internal network, this is the
highest risk architecture and must have the strongest controls. Customer transaction can include
accessing accounts, paying bills, transferring funds, etc. for example, if the customer has never
visited a branch throughout his entire relationship and prefers to carry out all his transactions
remotely (this commonly happens with some online share trading sites).

The Internet Banking Risks:

Internet banking creates new risk control challenges for national banks. But rather accentuates
the risks that any financial institution faces. From a supervisory perspective, risk is the potential

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that events, expected or unexpected, may have an adverse impact on the bank's earnings or
capital. Effective management of a banking regular activity requires that bank authority have
understood and control the bank's risk culture. Therefore, in our paper firstly we are going to
analyze the various types of risks faced by Internet Banking. The following are the various types
of risks associated with Internet Banking:

Credit Risk—this is the risk to earnings or capital from a customer's failure to meet his financial
obligations. Credit risk is found in all activities where success depends on counterparty, issuer,
or borrower performance. Internet banking enables customers to apply for credit from anywhere
in the world. Banks will find it extremely difficult to verify the identity of the customer, if they
intend to offer instant credit through the Internet. Verifying collateral and perfecting security
agreements are also difficult. Finally, there could be questions of which country's (or state's)
jurisdiction applies to the transaction.

Strategic Risk— Strategic risk is the current and prospective impact on earnings or capital
arising from adverse business decisions, improper implementation of decisions, or lack of
responsiveness to industry changes. The risk is a function of the compatibility of an
organization's strategic goals, the business strategies developed to achieve those goals, the
resources deployed against these goals, and the quality of implementation. The resources needed
to carry out business strategies are both tangible and intangible. They include communication
channels, operating systems, delivery networks, and managerial capacities and capabilities. The
organization's internal characteristics must be evaluated against the impact of economic,
technological, competitive, regulatory, and other environmental changes.

Transaction Risk—This is the current and prospective risk to earnings and capital arising from
fraud, error, negligence and the inability to maintain expected service levels. A high level of
transaction risk may exist with Internet banking products, because of the need to have
sophisticated internal controls and constant availability. Most Internet banking platforms are
based on new platforms which use complex interfaces to link with legacy systems, thereby
increasing risk of transaction errors. There is also a need to ensure data integrity and no
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repudiation of transactions. Third-party providers also increase transaction risks, since the
organization does not have full control over a third party. Without seamless process and system
connections between the bank and the third party, there is a higher risk of transaction errors.

Compliance Risk—this is the risk to earnings or Capital arising from v iolations of or,
nonconformance with, laws, regulations and ethical standards. Compliance risk may lead to
diminished reputation, actual monetary losses and reduced business opportunities. Banks need to
carefully understand and interpret existing laws as they apply to Internet banking and ensure
consistency with other channels such as branch banking. This risk is amplified when the
customer, the bank and theTransaction is in more than one country. Conflicting laws, tax
procedures and reporting requirements across different jurisdictions add to the risk. The need to
keep customer data private and seek customers' consent before sharing the data also adds to
compliance risk. Customers are very concerned about the privacy of their data and banks need to
be seen as reliable guardians of such data. Finally, the need to consummate transactions from
adverse business decisions, improper implementation of decisions, or lack of responsiveness
to industry changes. The risk is a function of the compatibility of an organization's strategic
goals, the business strategies developed to achieve those goals, the resources deployed against
these goals, and the quality of implementation. The resources needed to carry out business
strategies are both tangible and intangible. They include communication channels, operating
systems, delivery networks, and managerial capacities and capabilities. The organization's
internal characteristics must be evaluated against the impact of economic, technological,
competitive, regulatory, and other environmental changes.

Reputation Risk: Reputation risk is the current and prospective impact on earnings and capital
arising from negative public opinion. This affects the institution's ability to establish new
relationships or services. This risk may expose institution to litigation, financial loss, or a decline
in its customer base. A bank's reputation can suffer if it fails to deliver on marketing claims or to
provide accurate, timely services. National Banks need to a sure that their business continuity
plans include the internet banking business. Regular testing or business continuity plan ,
communications strategies with the press and public, will help the bank ensure it can respond

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effectively and promptly to any adverse customer of media reactions.

Information security risk—This is the risk to earnings and capital arising out of lax
information security processes, thus exposing the institution to malicious hacker or insider
attacks, viruses, denial-of-service attacks, data theft, data destruction and fraud. The speed of
change of technology and the fact that the Internet channel is accessible universally makes this
risk especially critical.

Interest Rate Risk: Internet rate risk is the risk to earnings or capital arising from movements in
interest rates. Interest rate risk arises from different between the timing of rate changes and
timing of cash flows. Internet banking can attract deposits, loans and other relationships from a
large pool of possible customers than other forms of marketing. Greater access to customers who
primarily seek the best rate or term reinforces the need for managers to maintain appropriate
asset/liability management systems, including the ability to react quickly to changing market
conditions.

Liquidity Risk: Liquidity risk is the risk to earnings or capital arising from a bank's inability to
meet its obligations when they come due, without incurring unacceptable losses. Liquidity risk
arises from the failure to recognize or address changes in market conditions affecting the ability
of the bank to liquidate assets quickly and with minimum loss in value. Asset/liability and loan
portfolio management systems should be appropriate for products offered through internet
banking. Increased monitoring of liquidity and changes in deposits and loans may be warranted
depending on the volume and nature of internet account activities.

Price Risk: Price risk is the risk to earnings or capital arising from changes in the value of
traded portfolio of financial instruments. The risk arises from market making, dealing and
position taking in interest rate, foreign exchange, equity and commodities markets. Banks
may have exposed to price risk if they create or expand deposit b r o k e r i n g , l o a n
s a l e programmed as a result of Internet banking activities. Appropriate management
systems should be maintained to monitor, measures, and manage price risk if assets are activity
.

Foreign exchange risk—Foreign exchange risk arises when assets in one currency are funded

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by liabilities in another. Internet banking may encourage residents of other countries to
transact in their domestic currencies. Due to the ease and lower cost of transacting, it may
also lead customers to take speculative positions in various currencies. Higher holdings and
transactions in nondomestic currencies increase foreign exchange risk.

Mobile banking 

Mobile banking is a system that allows customers of a financial institution to conduct a number
of financial transactions through a mobile device such as a mobile phone orpersonal digital
assistant.

Mobile banking differs from mobile payments, which involve the use of a mobile device to pay
for goods or services either at the point of sale or remotely analogously to the use of a debit or
credit card to effect an EFTPOS payment.

The earliest mobile banking services were offered over SMS, a service known as SMS banking.
With the introduction of smart phones with WAP support enabling the use of themobile web in
1999, the first European banks started to offer mobile banking on this platform to their
customers.

Mobile banking has until recently (2010) most often been performed via SMS or the mobile
web. Apple's initial success with iPhone and the rapid growth of phones based
on Google'sAndroid (operating system) have led to increasing use of special client programs,
called apps, downloaded to the mobile device. With that said, advancements in web technologies
such as HTML5, CSS3 and JavaScript have seen more banks launching mobile web based
services to complement native applications. A recent study (May 2012) by Mapa Research
suggests that over a third of banks have mobile device detection upon visiting the banks' main
website. A number of things can happen on mobile detection such as redirecting to an app store,
redirection to a mobile banking specific website or providing a menu of mobile banking options
for the user to choose from.

According to this model mobile banking can be said to consist of three inter-related concepts:

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 Mobile accounting
 Mobile brokerage
 Mobile financial information services

Most services in the categories designated accounting and brokerage are transaction-based. The

non-transaction-based services of an informational nature are however essential for conducting
transactions - for instance, balance inquiries might be needed before committing a money
remittance. The accounting and brokerage services are therefore offered invariably in
combination with information services. Information services, on the other hand, may be offered
as an independent module.

Mobile banking may also be used to help in business situations as well as financial.

Mobile banking services

Account information

1. Mini-statements and checking of account history

2. Alerts on account activity or passing of set thresholds

3. Monitoring of term deposits

4. Access to loan statements

5. Access to card statements

6. Mutual funds / equity statements

7. Insurance policy management

8. Pension plan management

9. Status on cheque, stop payment on cheque

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10. Ordering cheque books

11. Balance checking in the account

12. Recent transactions

13. Due date of payment (functionality for stop, change and deleting of payments)

14. PIN provision, Change of PIN and reminder over the Internet

15. Blocking of (lost, stolen) cards

16. Locating nearest bank branch,ATMs

Payments, deposits, withdrawals, and transfers

1. Cash-in, cash-out transactions on an ATM

2. Domestic and international fund transfers

3. Micro-payment handling

4. Mobile & Direct to Home package recharging

5. Purchasing tickets for travel and entertainment

6. Commercial payment processing

7. Bill payment processing

8. Peer to Peer payments (e.g., Popmoney, Isis)

9. Withdrawal at banking agent

10. Deposit at banking agent

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A specific sequence of SMS messages will enable the system to verify if the client has sufficient
funds in his or her wallet and authorize a deposit or withdrawal transaction at the agent. When
depositing money, the merchant receives cash and the system credits the client's bank account or
mobile wallet. In the same way the client can also withdraw money at the merchant: through
exchanging sms to provide authorization, the merchant hands the client cash and debits the
merchant's account.

Kenya's M-PESA mobile banking service, for example, allows customers of the mobile phone
operator Safaricom to hold cash balances which are recorded on their SIM cards. Cash may be
deposited or withdrawn from M-PESA accounts at Safaricom retail outlets located throughout
the country, and may be transferred electronically from person to person as well as used to pay
bills to companies. One of the most innovative applications of mobile banking technology is
Zidisha, a US-based nonprofit microlending platform that allows residents of developing
countries to raise small business loans from web users worldwide. Zidisha uses mobile banking
for loan disbursements and repayments, transferring funds from lenders in the United States to
the borrowers in rural Africa using nothing but the internet and mobile phones.

In Côte d'Ivoire, Orange has a commercial offer which

Investments

1. Portfolio management services

2. Real-time stock quotes

3. Personalized alerts and notifications on security prices

Support

1. Status of requests for credit, including mortgage approval, and insurance coverage

2. Check (cheque) book and card requests

3. Exchange of data messages and email, including complaint submission and tracking

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4. ATM Location

Content services

1. General information such as weather updates, news

2. Loyalty-related offers

3. Location-based services

A report by the US Federal Reserve (March 2012) found that 21 percent of mobile phone owners
had used mobile banking in the past 12 months. Based on a survey conducted by Forrester,
mobile banking will be attractive mainly to the younger, more "tech-savvy" customer segment. A
third of mobile phone users say that they may consider performing some kind of financial
transaction through their mobile phone. But most of the users are interested in performing basic
transactions such as querying for account balance and making bill payment.

Future functionalities in mobile banking

Based on the 'International Review of Business Research Papers' from World business Institute,
Australia, following are the key functional trends possible in world of Mobile Banking.

With the advent of technology and increasing use of smartphone and tablet based devices, the
use of Mobile Banking functionality would enable customer connect across entire customer life
cycle much comprehensively than before. With this scenario, current mobile banking objectives
of say building relationships, reducing cost, achieving new revenue stream will transform to
enable new objectives targeting higher level goals such as building brand of the banking
organization. Emerging technology and functionalities would enable to create new ways of lead
generation, prospecting as well as developing deep customer relationship and mobile banking
world would achieve superior customer experience with bi-directional communications. Among
digital channels, mobile banking is a clear IT investment priority in 2013 as retail banks attempt
to capitalise on the features unique to mobile, such as location-based services.

Illustration of objective based functionality enrichment In Mobile Banking

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• Communication enrichment: - Video Interaction with agents, advisors.

• Pervasive Transactions capabilities: - Comprehensive “Mobile wallet”

• Customer Education: - “Test drive” for demos of banking services

• Connect with new customer segment: - Connect with Gen Y – Gen Z using games and
social network ambushed to surrogate bank’s offerings

• Content monetization: - Micro level revenue themes such as music, e-book download

• Vertical positioning: - Positioning offerings over mobile banking specific industries

• Horizontal positioning: - Positioning offerings over mobile banking across all the
industries

• Personalization of corporate banking services: - Personalization experience for multiple

roles and hierarchies in corporate banking as against the vanilla based segment based
enhancements in the current context.

• Build Brand: - Built the bank’s brand while enhancing the “Mobile real estate”.

Mobile banking in the world

Mobile banking is used in many parts of the world with little or no infrastructure, especially
remote and rural areas. This aspect ofmobile commerce is also popular in countries where most
of their population is unbanked. In most of these places, banks can only be found in big cities,
and customers have to travel hundreds of miles to the nearest bank.

In Iran, banks such as Parsian, Tejarat, Mellat, Saderat, Sepah, Edbi, and Bankmelli offer the
service. Banco Industrial provides the service in Guatemala. Citizens of Mexico can access
mobile banking with Omnilife, Bancomer and MPower Venture. Kenya'sSafaricom (part of the
Vodafone Group) has the M-Pesa Service, which is mainly used to transfer limited amounts of
money, but increasingly used to pay utility bills as well. In 2009, Zain launched their own mobile
money transfer business, known as ZAP, in Kenya and other African countries. In Somalia, the

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many telecom companies provide mobile banking, the most prominent being Hormuud Telecom
and its ZAAD service.

Telenor Pakistan has also launched a mobile banking solution, in coordination with Taameer
Bank, under the label Easy Paisa, which was begun in Q4 2009. Eko India Financial Services,
the business correspondent of State Bank of India (SBI) and ICICI Bank, provides bank
accounts, deposit, withdrawal and remittance services, micro-insurance, and micro-finance
facilities to its customers (nearly 80% of whom are migrants or the unbanked section of the
population) through mobile banking.

In a year of 2010, mobile banking users soared over 100 percent in Kenya, China, Brazil and
USA with 200 percent, 150 percent, 110 percent and 100 percent respectively.

Dutch Bangla Bank launched the very first mobile banking service in Bangladesh on 31 March
2011. This service is launched with ‘Agent’ and ‘Network’ support from mobile operators,
Banglalink and Citycell. Sybase 365, a subsidiary of Sybase, Inc. has provided software solution
with their local partner Neurosoft Technologies Ltd. There are around 160 million people in
Bangladesh, of which, only 13 per cent have bank accounts. With this solution, Dutch-Bangla
Bank can now reach out to the rural and unbanked population, of which, 45 per cent are mobile
phone users. Under the service, any mobile handset with subscription to any of the six existing
mobile operators of Bangladesh would be able to utilize the service. Under the mobile banking
services, bank-nominated ‘Agents’ perform banking activities on behalf of the banks, like
opening mobile banking account, providing cash services (receipts and payments) and dealing
with small credits. Cash withdrawal from a mobile account can also be done from an ATM
validating each transaction by ‘mobile phone & PIN’ instead of ‘card & PIN’. Other services that
are being delivered through mobile banking system are person-to-person (e.g. fund transfer),
person-to-business (e.g. merchant payment, utility bill payment), business-to-person (e.g.
salary/commission disbursement), government-to-person (disbursement of government
allowance) transactions.

In May 2012, Laxmi Bank Limited launched the very first mobile banking in Nepal with its
product Mobile Khata. Mobile Khata ran on a third-party platform called Hello Paisa that was

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interoperable with all the telecoms in Nepal viz. Nepal Telecom, NCell and Smart Teland was
also interoperable with various banks in the country. The initial joining members to the platform
after Laxmi Bank Limited where Siddartha Bank, Bank of Kathmandu, Commerz and Trust
Bank Nepal and International Leasing and Finance Company. Such a platform that is
interoperable between multiple banks and multiple telecoms is the first of its kind in the world of
Mobile Banking so far.

Chapter – 7
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 CONCLUSION

The banking scenario has changed drastically. The changes which have taken
place in the last ten years are more than the changes took place in last fifty years because of the
institutionalisation, liberalisation, globalisation and automation in the banking industry.

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 Indian banking system has several outstanding achievements to its credit, the most
striking of which is its reach. Indian banks are now spread out into the remote corners of our
country. In terms of the number of branches, India’s banking system is one of the largest in the
world. According to the Banker 2004, India has 20 banks within the world’s top 1000 out of
which only 6 are within the top 500 bank

Today banking sector is marked by high customer expectations and technological innovations.
Technology is playing a crucial role in the day to day functioning of the banks. These banks that
have harnessed and leveraged technology best have a strategic advantage. To face competition it
is necessary for banks to absorb the technology and upgrade their services.
In today’s context banks are following the strategy of “relationship banking” than “mass
banking” which is need of the hour. The customer services are playing a very significant role in
banking business. In India major events leading to deregulation, liberalisation and privatisation
have unleashed forces of competition, making the banks run for their business, not only to create
the customer, but more difficult to run for their business, not only to create the customer, but
more difficult to retain the customer. Prompt and efficient customer service, thus, has become
very significant. Relationship banking is the paradigfor survival and success, embracing a ‘share
of customer’ approach to growth by identifying, protecting and expanding customer relationship.

BIBLIOGRAPHY

 MANAGEMENT PARADISE.COM

 METACRAWLER.COM

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 SCRIBD.COM

 MBAKNOWLEDGE.COM

 AUTHORSTREAMS.COM

 https://localfirstbank.com/content/different-types-of-banking-services

 https://www.sc.com/en/banking-services/

 http://www.bem.md/en/page/3666

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