Malhotra Committee Liberalization of the Indian insurance market was recommended in a report released in 1994 by the Malhotra Committee,

indicating that the market should be opened to privatesector competition, and ultimately, foreign private-sector competition. It also investigated the level of satisfaction of the customers of the LIC. Curiously, the level of customer satisfaction seemed to be high. The union of the LIC made political capital out of this finding. The following are the purposes of the committee. (a) To suggest the structure of the insurance industry, to assess the strengths and weaknesses of insurance companies in terms of the objectives of creating an efficient and viable insurance industry, to have a wide coverage of insurance services, to have a variety of insurance products with a high quality service, and to develop an effective instrument for mobilization of financial resources for development. (b) To make recommendations for changing the structure of the insurance industry, for changing the general policy framework etc. (c) To take specific suggestions regarding LIC and GIC with a view to improve the functioning of LIC and GIC. (d) To make recommendations on regulation and supervision of the insurance sector in India. (e) To make recommendations on the role and functioning of surveyors, intermediaries like agents etc. in the insurance sector. (f) To make recommendations on any other matter which are relevant for development of the insurance industry in India. The committee made a number of important and far-reaching recommendations. (a) The LIC should be selective in the recruitment of LIC agents. Train these people after the identification of training needs. (b) The committee suggested that the Federation of Insurance Institute, Mumbai should start new courses and diploma courses for intermediaries of the insurance sector. (c) The LIC should use an MBA specialized in Marketing (a similar suggestion for the GIC subsidiaries). (c) It suggested that settlement of claims were to be done within a specific time frame without delay. (d) The committee has several recommendations on product pricing, vigilance, systems and procedures, improving customer service and use of technology. (f) It also made a number of recommendations to alter the existing structure of the LIC and the GIC. (g) The committee insisted that the insurance companies should pay special attention to the rural insurance business. (h) In the case of liberalization of the insurance sector the committee made several recommendations, including entry to new players and the minimum capital level requirements for such new players should be Rs. 100 crores (about USD 24 million). However, a lower capital requirement could be considered for a co-operative sectors' entry in the insurance business. (i) The committee suggested some norms relating to promoters equity and equity capital by foreign companies, etc.

Mukherjee Committee Immediately after the publication of the Malhotra Committee Report, a new committee (called the Mukherjee Committee) was set up to make concrete plans for the requirements of the newly formed insurance companies. Recommendations of the Mukherjee Committee were never made public. But, from the information that filtered out it became clear that the committee recommended the inclusion of certain ratios in insurance company balance sheets to ensure transparency in accounting. But the Finance Minister objected. He argued (probably on the advice of some of the potential entrants) that it could affect the prospects of a developing insurance company.

Insurance Regulatory Act (1999) After the report of the Malhotra Committee came out, changes in the insurance industry appeared imminent. Unfortunately, instability in Central Government, changes in insurance regulation could not pass through the parliament. The dramatic climax came in 1999. On March 16, 1999, the Indian Cabinet approved an Insurance Regulatory Authority (IRA) Bill that was designed to liberalize the insurance sector. The bill was awaiting ratification by the Indian Parliament. However, the BJP Government fell in April 1999. The deregulation was put on hold once again. An election was held in late 1999. A new BJP-led government came to power. On December 7, 1999, the new government passed the Insurance Regulatory and Development Authority (IRDA) Act. This Act repealed the monopoly conferred to the Life Insurance Corporation in 1956 and to the General Insurance Corporation in 1972. The authority created by the Act is now called IRDA. It has ten members. New licenses are being given to private companies (see below). IRDA has separated out life, non-life and reinsurance insurance businesses. Therefore, a company has to have separate licenses for each line of business. Each license has its own capital requirements (around USD24 million for life or non-life and USD48 million for reinsurance). Some Details of the IRDA Bill On July 14, 2000, the Chairman of the IRDA, Mr. N. Rangachari set forth a set of regulations in an extraordinary issue of the Indian Gazette that details of the regulation.

Regulations The first covers the Insurance Advisory Committee that sets out the rules and regulation. The second stipulates that the "Appointed Actuary" has to be a Fellow of the Actuarial Society of India. Given that there has been a dearth of actuaries in India with the qualification of a Fellow of the Actuarial Society of India, this becomes a requirement of tall order. As a result, some companies have not been able to attract a qualified Appointed Actuary (Dasgupta, 2001). The IRDA is also in the process of replacing the Actuarial Society of India by a newly formed institution to be called the Chartered Institute of Indian Actuaries (modeled after the Institute of Actuaries of London). Curiously, for life insurers the Appointed Actuary has to be an internal company employee, but he or she may be an external consultant if the company happens to be a non-life insurance company. Third, the Appointed Actuary would be responsible for reporting to the IRDA a detailed account of the company. Fourth, insurance agents should have at least a high school diploma along with training of 100 hours from a recognized institution. More than a dozen institutions have been recognized by the IRDA for training insurance agents (the list appears online at Fifth, the IRDA has set up strict guidelines on asset and liability management of the insurance companies along with solvency margin requirements. Initial margins are set high (compared with developed countries). The margins vary with the lines of business (for example, fire insurance has a lower margin than aviation insurance). Sixth, the disclosure requirements have been kept rather vague. This has been done despite the recommendations to the contrary by the Mukherjee Committee recommendations. Seventh, all the insurers are forced to provide some coverage for the rural sector. (1) In respect of a life insurer, (a) five percent in the first financial year; (b) seven percent in the second financial year; (c) ten percent in the third financial year; (d) twelve percent in the fourth financial year; (e) fifteen percent in the fifth year (of total policies written direct in that year). (2) In respect of a general insurer, (a) two percent in the first financial year; (b) three percent in the second financial year; (c) five percent thereafter (of total gross premium income written direct in that year).

New Entry

Immediately after the passage of the Act, a number of companies announced that they would seek foreign partnership. In mid-2000, the following companies made public statements that they already were in the process of setting up insurance business with foreign partnerships). However, not all the partnerships panned out in the end. Three days before the deadline that the IRDA had set upon itself (October 25, 2000), it issued three companies with license papers: (1) HDFC Standard Life. This will be jointly set up by India's Housing Development Finance Company - the largest housing finance company in India and the Scotland based Standard Life. (2) Sundaram Royal Alliance Insurance Company. It is a partnership created by Sundaram Finance and three other companies of the TVS Group of Chennai (Madras) and the London based Royal & SunAlliance. (3) Reliance General Insurance. This company is fully owned by Mumbai based Reliance Industries which has operations in textile, petrochemicals, power and finance industries. There are three other companies with "in principal" approvals: (1) Max New York Life. It is a partnership between Delhi based pharmaceutical company Max India and New York Life, the New York based life insurance company. (2) ICICI Prudential Life Insurance Company. This is a joint venture between Mumbai based Industrial Credit & Investment Corporation and the London based Prudential PLC. (3) IFFCO Tokio General Insurance Company. It is a joint venture between Indian Farmers' Fertiliser Cooperative and Tokio Marine and Fire of Japan. On December 28, 2000, the State Bank of India (SBI) announced a joint venture partnership with Cardif SA (the insurance arm of BNP Paribas Bank). This partnership won over several others (with Fortis and with GE Capital). At present, 312 million middle class consumers in India have enough financial resources to purchase insurance products like pension, health care, accident benefit, life, property and auto insurance. Only 2.5 per cent of this insurable population, however, have insurance coverage in any form. The potential premium income is estimated at around US $80 billion. This will place India as the sixth largest market in the world (after the US, Japan, Germany, UK and France).

It seems unlikely that the LIC and the GIC will shrivel up and die within the next decade or two. The IRDA has taken a "slowly slowly" approach. It has been very cautious in granting

licenses. It has set up fairly strict standards for all aspects of the insurance business (with the probable exception of the disclosure requirements). The regulators always walk a fine line. Too many regulations kill the incentive for the newcomers; too relaxed regulations may induce failure and fraud that led to nationalization in the first place. India is not unique among the developing countries where the insurance business has been opened up to foreign competitors. From Table 4, we observe that the openness of the market did not mean a takeover by foreign companies even in a decade. Thus, it is unlikely that the same will happen in India, especially when the foreign insurers cannot have a majority shareholding in any company. The insurance business is at a critical stage in India. Over the next couple of decades we are likely to witness high growth in the insurance sector for two reasons. Financial deregulation always speeds up the development of the insurance sector. Growth in per capita GDP also helps the insurance business to grow.

Insurance Business Operations

Rate making Underwriting Production Claim settlement Reinsurance Investments Rate making refers to the pricing of insurance Total premiums charged must be adequate for paying all claims and expenses during the policy period Rates and premiums are determined by an actuary, using the companys past loss experience and industry statistics

Underwriting refers to the process of selecting, classifying, and pricing applicants for insurance The objective is to produce a profitable book of business A statement of underwriting policy establishes policies that are consistent with the companys objectives, such as Acceptable classes of business Amounts of insurance that can be written A line underwriter makes daily decisions concerning the acceptance or rejection of business There are three important principles of underwriting: The underwriter must select prospective insureds according to the companys underwriting standards Underwriting should achieve a proper balance within each rate classification In class underwriting, exposure units with similar loss-producing characteristics are grouped together and charged the same rate Underwriting should maintain equity among the policyholders

Underwriting starts with the agent in the field Information for underwriting comes from: The application The agents report An inspection report Physical inspection A physical examination and attending physicians report MIB report After reviewing the information, the underwriter can: Accept the application Accept the application subject to restrictions or modifications Reject the application

Production refers to the sales and marketing activities of insurers Agents are often referred to as producers Life insurers have an agency or sales department Property and liability insurers have marketing departments An agent should be a competent professional with a high degree of technical knowledge in a particular area of insurance and who also places the needs of his or her clients first claims settlement include: Verification of a covered loss Fair and prompt payment of claims Personal assistance to the insured Some laws prohibit unfair claims practices, such as: Refusing to pay claims without conducting a reasonable investigation Not attempting to provide prompt, fair, and equitable settlements Offering lower settlements to compel insureds to institute lawsuits to recover amounts due The claim process begins with a notice of loss Next, the claim is investigated A claims adjustor determines if a covered loss has occurred and the amount of the loss The adjustor may require a proof of loss before the claim is paid The adjustor decides if the claim should be paid or denied

Policy provisions address how disputes may be resolved

Reinsurance is an arrangement by which the primary insurer that initially writes the insurance transfers to another insurer part or all of the potential losses associated with such insurance The primary insurer is the ceding company The insurer that accepts the insurance from the ceding company is the reinsurer The retention limit is the amount of insurance retained by the ceding company The amount of insurance ceded to the reinsurer is known as a cession

Reinsurance is used to: Increase underwriting capacity Stabilize profits Reduce the unearned premium reserve The unearned premium reserve represents the unearned portion of gross premiums on all outstanding policies at the time of valuation Provide protection against a catastrophic loss Retire from business or from a line of insurance or territory Obtain underwriting advice on a line for which the insurer has little experience There are two principal forms of reinsurance: Facultative reinsurance is an optional, case-by-case method that is used when the ceding company receives an application for insurance that exceeds its retention limit Treaty reinsurance means the primary insurer has agreed to cede insurance to the reinsurer, and the reinsurer has agreed to accept the business Under a quota-share treaty, the ceding insurer and the reinsurer agree to share premiums and losses based on some proportion Under a surplus-share treaty, the reinsurer agrees to accept insurance in excess of the ceding insurers retention limit, up to some maximum amount An excess-of-loss treaty is designed for catastrophic protection

A reinsurance pool is an organization of insurers that underwrites insurance on a joint basis

Some insurers use the capital markets as an alternative to traditional reinsurance Securitization of risk means that an insurable risk is transferred to the capital markets through the creation of a financial instrument, such as a futures contract Catastrophe bonds are corporate bonds that permit the issuer of the bond to skip or reduce the interest payments if a catastrophic loss occurs Investments-Because premiums are paid in advance, they can be invested until needed to pay claims and expenses Investment income is extremely important in reducing the cost of insurance to policy owners and offsetting unfavorable underwriting experience Life insurance contracts are long-term; thus, safety of principal is a primary consideration In contrast to life insurance, property insurance contracts are short-term in nature, and claim payments can vary widely depending on catastrophic losses, inflation, medical costs, etc The electronic data processing area maintains information on premiums, claims, loss ratios, investments, and underwriting results The accounting department prepares financial statements and develops budgets In the legal department, attorneys are used in advanced underwriting and estate planning Property and liability insurers provide numerous loss control services

Recent Trends In Insurance

INDIAN INSURANCE IN 21ST CENTURY: 2000: IRDA starts giving licenses to private insurers: ICICI prudential and HDFC Standard Life insurance first private insurers to sell a policy 2001: Royal Sundaram Alliance first non life insurer to sell a policy 2002: Banks allowed selling insurance plans. As TPAs enter the scene, setting non-life claims in the cashless mode insurers start

2007: First Online Insurance portal, https:/// set up by an Indian Insurance Broker, Bonsai Insurance Broking Pvt Ltd. The Government of India liberalized the insurance sector in March 2000 with the passage of the Insurance Regulatory and Development Authority (IRDA) Bill, lifting all entry restrictions for private players and allowing foreign players to enter the market with some limits on direct foreign ownership. Minimum capital requirement for direct life and Non-life Insurance company is INR1000 million and that for reinsurance company is INR 2000 million. In the 2004-05 budgets, the Government proposed for increasing the foreign equity stake to 49%, this is yet to be effected. Under the current guidelines, there is a 26 percent equity cap for foreign partners in direct insurance and reinsurance Company. Insurance Trends in India : With the de-regulation in Indian Insurance industry, the monopoly of public sector companies in life insurance and general insurance has come to an end. This has augmented the innovative practices initiated by the private players. Growth in the interactive technology such as internet has further created a wave of excitement in the insurance market. Indian economy and Indian Insurance sector is committed to a double digit growth. Heres a glimpse of Insurance Industry over 190 years.

Background : Insurance is a Rs 450 billion industry in India. The value of the market is determined by gross premium incomes. The life insurance segment writes about 80% of the overall market value.Indian Insurance market was at its all time high in 2003 with a growth of about 17.4% over the pervious year. Since 2001 Insurance is growing at the rate of 15-20 % annually. The growth in the insurance industry is affected by volatility in real estate rates, GDP rates and long term interest rates. Fluctuations in exchange rates also affect the growth in this sector. The gross premium as a percentage of the GDP has gone up from 2.3 in the year 2000 to 4.8 in 2006. Together with banking services, it adds about 7% to the countrys GDP. History of Indian Insurance : A] Ancient Historical Times : Insurance is as old as human society itself. The ancient origin of insurance is Emerigon, whose brilliant and learned Traite des Assurances, first published in 1783, is still read with respect and admiration. The result shows that insurances were known to the ancients such as Romans, Phoenicians Rhodians, although the business of underwriting commercial risks was probably not highly developed. The histories of Livy and Suetonius shows that the contractors who undertook to transport provisions and military stores to the troops in Spain stipulated that the government should assume all risk of loss by reason of perils of the sea or capture and this was probably the first time when insurance process was known. There were friendly societies organized, for the purpose of extending aid to their unfortunate members from a fund made up of contributions from all. These societies undoubtedly existed in China and India in the earliest times. The earliest traces of Insurance in the ancient Indian history was in the form of marine trade loans or carriers contracts, which can be found in Kautilyas Arthashastra, Yajnyavalkyas Dharmashastra and Manus Smriti. These works show that the system of credit and the law of interest were well developed in India. They were based on clear appreciation of hazard involved and the means of safeguarding against it. B] British-India Period : Insurance in India without any regulations started in the nineteenth century. It was a typical story of a colonial era where a few British insurance companies dominated the market serving mostly large urban centers. Company started by Europeans in Calcutta was the first life insurance company on Indian Soil. Bombay Mutual Life Assurance Society indicated the birth of first Indian life insurance company in the year 1870, and covered Indian lives at normal rates. 1930s was the last of the old-style crises in the Indian economy because it marked the beginning of the end of the colonial state and an acceleration of the pace of industrialization as entrepreneurs moved their capital out of the countryside.

Independent India reduced its vulnerability to external economic shocks by close control of foreign exchange and by promoting a massive change in the export schedule. Till the end of nineteenth century insurance business was almost entirely in the hands of overseas companies. C] Post Independence era of Indian Insurance : The insurance business grew at a faster pace after independence. Indian companies strengthened their hold on this business but despite the growth that was witnessed, insurance remained an urban phenomenon. During Mrs. Gandhis tenure (from 19661968), there was a split within the business community of protectionists and those who wanted more open trade. But what maintained the momentum was the commitment of Two Ministers, Ashok Mehta and Subramaniam towards liberalization of the economy. This was seconded with high hope of getting increased foreign aid. Deregulation actually helped the poorest in India as it would eventually create more employment and faster growth. Yet the intense fears of liberalization in the lower middle class and among working class employees of the state sector, pose serious risks in freeing the economy. It might be preferable to introduce liberalization during an economic upswing when the risk of switching jobs is less traumatic. The three liberalization episodes in Indian economic policy have followed clear cyclical patterns. Economic policy has swung broadly between controls and greater openness, with a tendency toward decontrolling larger and more important segments of the economy. D] Nationalization Phase of Indian Insurance : 1944 : The Nationalization of insurance industry gathered momentum in 1944 when a bill to amend the Life Insurance Act 1938 was introduced in the Legislative Assembly. 1956 : 154 Indian insurance companies, 16 non-Indian companies and 75 provident societies were taken over by the central government and nationalised. LIC formed by an Act of Parliament, viz. LIC Act, 1956, with a capital contribution of Rs. 5 Crore from the Government of India. 1972 : The General Insurance Business (Nationalisation) Act, which nationalised the general insurance business in India with effect from 1st January 1973. 107 insurers amalgamated and grouped into four companies viz. the National Insurance Company Ltd., the New India Assurance Company Ltd., the Oriental Insurance Company Ltd. and the United India Insurance Company Ltd. Nationalization was accomplished in two stages; initially the management of the companies was taken over by means of an Ordinance, and later, the ownership too was taken by means of a comprehensive bill. However, it was only in 1956, LIC was nationalised, with the objective of spreading life insurance much more widely and in particular to the rural areas with a view to reach all insurable persons in the country, providing them adequate financial cover at a reasonable cost.And as of 2007, LIC is Indias

leading Insurance company, with 2000 branches, which probably is the highest number of branches across India insurance sector. E] Liberalization of Indian Insurance : 1994 : Insurance sector invited private participation to induce a spirit of competition amongst the various insurers and to provide a choice to the consumers. 1997 : Insurance regulator IRDA was set up as there felt the need: a) To set up an independent regulatory body, that provides greater autonomy to insurance companies in order to improve their performance, b) To Enable them to act as independent companies with economic motives. c) To Protect the interest of holders of insurance policies. d) To Amend the Insurance Act, 1938, the Life Insurance Corporation Act, 1956 and the General insurance Business (Nationalisation) Act, 1972 e) To end the monopoly of the Life Insurance Corporation of India and General Insurance Corporation and its subsidiaries . In the first year of insurance market liberalization (2001) as much as 16 private sector companies including joint ventures with leading foreign insurance companies have entered the Indian insurance sector. Of this, 10 were under the life insurance category and six under general insurance. Thus in all there are 25 players (12-life insurance and 13-general insurance) in the Indian insurance industry till date. F] Indian Insurance in 21st Century : 2000 : IRDA starts giving licenses to private insurers : ICICI prudential and HDFC Standard Life insurance first private insurers to sell a policy 2001 : Royal Sundaram Alliance first non life insurer to sell a policy 2002 : Banks allowed to sell insurance plans. As TPAs enter the scene, insurers start setting non-life claims in the cashless mode 2007 : First Online Insurance portal, www.insurancemall.in set up by an Indian Insurance Broker, Bonsai Insurance Broking Pvt Ltd. The Government of India liberalised the insurance sector in March 2000 with the passage of the Insurance Regulatory and Development Authority (IRDA) Bill, lifting all entry restrictions for private players and allowing foreign players to enter the market with some limits on direct foreign ownership.

Minimum capital requirement for direct life and Non-life Insurance company is INR1000 million and that for reinsurance company is INR 2000 million. In the 2004-05 budget, the Government proposed for increasing the foreign equity stake to 49%, this is yet to be effected. Under the current guidelines, there is a 26 percent equity cap for foreign partners in direct insurance and reinsurance Company.(World Bank Economic Review-2000). Online Insurance In India : Internet access in India has doubled every year over the last five years and forecasts predict this growth to quadruple every year over the next three years. According to emarketer report on India online, in 2007, about 33.2 million people in India accessed internet and thats about 2.9% of Indian population. This figure is going to be 71.6 million people, which will be about 6% of population by 2011. Considering limited access of humaninsurance agents in rural areas, there will more demand of purchasing insurance online from these areas, followed by semi-urban areas. The insurance portals that are active in online distribution are www.icicilombard.com, www.bajajallianz.co.in, www.insurancemall.in, www.bimaonline.com, www.insurancepandit.com. Recently, Compare Choose Buy portals like Bonsai Insurance Brokers www.insurancemall.in, have been developed for providing comparison of different types of insurance policies, their premiums and their purchase online. The policy details are stored digitally and all transactions are made over secure channels. E-insurance offers a new gateway of incomes and provides additional market penetration, which is a need of an hour for Indian Insurance Segment. The First Movers in eDistribution of Insurance goes to 3 companies in India : 1. ICICI Lombard General Insurance 2. Bajaj Allianz General Insurance 3. www.insurancemall.in ( Created by Bonsai Insurance Broking.)

Recent Trends in Banking Industry of India Introduction The economy can be divided in the entire spectrum of economic activity into the real and monetary sectors. The real sector is where production takes place while the monetary sector supports this production and in a way is the means to the end. We know and we accept the financial system is critical to the working of the rest of the economy. In fact, the Asian crisis of the nineties, or for that matter what happened in Latin America and Russia subsequently and also Dubai Crisis have shown how a fragile financial sector can wreak havoc on the rest of the economy. Therefore the banking sector is crucial and we want to express our views to explore how this sector can work in harmony with the real sector to achieve the desired objectives. the Banking sector has been immensely benefited from the implementation of superior technology during the recent past, almost in every nation in the world. Productivity enhancement, innovative products, speedy transactions seamless transfer of funds, real time information system, and efficient risk management are some of the advantage derived through the technology. Information technology has also improved the efficiency and robustness of business processes across anking sector. Indias banking sector has made rapid strides in reforming and aligning itself to the new competitive business environment. Indian banking industry is the midst of an IT revolution. Technological infrastructure has become an indispensable part of the reforms process in the banking system, with the gradual development of sophisticated instruments and innovations in market practices. IT in Banking Indian banking industry, today is in the midst of an IT revolution. A combination of regulatory and competitive reasons has led to increasing importance of total banking automation in the Indian Banking Industry. Information Technology has basically been used under two different avenues in Banking. One is Communication and Connectivity and other is Business Process Reengineering. Information technology enables sophisticated product development, better market infrastructure, implementation of reliable techniques for control of risks and helps the financial intermediaries to reach geographically distant and diversified markets.

The bank which used the right technology to supply timely information will see productivity increase and thereby gain a competitive edge. To compete in an economy which is opening up, it is imperative for the Indian Banks to observe the latest technology and modify it to suit their environment. Not only banks need greatly enhanced use of technology to the customer friendly, efficient and competitive existing services and business, they also need technology for providing newer products and newer forms of services in an increasingly dynamic and globalize environment. Information technology offers a chance for banks to build new systems that address a wide range of customer needs including many that may not be imaginable today. Following are the innovative services offered by the industry in the recent past: Electronic Payment Services E Cheques Nowadays we are hearing about e-governance, e-mail, e-commerce, e-tail etc. In the same manner, a new technology is being developed in US for introduction of e-cheque, which will eventually replace the conventional paper cheque. India, as harbinger to the introduction of e-cheque, the Negotiable Instruments Act has already been amended to include; Truncated cheque and E-cheque instruments. Real Time Gross Settlement (RTGS) Real Time Gross Settlement system, introduced in India since March 2004, is a system through which electronics instructions can be given by banks to transfer funds from their account to the account of another bank. The RTGS system is maintained and operated by the RBI and provides a means of efficient and faster funds transfer among banks facilitating their financial operations. As the name suggests, funds transfer between banks takes place on a Real Time basis. Therefore, money can reach the beneficiary instantaneously and the beneficiarys bank has the responsibility to credit the beneficiarys account within two hours. Electronic Funds Transfer (EFT) Electronic Funds Transfer (EFT) is a system whereby anyone who wants to make payment to another person/company etc. can approach his bank and make cash payment or give instructions/authorization to transfer funds directly from his own account to the bank account of the receiver/beneficiary. Complete details such as the receivers name, bank account number, account type (savings or current account), bank name, city, branch name etc. should be furnished to the bank at the time of requesting for such transfers so that the amount reaches the beneficiaries account correctly and faster. RBI is the service provider of EFT.

Electronic Clearing Service (ECS) Electronic Clearing Service is a retail payment system that can be used to make bulk payments/receipts of a similar nature especially where each individual payment is of a repetitive nature and of relatively smaller amount. This facility is meant for companies and government departments to make/receive large volumes of payments rather than for funds transfers by individuals. Automatic Teller Machine (ATM) Automatic Teller Machine is the most popular devise in India, which enables the customers to withdraw their money 24 hours a day 7 days a week. It is a devise that allows customer who has an ATM card to perform routine banking transactions without interacting with a human teller. In addition to cash withdrawal, ATMs can be used for payment of utility bills, funds transfer between accounts, deposit of cheques and cash into accounts, balance enquiry etc. Point of Sale Terminal Point of Sale Terminal is a computer terminal that is linked online to the computerized customer information files in a bank and magnetically encoded plastic transaction card that identifies the customer to the computer. During a transaction, the customers account is debited and the retailers account is credited by the computer for the amount of purchase. Tele Banking Tele Banking facilitates the customer to do entire non-cash related banking on telephone. Under this devise Automatic Voice Recorder is used for simpler queries and transactions. For complicated queries and transactions, manned phone terminals are used. Electronic Data Interchange (EDI) Electronic Data Interchange is the electronic exchange of business documents like purchase order, invoices, shipping notices, receiving advices etc. in a standard, computer processed, universally accepted format between trading partners. EDI can also be used to transmit financial information and payments in electronic form.

Implications

The banks were quickly responded to the changes in the industry; especially the new generation banks. The continuance of the trend has re-defined and re-engineered the banking operations as whole with more customization through leveraging technology. As technology makes banking convenient, customers can access banking services and do banking transactions any time and from any ware. The importance of physical branches is going down. Challenges Faced by Banks, vis--vis, IT Implementation It is becoming increasingly imperative for banks to assess and ascertain the benefits of technology implementation. The fruits of technology will certainly taste a lot sweeter when the returns can be measured in absolute terms but it needs precautions and the safety nets. It has not been a smooth sailing for banks keen to jump onto the IT bandwagon. There have been impediments in the path like the obduracy once shown by trade unions who felt that IT could turn out to be a threat to secure employment. Further, the expansion of banks into remote nooks and corners of the country, where logistics continues to be a handicap, proved to be another stumbling stock. Another challenge the banks have had to face concerns the inability of banks to retain the trained and talented personnel, especially those with a good knowledge of IT. The increasing use of technology in banks has also brought up security concerns. To avoid any pitfalls or mishaps on this account, banks ought to have in place a welldocumented security policy including network security and internal security. The passing of the Information Technology Act has come as a boon to the banking sector, and banks should now ensure to abide strictly by its covenants. An effort should also be made to cover e-business in the countrys consumer laws. Some are investing in it to drive the business growth, while others are having no option but to invest, to stay in business. The choice of right channel, justification of IT investment on ROI, e-governance, customer relationship management, security concerns, technological obsolescence, mergers and acquisitions, penetration of IT in rural areas, and outsourcing of IT operations are the major challenges and issues in the use of IT in banking operations. The main challenge, however, remains to motivate the customers to increasingly make use of IT while transacting with banks. For small banks, heavy investment requirement is the compressing need in addition to their capital requirements. The coming years will see even more investment in banking technology, but reaping ROI will call for more strategic thinking.

Future Outlook

Everyone today is convinced that the technology is going to hold the key to future of banking. The achievements in the banking today would not have make possible without IT revolution. Therefore, the key point is while changing to the current environment the banks has to understand properly the trigger for change and accordingly find out the suitable departure point for the change. Although, the adoption of technology in banks continues at a rapid pace, the concentration is perceptibly more in the metros and urban areas. The benefit of Information Technology is yet to percolate sufficiently to the common man living in his rural hamlet. More and more programs and software in regional languages could be introduced to attract more and more people from the rural segments also. Standards based messaging systems should be increasingly deployed in order to address cross platform transactions. The surplus manpower generated by the use of IT should be used for marketing new schemes and banks should form a brains trust comprising domain experts and technology specialists.

Conclusion The banking today is re-defined and re-engineered with the use of Information Technology and it is sure that the future of banking will offer more sophisticated services to the customers with the continuous product and process innovations. Thus, there is a paradigm shift from the sellers market to buyers market in the industry and finally it affected at the bankers level to change their approach from conventional banking to convenience banking and mass banking to class banking. The shift has also increased the degree of accessibility of a common man to bank for his variety of needs and requirements.

Recent Trends in Indian Banking Sector

Today, we are having a fairly well developed banking system with different classes of banks public sector banks, foreign banks, private sector banks, regional rural banks and co-operative banks. The Reserve Bank of India (RBI) is at the paramount of all the banks. The RBIs most important goal is to maintain monetary stability (moderate and stable inflation) in India. The RBI uses monetary policy to maintain price stability and an adequate flow of credit. The rates used by RBI to achieve this are the bank rate, repo rate, reverse repo rate and the cash reserve ratio. Reducing inflation has been one of the most important goals for some time. Growth and diversification in banking sector has transcended limits all over the world. In 1991, the Government opened the doors for foreign banks to start their operations in India and provide their wide range of facilities, thereby providing a strong competition to the domestic banks, and helping the customers in availing the best of the services. The Reserve Bank in its bid to move towards the best international banking practices will further sharpen the prudential norms and strengthen its supervisor mechanism. There has been considerable innovation and diversification in the business of major commercial banks. Some of them have engaged in the areas of consumer credit, credit cards, merchant banking, internet and phone banking, leasing, mutual funds etc. A few banks have already set up subsidiaries for merchant banking, leasing and mutual funds and many more are in the process of doing so. Some banks have commenced factoring business Role of Information Technology (IT) and Customer Relationship Management (CRM) in Banking IT plays an important role in the banking sector as it would not only ensure smooth passage of interrelated transactions over the electric medium but will also facilitate complex financial product innovation and product development. The application of IT and e-banking is becoming the order of the day with the banking system heading towards virtual banking. Banks, who strongly rely on the merits of relationship was banking as a time tested way of targeting & servicing clients, have readily embraced CRM, with sharp focus on customer centricity, facilitated by the availability of superior technology. CRM, therefore, has become a new mantra in service management, both relationship & information wise. Foreign Direct Investment (FDI) in India Definition of FDI: Investment made to acquire lasting interest in enterprises operating outside of the economy of the investor. Maximum FDI permitted in Indian private sector banks 74 percent, under the automatic route which includes Portfolio Investment i.e. FIIs and NRIs, Initial Public Issue (IPO), Private Placements, ADR/GDRs; and Acquisition of shares from existing shareholders; Maximum FDI permitted in Indian public / nationalized banks 20 percent;

Automatic route is not applicable to transfer of existing shares in a banking company from residents to non-residents. This category of investors require approval of FIPB, followed by in principle approval by Exchange Control Department of the RBI. The fair price for transfer of existing shares is determined by RBI, broadly on the basis of the Securities and Exchange Board of India guidelines for listed shares and erstwhile CCI guidelines for unlisted shares. After receipt of in principle approval, the resident seller can receive funds and apply to RBI, for obtaining final permission for transfer of shares. A foreign bank or its wholly owned subsidiary regulated by a financial sector regulator in the host country can now invest up to 100% in an Indian private sector bank. This option of 100% FDI will be only available to a regulated wholly owned subsidiary of a foreign bank and not any investment companies. Benefits of FDI: Transfer of technology from overseas countries to the domestic market Ensure better and improved risk management in the banking sector Assures better capitalization Offers financial stability in the banking sector in India. Voting Rights of Foreign Investors Private Sector Banks Nationalized Banks

Not more than 10% of the total voting rights of all the shareholders Not more than 1% of the total voting rights of all the shareholders of the nationalized bank.

Major challenges faced by banks Increased competition from domestic and international markets; Transaction costs of carrying non-performing assets and substandard assets in its books; Frequent changes in key policy rates and reserve requirements by the RBI; Maintaining sufficient liquidity.

Conclusion:

In the days to come, banks are expected to play a very useful role in the economic development and the emerging market will provide ample business opportunities to harness. Human Resources Management is assuming to be of greater importance. As banking in India will become more and more knowledge supported, human capital will emerge as the finest assets of the banking system. Ultimately banking is people and not just figures. To conclude it all, the banking sector in India is progressing with the increased growth in customer base, due to the newly improved and innovative facilities offered by banks. FDI has provided a great fillip to the whole of banking sector industry as banks are now competing at a global level.