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Chapter IV - Envisages the History of Alternative Banking Kumbhar V. M.

This chapter presents history and development of alternative banking channels.

This chapter begins with general information of the Indian banking industry, concept of

alternative banking and characteristics of alternative banking. There are some reviews

were have taken from the developed countries to address the history of alternative

banking. This chapter also presents origins and developments of alternative banking

channels in India. There are some statistical data also presented which shows

developmental aspects of the alternative banking services in India and developed

nations. At the end of the topic we have discussed about Bank Ombudsman Scheme,

Complaints registered against banks, Information Technology Act, 2000 and its

provisions related to banking and recommendations of Electronic Banking Group

(EBG) of BASEL committee.

4.1 Concept Alternative Banking and types of channelsModern service provision to customers, such as banking or retailing, is now

supported by a myriad of interactive technologies, such as the internet, mobile

applications, or interactive kiosks, leading to the emergence of multichannel or multi-

interface service systems (Patrcio et al, 2009). Technological innovations in banking

provide many efficient alternative delivery channels to customers (Frei et al, 1998). The

advance of communication and computer technology have made it possible that one can

do most banking transactions from a any location even without stepping into a physical

financial structure (Burns, 2002) through alternative banking channels. Alternative

banking, as the name suggest, is the newer method of carrying on banking operations,

is the newer method of carrying on banking operations. It includes all non-traditional

means of banking (World Retail Banking Report-2008, pp-40; Shrotryiya, 2007;

Ogilvie, 2008; Rakesh Mohan, 2002; Niels et al , 1999; Chris et al , 2005; Sathye,

1999) such as ATM, internet banking, bank automation, core banking, credit cards,

debit cards, mobile banking, EFT etc. According to IBM Global Services alternative

banking is set of alternative delivery channels1. Alternative distribution channels are

not only important to reducing costs and improving competitiveness, but also ability to

retain the existing customer case as well as to attract new customers (Kimball and

Gregor, 1995). Daniel, (1999) mentioned that there are six different alternative delivery

chandelles of banking i.e. PC banking, internet banking, managed network2, TV

banking3, Telephone banking and Mobile phone banking. Association of Banks in

1

https://www-935.ibm.com/services/in/igs/pdf/g510-3829-optimizing-retail-banking-channels.pdf(Sept, 24, 2010)2Managed network - A bank makes use of an online service provided by another party.

3TV Banking- Account information is delivered via satellite or cable to the TV screens of customers.
https://www-935.ibm.com/services/in/igs/pdf/g510-3829-optimizing-retail-banking-channels.pdfhttps://www-935.ibm.com/services/in/igs/pdf/g510-3829-optimizing-retail-banking-channels.pdfhttps://www-935.ibm.com/services/in/igs/pdf/g510-3829-optimizing-retail-banking-channels.pdfhttps://www-935.ibm.com/services/in/igs/pdf/g510-3829-optimizing-retail-banking-channels.pdf


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Palestine (2009) defined as it is conducting financial transactions electronically,

without physically interacting with the bank (i.e. using visa card, visa electron, internet

banking, other). However TV banking facilities are not available in India till date.

Alternative banking is alternative options for process banking transactions other

than traditional means. It is also known as e-banking, electronic banking, online

banking, virtual banking, direct banking and high tech-banking. According to Howcroft

(1993) alternative distribution channels provides convenient alternatives to branch

banking. In the traditional banking system customers need to visit branch to make

transaction and getting information about banking services, account information etc.

But in the alternative banking there is no need to visit physical branch most of banking

transactions are possible through alternative channels (Kumbhar 2009). It is also known

as quasi-banking, alternative remittance systems, and parallel banking. According toDevlin, et al (2003) Direct banking is the generic term that has been adopted to

encompass telephone and Internet banking, as well as interactive television and most

recently m-banking (banking using a mobile platform such as a hand phone or personal

digital assistant). There is substantial evidence to suggest that e-banking is being

embraced by financial institutions in developed and emerging markets. There are two

different strategies has been adopted by banks for e-banking: First, an existing bank

with physical offices can establish a web site and offer alternative banking to its

customer as an additional delivery channel. A second alternative is to establish an

Internet-only bank or additional e-channels or virtual bank, almost without physical

offices (Miranda et al, 2006). Recently in Indian followings alternative banking

channels are available (See Table No. 4.1 )

IT-based service channel may significantly lower costs of serving customers.

The analysts forecast that 40% of adult UK consumers will be lured in by the

conveniences of online banking bringing the number to 22 million users by 2012.

Internet banking allows customers to perform many banking functions anytime and

anywhere, while ATMs provide some services not possible by internet banking, such as

withdrawing money around the clock (Banker et al 2009). The advent of Internet,

electronic commerce, communication technology and users response to this

technology has opened opportunity for many businesses including the financial

institution (Wang and Wang 2006).


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4.1.1 Features of alternative banking

According to Kaleem Ahmad (2008) Electronic banking minimizes the cost of

transactions, saves time, minimizes inconvenience, provides up-to-date information,

increases operational efficiency, reduces HR requirements, facilitates quick responses,

improves service quality and minimizes the risk of carrying cash. As per Report of

European Central Bank (1999) technology has reduced the cost of operation and ways

of the banking truncation. After reviewing the literature related to alternative banking,

e-commerce, mobile commerce and ICT based financial services we have identified

followings characteristics of alternative banking services are:

Table No. 4.1: Alternative Banking Channels

Traditional

Service

Alternative

Means

Medium Services available

1 Brick-Mortar

services

Automated

Branches

PC and LAN Instant deposit and withdraw

money, getting statement, DD,calculation of interest etc.

2 BranchBanking

Core Banking PC and Internet Instant deposit and withdrawmoney, getting statement, chequeclearance and depositing, stoppayment etc.

3 Manual NoteCounting

Note countingMachines

Electronic device Instant notes and bundle of notecounting

4 Formal Cheque MICR cheque MICR technology Instant clearing of cheques

5 DD/MT/TT EFT Internet and CoreBanking Solution(CBS)

Instant Fund Transfer from to anybranch under CBS

6 On counterCash Withdraw

ATM, DebitCard

ATM Withdraw money, BalanceInquiry, Account statement,Mobile recharge, Make donation,Card to card transfer, Utility billpayments

7 On counterCash Withdraw

ATM or DebitCard

Point of SaleTerminals (POS)

Mobile recharge, Purchasing,Utility bill payments andWithdraw money etc.

8 Letter of Credit E-Money Credit Card Purchasing and Payments of utilitybill payments

9 BranchBanking

InternetBanking(PC Banking)

PC and Internet Balance inquiry, accountstatement, stop payment order,EFT, purchasing, utility billpayment etc.

10 BranchBanking

Mobile Banking Mobile phone,SMS, WAP

4, 3G

5

Balance inquiry, accountstatement, stop payment order,EFT, purchasing, utility billpayment etc.

Source: Miranda et al, 2006 (edited by author)

4 The Wireless Application Protocol (WAP) is an open, global specification that empowers mobile users withwireless devices to easily access and interact with information and services instantly. Most use of WAP involvesaccessing the mobile web from a mobile phone or from a PDA.53G is the next generation of mobile communications systems. It enhances the services such as multimedia, high

speed mobile broadband, internet access with the ability to view video footage on your mobile handset. With a 3Gphone and access to the 3G network you can make video calls, watch live TV, access the high speed internet, receiveemails and download music tracks.


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Technology dependency Alternative banking services are highly depends on

technology and high-tech communication system (Srotriya, 2007, Verner, et. al.

1989). For the pursuing the e-banking services banks are using Information and

communication technology (Internet, mobile phone, telephone, other electronic

devises) But e-banking services are totally technology based services.

Round the clock service-Alternative banking portal are provides 24 hours banking

services. Customers can enjoy round the clock banking service through the self-

service banking modes. They have freedom from tense about official time of bank.

Multi channel banking Modern technology based banking provides many

alternatives to transact banking business through the different channels e.g. ATM,

core banking, Mobile banking, Internet banking, Phone banking, POS terminals,

Credit and Debit cards etc.

Lack of Face2Face contact- in the e-banking transaction there is lacking face to

face contact of customer and services provider (Jayawardhena & Foley, 2000;

Durkin and O'donnell, 2005). Customers can use the banking services via virtual

means of e-banking i.e. internet banking, mobile banking, ATM, credit card etc.

While Lack of face-to-face contact is biggest obstacle to modern banking because

right customer has been identified by ID and password than face to face

identification. Risk factors: Despite of certain benefits of alternative banking channels there are

some certain risks e.g. Performance risk6, Strategic risk, financial risk7, Compliance

and legal risk8, Reputational Risk9, Operational (Operational) Risk10there has been

fear of inadequate security is one of the electronic banking channels (Ezeoha, 2005;

Schilder 2001; Sokolov Dmitri). There may be. So, it is clear that alterative banking

channels is lacking actually the assurance provided in traditional banking (Lee et

al., 2009). The Electronic Data storage and interchange system also consist Data

Risk. Unauthorized access to the bank clients private information causes first of

all operational risk, but indirectly also legal as well as reputational risk (BIS, 2009).

6 Performance risk is born from the malfunctions of online banking7 Financial risk contains losses money due to wrong authentication process and online frauds. It is the constant and

terrible fear of transactions errors causing a potential monetary loss suffered by customers who perform onlinetransactions.

8 Compliance and legal issues arise out of the rapid growth in usage of e-banking and the differences betweenelectronic and paper-based processes.

9 Reputational risk the risk arising from negative perception on the part of customers, counterparties, shareholders,investors or regulators that can adversely affect a banks ability to maintain existing, or establish new, business

relationships and continued access to sources of funding (e.g. through the interbank or securitisation markets).10Transaction/Operations risk arises from fraud, processing errors, system disruptions, or other unanticipated events

resulting in the institutions inability to deliver products or services.


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Customer education on security risks and precautions can play an important role for

consumer protection and for limiting reputational risk.

Inseparability: e-banking services cant be separate from e-service channels and

even there is also inseparability in production and consumption of the e-banking

services. These services are being produced at the same time that the customer is

receiving it.

Homogeneity: Formal services have a heterogeneity concerns the potential for high

variability in the performance of services is special characteristics of the services it

make difficult to establish standard. However alternative banking services are

homogenous of one specific bank due to same types of channel and service

specifications, while their actual performance may be differ by place and speed of

internet connectivity. Cost effectiveness -Technology based banking services provide cost effectiveness

to customers and bank both. Banks can deliver banking services through alternative

channels at transaction costs far lower than traditional ways. It has been proved that

online banking channels are cheaper delivery channel than traditional banking

(Adesina, 2010).

Geographical reach: Alternative banking allows expanded customer contact

through increased geographical reach and lower cost of delivery channels. Yibin(2003) argued that it provides borderless banking services throughout the world

where the internet connectivity is available.

Virtual bankingAlternative banking channels have reduced branch networks and

downsized the number of service staff. E-banking offer freedom from place

constraint, and reduced stress of queuing in banking hall. Which has paved the way

to self-service channels as quite many customers felt that branch banking took too

much time and effort. Virtual banking offering any ware banking facilities.

According to Singhal and Padhmanabhan (2008), User of ICT based banking

expect Convenience, Flexibility, Easy to use and user friendliness, Reliability,

Fulfillment, Real time access, Cost effectiveness, Alternative Options, Security &

Privacy, Speed & Continuity, Anytime and anywhere banking facilities. There is some

risk factors include in e-banking like data loss, fraud, lack of adequate information,

password theft etc. Kaleem Ahmad (2008). Hence customers expect security and trust

in e-banking services.


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History of the bank automation traced with use of computer technology in India.

The government of India has established the Electronics Corporation of India Ltd. in

1967 with the objective of research & development in the fields of Electronic

Communication, Control, instrumentation, automation and Information Technology.

The Computer Maintenance Corporation of India Ltd. was established in 1976 to look

after maintenance operations of Main Frame Computers installed in several

organizations in India.

Entry of technology in the Indian banking industry can be traced back to the

Raganarajan Committee report, way back in the second half of the 1970s. In 1979, the

RBI has appointed the Talwar Committee on Consumer Services in Banks and it

recommended that, computerisation of some functions is required to avoid delays in

customer service in Indian banks. While automation process has not tack off stage till1993, because bank employees unions are not agree with bank automation process they

have fever about job losses. However, in 1993, the Employees' Unions of Banks signed

an agreement with Bank Managements under the auspices of Indian Banks' Association

(IBA) after job assurance given by management. This agreement was a major

breakthrough in the introduction of computerized applications and development of

communication networks in Banks. In the first phase the Indian banks started

computerizing the front-end operations through Advanced Ledger Posting Machines

(ALPMs). Some banks concentrated on the back office automation and some are front-

end operations. In the second phase banks started total branch automation with front-

end and back-end operation within same branch. In the third phase, during the nineties

the banking sector witnessed various foreign and new private sector banks are entre in

the Indian banking industry with the latest technology.

4.2.1 Bank computerization in India

As per the recommendations of the various committees and working groups the

RBI tied to enhance technology in Indian commercial banks. The first blue print for

computerization of banks in India was drown in 1983-84 as phased plan for

mechanization of banking industry (1985-89)11. Although, the Reserve Bank of India

(RBI) installed its first computer in 1968, and a larger one in 1979. But the United

Commercial (UCO) Bank, the Standard Chartered Bank, Lloyds' Bank, Grindlays, and

others had installed accounting and other machines before 1966 12. But in large scale

11Dr. Firdos T. Shroff, (2007) Modern Banking Technology, Northern Book Centre, New Delhi, ISBN- 81-7211-222-X12Bank Flag, Journal of the All India Bank Employees Association, Bombay, March, 1981.


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count off specific batch sizes for wrapping and storage. The first automatic bill

counting machines (or banknote counting machines) were introduced in the 1920s in

the United States and were produced by the Federal Bill Counter Company of

Washington, D.C.(USA). These machines were designed to increase efficiency in

tellers in the Federal Reserve Bank and reduce human error (Sunny, 2009). In 1962,

newer technology developed for banknote counting machines were introduced by

Tokyo Calculating Machine Works of Shinagawa, Tokyo, Japan. With its exponential

increase in speed and accuracy, it quickly replaced older models and began to dominate

the market (Bravo Seo, 2009). There are two types of counters one is note counter from

bundle and another is loose note counter machine. In the banking industry coin sorter

and coin counter machines also used to faster counting and sorting of coins. Coin sorter

is a device which sorts a random collection of coins into separate bins for variousdenominations. Coin sorters are typically specific to the currency of certain countries

due to different currencies often issuing similarly sized coins of different value.

4.3 ATM and POS terminals

The history of ATM is confusing due to the many claims about its invention and

very short literature and their evidences. The history of ATM can be traced back to the

1960s, when the first ATM machine was invented by John Shepherd-Barron he was

managing director of De La Rue Instruments. That machine used by Barclays Bank

(Barclays Bank in Enfield Town in North London, United Kingdom) in 27 June 1967

(Wikipedia E-encyclopaedia). Forth more, in 1965, Mr. Goodfellow designed a system

which accepted a machine readable encrypted card, to which he added a numerical

keypad, its called automatic cash dispenser machine. These Machines were marketed

by Chubb LTD and installed nationwide in the UK during the late 60s and early 70s.

According to Cornelis Robat (USA) the concept of the ATM first began in 1968, a

working prototype came about in 1969 and Docutel was issued a patent in 1973. The

first working ATM was installed in a New York based Chemical Bank. The machine

was called a "Credit Card Automatic Currency Dispenser". Some eveidances cleiam

that Westminister Bank installed first automated teller machine (ATM) at Victoria,

London Branch in 1967. While, According to Banknet organization (India) the first

Automated Teller Machine (ATM) was introduced in the year 1967 by Barclays Bank

in Enfield Town in North London. In 1969 first use of ATM magstripe cards in Docutel

installs its Docuteller machine at New York's Chemical Bank. Chemical Bank's ad


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campaign announces: "On Sept. 2, our bank will open at 9:00 and never close again!"

ATM also popular in Germany 84% of all Germans are using ATMs.

The first bank to introduce the ATM concept in India was the Hong Kong and

Shanghai Banking Corporation (HSBC) in the year 1987. As a Indian bank, Bank of

India was first bank to introduced ATM in Bombay in 1988 followed by Vijaya Bank at

Delhi in 1989 and then after almost of commercial banks have started their ATM

facilities. AS on March 2009 there are 24,645 on-site and 19,006 off-site ATMs

installed in India (total 43,651) (see Table No 4.4). Today, some Urban Cooperative

Banks (UCBs) and District Central Cooperative Banks (DCCBs) also providing ATM

service in India. However, SBI is following the concept of 'ATMs in Quantity SBI

group has installed highest ATMs in India. The Corporation Bank has the second

largest network of ATMs amongst the Public Sector Banks in India. Todays all PublicSector Banks are taking the installation of ATMs seriously for Indian market. They are

either setting up their own ATM centers or entering into tie-ups with other banks. Since

April 2009 access in any ATM machine is free of charge it is the great opportunity to

any ware banking in India.

Table 4.4:ATM Centres Established by Commercial Banks In India

Type of Bank

All

Scheduled

Banks

Public

Sector

Nationalized

Banks

SBI

Group

New

Private

Sector

Old

PrivateForeign

On-siteATMs

2006 12,134 20,727 4,812 1,775 2,255 1,054 232

2007 14,796 10,289 6,634 3,655 3,154 1,104 249

2008 18,486 12,902 8,320 4,582 3,879 1,436 269

2009 24,645 17379 9,861 7,146 5,166 1,830 270

Off-siteATMs

2006 11,019 6,021 2,353 3,668 3,857 493 648

2007 12,292 6,040 3,254 2,786 5,038 503 711

2008 16,303 8,886 5,035 3,851 5,988 664 765

2009 19,006 9898 5,177 4,193 7,480 844 784

TotalATMS

2006 23,153 12,608 7,165 5,443 6,112 1,547 880

2007 27,088 16,329 9,888 6,441 8,192 1,607 960

2008 34,789 21,788 13,355 8,433 9,867 2,100 1,034

2009 43,651 27277 15,038 11,339 12,646 2,674 1,054

Source: RBI Annual Reports, 2005-06 to 2008-09

The number of ATMs under National Financial Switch (NFS)15Network now

stands at 61,702 and the number is growing at a rate of around 1000 ATMs a month.

15The National Financial Switch (NFS) is payment settlement system managed by Euronet India Pvt. Ltd. It wasconceived and run by IDRBT since August 27, 2004, the NPCI is the settlement agency for this network; it is ashared-ATM network, which inter-connects banks ATM switches.


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National Payments Corporation of India which provides the central infrastructure and

routing service through the NFS can easily handle 300 million transactions a month.

Table No. 4.5 : ATM network and Name of the Bank Participated

Name of the

Switch

Est.

Year

Name of the Banks Participated in the Network Connected

ATMs

1 MITR 2003 Punjab National Bank, Oriental Bank of Commerce,Indian Bank, Karur Vysya Bank, IndusInd Bank andUCO Bank

3151

2 CashTree 2004Bank of India, Union Bank of India, SyndicateBank, United Bank of India, Dena Bank, IndianBank, Bank of Rajasthan, Bank of Maharashtra,Indian Overseas Bank, Karnataka Bank, YES Bank,Dhanalakshmi Bank and Lakshmi Vilas Bank.

6400

3 NFS 2004Allahabad Bank, Andhra Bank, Axis Bank, Bank ofBahrain & Kuwait, Bank of Baroda, Bank of India,Bank of Maharashtra, Barclays Bank, Canara Bank,Catholic Syrian Bank, Central Bank of India, City

Union Bank, Corporation Bank, CosmosCooperative Bank, Dena Bank, Development CreditBank, Dhanalakshmi Bank, Federal Bank, HDFCBank, ICICI Bank , IDBI Bank, Indian Bank,Indian Overseas Bank, IndusInd Bank, Jammu andKashmir BankKarnataka Bank, Karur Vysya Bank, KotakMahindra Bank, Lakshmi Vilas Bank, Oriental Bankof Commerce, Punjab and Sind Bank, PunjabNational Bank, Ratnakar Bank, Shamrao Vithal Co-operative Bank , South Indian Bank, StandardChartered Bank, State Bank of India, Syndicate

Bank, Tamilnad Mercantile Bank, UCO Bank,Union Bank of India, United Bank of India, VijayaBank, Yes Bank Limited

61702

4 BANCS 2004.Axis Bank, IDBI Bank, Bank of India, Bank ofBahrain & Kuwait, Saraswat Cooperative Bank,SVC Bank, Cosmos Cooperative Bank, GreaterMumbai Cooperative Bank, Abhyudaya CooperativeBank, Air Employees Cooperative Bank, ThaneJanata Sahakari Bank, Ernakulam DistrictCooperative Bank, Dombivili Nagari Shakari Bankand Punjab & Maharashtra Cooperative Bank. Other

banks including Jana Kalyan Sahakari Bank, NutanNagarik Sahakari Bank, Bapuji Cooperative Bank,Subramanyeswara Cooperative Bank, NagpurSahakari Cooperative Bank, Visweshwar SahakariBank and Zoroastrian Cooperative Bank

6500

5 SBI Group NAState Bank of India State Bank of Bikaner &Jaipur State Bank of Hyderabad State Bank ofMysore State Bank of Patiala State Bank ofTravancore***

***Note- State Bank of Saurashtra was merger on 13 August 2008,Sources: 1) National Payments Corporation of India (NPCI)

2)http://www.bankingfrontiers.com/2009/july/July%20Page%2022,23.pdf(5,Oct. 2010)
http://www.bankingfrontiers.com/2009/july/July%20Page%2022,23.pdfhttp://www.bankingfrontiers.com/2009/july/July%20Page%2022,23.pdfhttp://www.bankingfrontiers.com/2009/july/July%20Page%2022,23.pdfhttp://www.bankingfrontiers.com/2009/july/July%20Page%2022,23.pdf


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MITR is a Multi lateral ATM Network Sharing arrangement of 6 member

Banks in India. It came into existence on 8 October 2003. CashTree is an interbank

network in India that has been in operation since March 2004. Bank of India is the

settlement bank for this network, which started with just 6 public sector banks but later

expanded to admit private sector banks. BANCS is another TAM network run by Bank

of India since 2004. Swadhan it most fevered network of this network. Other than these

network there are some bilateral ATM network also working in Indian banking industry

i.e. SBI groups ATM network and SVC Cache 24 Insta ATM sharing Arrangement of

the Shamrao Vithal Co-operative Bank Ltd. SWADHAN also one of the ATM network

of the public sector banks in India (Uppal and Jatana, 2007 pp. 103). The Indian Banks

Association has introduced SWADHAN as shared payment network.

4.3.2 POS terminals in IndiaA Point of Sale (POS) terminal is an integrated PC-based device, with a

monitor (CRT), POS keyboard, POS printer, Customer Display, Magnetic Swipe

Reader and an electronic cash drawer all rolled into one16. More generally, the POS

terminal refers to the hardware and software used for checkouts kept at the merchant's

store. POS terminals are predominantly used for sale and purchase transactions.

According to the Information provided by National Payment Corporation of India

(NPCI) In India there are 4, 87,024. POS terminals established in merchant

establishments at the end of August 2009 was17. Currently, most people use their debit

cards to withdraw money from ATMs. Only 2-3% of PSU bank customers and 14-19%

customers of private and foreign banks use their debit cards to make payments.

Therefore, to encourage ccustomers for used of POS the Reserve Bank of India (RBI)

has allowed cash withdrawal from point of sale (POS) terminals across the country

since 200918. According to the bankers this will also encourage the use of debit cards at

PoS-enabled merchant establishments in India.

4.4 Electronic money or plastic money

The history of money is one of its progressive dematerialization from metal

money to e-money. Recently paper money system has been replaced by e-money.

According to the Report on electronic Money published by the European Central

Bank (1998) Electronic Money is an electronic store of monetary value on a technical

16Abhijit Roy, Commercial banking In India: A Beginners Module, National Stock exchange

17

http://www.moneylife.in/article/8/2252.html18The Economic Times, 23 Jul, 2009, RBI allows cash withdrawals of up to Rs 1,000 a day at stores


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device that may be widely used for making payments to undertaking other than the

issuer without necessarily involving bank accounts in the transaction, but acting as a

prepaid bearer instrument (Desai, 2007 pp12-13) it is also known as Plastic Money,

Cybercash, eCash and Digcash (Digital cash). Plastic card also known as plastic

currency involving electronic device in their functioning is gaining popularly as a

convenient mode of payment (Uppal and Jatana, 2007 pp. 112)

As per the history of the electronic money the most popular type of the e-money

is debit card, since their launch in 1987 debit cards have established themselves as the

most popular card payment with consumers. Initially developed as a convenient and

cost-effective alternative to point-of-sale cheques, debit cards are increasingly being

used as a substitute for cash. A debit card is a plastic card which provides an alternative

payment method to cash when making purchases. Debit cards are accepted at manylocations, including grocery stores, retail stores, gasoline stations, and restaurants. Its

an alternative to carrying a cheque book or cash. There are currently two ways that

debit card transactions are processed: online debit cards and offline debit cards. Online

debit cards require electronic authorization of every transaction and the debits are

reflected in the users account immediately.

4.4.1 Credit cards

Use of credit card is many countries of the world are quite old. But it has

become popular in Indian past one decade only. The origins of the bank credit card

have been traced to Johnc Bigginsa customer credit specialist at the Flatbush National

Bank of Brooklyn, New York. In 1946, Biggins launched as credit plan called Charge

it. The programme featured a form of script that was accepted by local merchants for

small purchases. After the sale was completed the merchant deposited the scrip in the

bank account and the bank billed the customer for the total scrip issued (Auriemma,

1999 pp 4-5).

In the 1951 the first modern was introduced in America in 1950 when a

businessman Frank Menomara invited some of friends in hotel and suddenly at the

time of payment he discovered that he forgot bring the purse. Then he decided to

develop a fool proof system to avoid such conditions in future.The first of these was

the Diners Club Card, initially accepted by 14 restaurants in New York City. American

Express, then a leading issuer of travelers cheques, launched a more widely accepted

T&E card in 1958. Unlike some retail chains, Diners Club and American Express

expected the consumer to pay his charge balance in full at the end of each month.


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Franklin National Bank in New York in 1951, began issuing their own universal

credit cards combining widespread acceptance with the opportunity to defer repayment

beyond the end of the month, then Bank of America, launched its BankAmericard in

1958 (Latzer, 2005).

A credit card system is a type of retail transaction settlement and credit system,

named after the small plastic card issued to users of the system. In the case of credit

cards, the issuer lends money to the consumer. Credit cards are the most frequently

used electronic payment instrument in the United States. These cards combine a

payment instrument with a credit arrangement. There were 20.5 billion credit card

transactions processed during 2000, valued at USD 1.5 trillion. Bank credit cards are

generally issued by a bank under a license from a national organisation, such as Visa

and MasterCard

19

, and typically involve a revolving credit agreement. There are Fourmajor service providers who are providing technical services to banks to provide credit

and debit card facilities worldwide i.e. Visa, MasterCard. American Express, and

Discover. According to American Bankers Associations (ABA) Report there are 576.4

million credit cards and 507 million debit cards circulated in USA as end of year 2009

(See Table No.4.6)

Table No. 4.6: Total Cards in Circulation in U.S.A (Through year-end 2009)

Visa credit 270.1 million 11 percent

Visa debit 382 million 18 percent

MasterCard credit 203 million 22 percent

MasterCard debit 125 million 1 percent

American Express credit 48.9 million 9 percent

Discover credit 54.4 million 6 percent

Source: American Bankers Associations (ABA) Survey Report, 2009

4.4.2 Debit cards

A debit card is a plastic bank card used at an ATM or a point-of-sale (POS)

terminal that enables a consumer to have funds directly debited from customers bank

account. Some financial service providers (such as check cashers and currency

exchanges) may market a so-called debit card that is not tied to a deposit account but

instead functions as a stored-value card (Anguelov et al , 2004). The debit cards most

19To enhance geographical area for credit card holder Bank America Introduced network based card

system in 1976 as VISA card. Consequently 16 banks in Buffalo (New York) form their network calledInterbank Card Association, now is Master Card International. By the early 1980 the VISA andMasterCard system had expanded throughout the world.


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commonly used in the UK are Visa Debit, issued under the Visa card scheme, and

Maestro Cards, previously known as Switch cards, have been rebranded Maestro to

make them part of a worldwide scheme. There are two types of debit cards: Onl ine and

off -li ne debit card. Online debit card require the card to be present with the cardholder

entering a PIN to complete the sale while offline debit card transactions may or may

not be authorized against the cardholder. However, now most of banks are providing

online debit cards. Use of card based payment system was introduced during 1960s in

India. While as a branch of Diners Club Card in August 1980 credit card facility was

provided by Central Bank of India as Master Card. Then Andhra Bank has issued a

credit card in 1981 with linkage VISA and Japan Credit Bureau International (JCBI). In

India card fashion increasing day by day due to its convenience and utility. Many banks

have providing customised credit and debit cards to increase their business in India.Most of banks are using VISA, MasterCardtechnology to provide cars services.

Table No 4.7: Card Payments (POS Transactions)(Number in Lakh and Amount in ` crore)

Credit Card Debit Cards*

Year

No. of Out-

standing

Cards

Volume mount

Number of

Out- standing

Cards**

Volume Amount

2003-04 1,001.79** 17,662.72 377.57 4,873.67

2004-05 1,294.72** 25,686.36 415.32 5,361.04

2005-06 173.27 1,560.86 33,886.47 497.63 456.86 5,897.14

2006-07 231.23 1,695.36 41,361.31 749.76 601.77 8,171.63

2007-08 275.47 2,282.03 57,984.73 1,024.37 883.06 12,521.22

2008-09 246.99 2,595.61 65,355.80 1,374.31 1,276.54 18,547.14

2009-10 182.83 2341.91 62,881.83 1,819.72 1,701.70 26,418.11

*: Debit Cards figures for 2003-04 and 2004-05 are estimated based on 2005-06 figures.

**: Cards issued by banks (excluding those withdrawn/blocked).

Source: - RBI, Statistical Tables Relating to Banks in India 2002 to 2009

However the card base as well as the usage has picked up during the last five

years drastically. In the year 2003 to 2010 credit card based transaction are increased

from ` 17,662.72 crore to ` 62,881.83crore and debit card based transactions are

increased from ` 4,873.67 crore to ` 18,547.14 crore. See the Table No 4.7 and Graph

No. 4.4. Because of increased use and transaction trough credit cards in India. The RBI

has issued new guidelines to issue credit cards in India as per notification date 1 stJuly

2009 to insure credit card fraud and customer protection.


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Graph No. 4.4:Card Payments (POS Transactions) (Number in Lakh and Amount in crore)

4.5 Evolution of payment systems in India

Payment systems are the means by which funds are transferred between a payerand a beneficiary. It has importance for the functioning and integration of financial

markets. It influences the speed, financial risk, reliability and cost of domestic and

international transactions. The evolution of modern payment systems was characterized

by computerization of clearing operations. The other significant milestones in the

development of the payment systems were magnetic image character recognition

(MICR) based mechanised cheque processing technology in Mumbai (1986), Chennai,

New Delhi (in 1987) and Calcutta (1989). To reduce the pressures on the cheque

clearing and settlement process, and to improve customer service (especially for high

volume, low value clearing,) the central bank introduced an electronic clearing service

(ECS) credit scheme and the ECS debit scheme to facilitate payment of charges to

utility services. The modernization of the payment system in line with the global

standards was implemented as a part of the reforms of the financial system. It includes

followings transactions:

The Inter-bank Clearing System;

The Securities Clearing and Settlement System;


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The MICR Clearing System;

The Government Securities and Foreign Exchange Clearing Systems;

The Real Time Gross Settlement System. (The High Value Clearing

System) -RTGS;

Retail Card Based Clearing System

An efficient and stable payment system is the backbone of any economy.

Recognizing the importance of payment systems in the financial system, the Reserve

Bank of India has taken a number of steps to strengthen the institutional framework for

the payment and settlement systems in the country. The emergence of e-commerce has

created new financial requirements that in many cases cannot be effectively fulfilled by

the traditional payment systems. The efforts of the Reserve Bank have been to ensure

full compliance to the core principles of BIS. The improvement in payment systems in

India has facilitated the integration of financial markets. For recognizing these needs

the RBI has implemented bank computerisation project in India and providing ICT

based networking facilities to the banks and financial institutions in India. Since 1991

the RBI has started BANKNETit is network for banking institutes other than Banknet

The 'INFINET'- Indian Financial Network is a satellite based wide area network using

VSAT (Very Small Aperture Terminal) technology set up in June 1999. The

Centralised Funds Management System (CFMS) facilitates centralised balance viewingof and funds transfer between own accounts of a member bank maintained with the

Bank at different locations. In Indian banking system ATM also providing better

alternative to traditional payment system it can be used for payment of utility bills,

funds transfer between accounts, deposit of cheques and cash into accounts, balance

enquiry and several other banking transactions. Apart from these facilities RBI has

enhancing the payment system by introducing MICR technology, ECS, EFT, NEFT,

Card Based Clearing and RTGS etc. According to the changing payment and settlement

system in India the government of India has introduced The Payment and Settlement

Bill. The Payments and Settlements Bill, 2006 was introduced in the Lok Sabha on

July 25, 2006. The Bill seeks to designate the Reserve Bank as the authority to regulate

payment and settlement systems. The RBI has introduced Payment Systems in India -

Vision 2005-08. It is implemented to enhance payment system in India, the four broad

tenets of the mission relate to the Safety, Security, SoundnessandEfficiency. It is called

the Triple-S + E principle in short, each of the principles support to customer


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satisfaction and enhancement of payment system. In the Vision document 2009-2012

two more principles are added as accessibility and authorizationin payment system.

In order to relieve the central bank from the ownership of the retail payment

systems it envisaged that the creation of a separate legal entity entrusted with at the

national level to be entrusted with the Indian retail clearing function. The advantage of

setting up of the national entity on these lines for running all retail payment system

activities will be that this entity will have uniformity in the structure, operations and

procedures20.

4.5.1 BANKNET

BANKNET is an internet based communication network backbone. It provides

speed of financial transaction. At present, seven centers viz. Mumbai, Delhi, Calcutta,

Madras, Nagpur, Bangalore and Hyderabad. It is set up in 1991 by the RBI, thisbackbone is meant to facilitate transfer of inter-bank (and inter-branch) messages

within India by Public Sector banks who are members of this network. This project has

been implemented in two stages e.g. BANKNET-I and BANKNET-II, now more

centres like Pune, Ahmedabad, Kanpur, Lucknow, Chandigarh, Kochi, Jaipur, Bhopal,

Patna, Bhubaneshwar, Thiruvananthapuram, Guwahati, Panaji Jammu etc are being

brought on the network.

4.5.2 INFINET-Indian Financial Network

The 'INFINET' - Indian Financial Network is a satellite based wide area

network using VSAT (Very Small Aperture Terminal) technology set up by the RBI in

June 1999. The hub and the Network Management System of the INFINET are located

in the Institute for Development and Research in Banking Technology, (IDRBT)

Hyderabad. Among the major applications identified for porting on the INFINET in the

initial phase are e-mail, Electronic Clearing Service - Credit and Debit, Electronic

Funds Transfer and transmission of Inter-city Cheque Realization advices. Later, other

payment system related applications as well as Management Information System (MIS)

applications are proposed to be operationalized.

4.5.3 SWIFT

Society for Worldwide Inter-Bank Financial Telecommunication (SWIFT),

Brussels is a co-operative society for interbank financial networking, is established in

May 1973 with 239 participating banks from 15 countries (Uppal and Jatana, 2007 pp

20Sahana Rajaram, Aparna Vachharajani, Payal Ghose, Suresh Sahu (2008), Payment System in India,CCIL, pp 290-312


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89-90). Actually it started functioning in 1977, and Albert, Prince of Belgium and now

King, sends the first message. The initial group of members has grown to 518

commercial banks in 22 countries. SWIFTs regional office is located in Mumbai

(India). India is 74th country joined SWIFT network in 2nd December 1991. The

Reserve Bank of India, 27 public sector banks and 8 foreign banks are initially taken

membership of SWIFT now 92 banks are member of SWIFT. SWIFT has transferred

Indian user to SWIFTnet (IP based solution for messaging) since July 2004, it is a new

service of the SWIFT.

Now more than 9,000 banking organisations, securities institutions and

corporate customers in 209 countries trust us every day to exchange millions of

standardised financial messages. Swift facilitate the members to transfer messages

relating to financial transaction, debit-credit exchange, and foreign exchange. SWIFTenables its customers to automate and standardise financial transactions, thereby

lowering costs, reducing operational risk and eliminating inefficiencies from their

operations. This service is available 24 hours to participating member.

4.5.4 Electronic Funds Transfer (EFT)

Reserve Bank of India has introduced the Reserve Bank of India Electronic

Funds Transfer System in 1997 which may be referred to as 'RBI EFT System as per

recommendations of the Share Committee (Committee for proposing Legislation on

Electronic Funds Transfer and other Electronic Payments, 1995). It is operated by the

RBI and permits transfer of funds, unto ` 5 lakhs from any account at any branch of

any member bank in any city to any other account at any branch of any member bank in

any other city. This system utilizes the Service Branches of the member banks and the

nodal offices of RBI and RBINET is the conduit for the flow of funds. The Reserve

Bank of India acts as the service provider as well as regulator of EFT. The National

Electronic Fund Transfer (NEFT) was introduced in 2003 covering about 3000

branches in 500 cities; now (Sept, 2010) 77 banks are participated in EFT. Since its

inception the coverage of NEFT has increased about 69000 branches as on June 2010

(Axis Bank- 1003, Bank of Baroda3098, Corporation Bank- 1139, HDFC Bank Ltd-

1741, IDBI Bank- 772 and State Bank of India- 13051branches connected NEFT) it is

called Special Electronic Fund Transfer SEFT also. This has facilitated same day

transfer of funds across accounts of constituents at all these branches. Overall EFT and

NEFT based clearing grow from ` 17,124.81 crore to ` 2,51,956.38 Crore in 2003-04

to 2008-09 (Table No. 4.8).


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Table No. 4.8 : Electronic Funds Transfer EFT/NEFT

Volume (In Lakh) Amount ( ` Crore)

2003-04 8.19 17,124.81

2004-05 25.49 54,601.38

2005-06 30.67 61,288.22

2006-07 47.76 77,446.312007-08 133.15 1,40,326.48

2008-09 321.61 2,51,956.38

2009-10 663.38 4,09,507.47

Jun 2010 236.47 1,65,826.59

Source: - RBI Annual Reports 2002 to 2009

4.5.5 Real Time Gross Settlement System (RTGS)

RTGS stands for Real Time Gross Settlement. RTGS system is a funds transfer

mechanism where transfer of money takes place from one bank to another on a real

time and on gross basis. The RTGS system is primarily for large value transactionssystem established as per recommendations of the Dr. R. H. Patil committee

Committee on Payment System (2002). The minimum amount to be remitted through

RTGS is ` 1 lakh. There is no upper ceiling for RTGS transactions. RTGS System has

been implemented from March 26, 2004 placing India at par with the best practices in

the world in terms of payment system. It is system for large value clearingoperated by

RBI. This system ensures settlement of payments with no credit risk involved. It is

therefore, essentially a system for settlement of large value and time critical payments.

The system facilitates Inter-bank as well a customer payments.

Inter-bank clearing is used by banks mainly for four types of transactions i.e.

call money transactions, Rupee payment of foreign currency transactions, Bank to Bank

transfers for funding upcountry requirements and Inward remittances. Inter-bank

clearing was introduced in Chennai in April 1989, followed by Mumbai, Calcutta and

New Delhi. In India all bank branches are not RTGS enabled because only core

banking (CBS) enabled bank branches can extend this facility. During the year 2009-

10, a total of 11,172 bank branches were added in the RTGS system, thereby increasing

the number of RTGS enabled bank branches to 66,178. In year 2004-05 to 2008-09

transactions related customers remittances have raised from ` 2,49,662 crore to `

2,00,04,107 crore. In 2003-04 to 2008-09 amount of inter-bank remittances raised Rs.

1,965 crore to ` 1,22,75,773 crore, and total amount of transaction has been raised from

` 1,965 crore to ` 6,11,39,912 crore. It shows that increasing popularity of RTGS in

Indian banking system. See Table No.4.9


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Table No. 4.9 : Large Value Clearing and Settlement Systems

(Number in Lakh and Amount in `crore)

Year / Period 2004-05 2006-07 2008-09

Real TimeGross

Settlement

System

Customer

Remittance

1 Number 0.68 24.82 112.34

Amount 2,49,662.00 71,67,807.91 2,00,04,107.80

Inter-Bank

Remittance* 2

Number 3.92 13.94 21.32

Amount 38,16,522.00 1,13,13,346.69 1,22,75,773.49

Inter-bank

Clearing

Settlement**

3 Number 0.04 0.19

Amount 61,38,025.39 2,88,60,031.15

Total Inter-bank 2+3 Number 3.92 13.98 21.5

Amount 38,16,522.00 1,74,51,372.08 4,11,35,804.65

* : Inter-Bank Clearing Settlement pertains to the MNSB batches. MNSB settlement in RTGS started from 12August, 2006.** : The MNSB Settlement relates to the settlement of NECS, ECS, EFT, NEFT, REPO, Outright, FOREX, CBLOand Cheque Clearing at Mumbai.

Source: - 1) Statistical Tables Relating to Banks in India 2002 to 2009

2) http://rbi.org.in/scripts/bs_viewbulletin.aspx/scripts/BS_ViewBulletin_Test.aspx?Id=11458

Other than electronic clearing service the RBI has implemented Cheque

Truncation Systemto faster cheque clearing services. In the cheque truncation process

the physical cheque will be converted in electronic image and image of cheque would

be sent to the drawee branch along with the relevant information like the MICR fields,

date of presentation, presenting banks to its clearance. This process works through the

INFINET with proper authentication. The required time frame of cheque clearing via

cheque truncation is T+0 (same day) for Local Clearing and T + 1 (within one day) for

inter-city clearing.

4.5.6 Electronic Clearing Service (ECS)

To solve critical problem of hug clearing transaction in April 1968 the clearing

banks set up the Inter-Bank Computer Bureau, latter to become a separate company

known as Bankers Automated Clearing Service-BACS. Now, there is MICR, ECS

debit and Credit clearing services and National Electronic Clearing services are now

available to bankers and customers both as clearing mechanisms. ECS Scheme operated

by the RBI since 1996-97, A new variant of ECS styled National Electronic Clearing

Service (NECS) was introduced in September 2008.

ECS (Credit) facilitates the bulk payments whereby the account of the

institution remitting the payment is debited and the payments remitted to beneficiaries'

accounts. In India it is mostly known as pay unit system provided by banks to

employers. This facility is now available at 86 major centres in the country. ECS

(Debit) facilitates is the collection of payments by utility companies. In this system the


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account of the customers of the utility company, in different banks are debited and the

amounts are transferred to the account of the company. ECS (Debit) is automated

method of payment which provides an option to pay monthly/quarterly/half-

yearly/yearly interest/dividend/salary/pension utility bills like telephone, electricity,

loan installments, insurance premium etc directly through customers bank account.

The RBI report shows that there is significant growth in the ECS transaction in India

since its inception. At the end of year march 2010 there are 34550 branches participated

in ECS clearing services and their amount of ECS based credit is increased from ` 10,

228 crore to ` 1,17,612.60 crore in 2002-03 to 2009-10 and ECS based Debit

transaction has been increased from ` 2,253 crore to ` 69,523.87 crore in 2002-03 to

2009-10 (Table No. 4.10).

Table No. 4.10: ECS Clearings In India (Volume in Lakhs Amount in`

Core)2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

ECS

(Credit)

Vol. 203 400.51 442.16 690.19 783.65 883.94 981.33

Amt. 10,228.00 20,179.81 32,324.35 83,273.09 7,82,222.30 97,486.58 1,17,612.60

ECS

(Debit)

Vol. 79 153 359.58 752.02 1,271.20 1600.55 1492.81

Amt. 2,253.58 2,921.24 12,986.50 25,440.79 48,937.20 66,975.89 69,523.87

Source: - RBI Annual Reports 2002 to 2009

4.5.7 MICR cheque clearing service

MICR (Magnetic Ink Character Recognition) is the technology to reading and

identification of paper documents by electronic machines. MICR is a character

recognition technology used primarily by the banking industry to facilitate the

processing of cheques. According to available information MICR technology was first

demonstrated to the Ameri can Bankers Association in July 1956, and by 1963 it was

almost universally employed in the U.S. (Mandell, Lewis 1977) On September 12,

1961, U.S. Patent Number 3,000,000 was awarded for the invention of MICR. MICR

cheques are processed by the MICR Scanner, it the electronic devise for scanning

MICR cheques and recording to city, name of bank, name of branch and other details of

cheque. The MICR scanning machine can scan the MICR cheque and read their data

and convert in digital form and send that information to service computer of the bank to

further clearing operation. It make easy clearing and sorting of thousands of cheques.

In order to changing technology RBI has taken one more step in the cheque

clearing system in 80s it is known as inception of Magnetic Ink Character Recognition

(MICR) technology for cheque clearing. This technology was installed in Mumbai

(1986) followed by Chennai, New Delhi, (1987) and Calcutta (1989), The MICR

Clearing is now in operation in 64 centers including RBIs 16 MICR clearing centres in


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Hyderabad, Banglore, Ahmedabad, Kanpur, Jaipur, Nagpur, Baroda, Pune, Gauhati,

Trivandrum etc. Now most of banks are issuing the MICR cheques to their customers.

MICR cheque is paper instrument but it has MICR coding. The codes are arranged on

cheque by order city, name of bank and name of the branch as given in the following

figure.Figure 4.1: MICR Cheque

First set of number is cheque number, second set of numbers related to city,

bank and branch name it helps a bank to recognize the bank and branch that issued the

cheque, city of the bank where bank office located. The third set of six digit numbers

represents customers account number. In the case of Government Cheques issued by

RBI alone, the account number is of seven digits and set of number consisting two digitis transaction code, in case of government cheque it have three digits. Transaction code

shows type and mode of transaction given.

Table No. 4.11 : Number of Clearing Houses

Managed by

RBI SBI Asso. of SBI Nationalised Banks Others Total

2001 14 649 316 7 - 986

2002 14 672 332 7 - 1025

2003 16 672 332 7 - 1027

2004 16 (15) 684 (9) 327 (2) 18 (13) - 1045 (39)

2005 16 (15) 684 (10) 327 (2) 18 (13) - 1045 (40)2006 16 (16) 659 (12) 324 (3) 31 (21) - 1030 (52)

2007 16 (16) 667 (17) 333 (4) 29 (22) - 1045 (59)

2008 16 (16) 703 (18) 335 (4) 40 (22) - 1094 (60)

2009 16 (16) 728(19) 312(4) 46(25) 1(0) 1103(64)Note : Figures in bracket indicate MICR Cheque processing Centres

Source: Department of Payment and Settlement Systems, RBI

Table no 4.11 indicates that there are 64 MICR clearing centers are operated in

India in 15 divisions in India. MICR technology transformed cheque processing

systems by enabling the introduction of automated clearing houses. Out of 64 MICR

clearing houses 16 houses managed by RBI, 19 managed by SBI, 04 managed by SBI


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associated banks and 25 has managed by other nationalised banks in India. Other than

MICR clearing houses there are 1103 clearing houses are working in India.

Table no. 4.12 : MICR and Non-MICR Cheque Clearing

(Numbers in Lakh & Amount in ` Crore)

Year Total MICR Centres Non-MICR Centres

Number Amount Number Amount Number Amount2001-02 9,015.0 1,25,75,254.0 5,377.0 1,09,47,391.0 3,638.0 16,27,863.0

2002-03 10,139.0 1,34,24,313.0 5,980.0 1,09,78,762.0 4,159.0 24,45,551.0

2003-04 10,228.0 1,15,95,960.0 6,241.0 91,78,751.0 3,987.0 24,17,209.0

2004-05 11,668.5 1,04,58,894.9 9,414.6 93,56,252.2 2,253.9 11,02,642.7

2005-06 12,867.6 1,13,29,133.5 10,318.4 94,74,370.8 2,549.2 18,54,762.8

2006-07 13,672.8 1,20,42,425.7 11,441.0 1,04,35,436.1 2,231.8 16,06,989.5

2007-08 14,605.6 1,33,96,065.9 12,229.6 1,15,28,690.2 2,376.0 18,67,375.7

2008-09 13,973.9 1,24,69,134.9 11,638.2 1,04,08,242.0 2,335.7 20,60,892.92009-10 (P) 13,802.7 1,04,09,941.5 11,497.1 85,31,516.9 2305.7 18,78,424.7

Source: - Statistical Tables Relating to Banks in India 2002 to 2009

The system is well stabilized in India with the overall reject rates of around 1%

while international reject rates are around 2%. Cheque clearing accounts for over 95%

of the retail payment and more than 70% of cheque clearing is based on MICR

technology (Nair,2007).According to the available data volume of MICR based

clearing has been growing rate of 13.83 percent and value is increased 0.33 percent in

2001-02 to 2009-10. Amount of MICR based clearing rose from ` 1, 04, 09,941 crore

to ` 1,25,75,254 crore in same period. See Table No 4.12.

4.5.8 Speed clearing

Speed clearing refers to collection of outstation cheques through the local

clearing. It facilitates collection of cheques drawn on outstation core-banking-enabled

branches of banks, if branch have a net-worked branch locally. The concept of Speed

Clearing combines the advantages of MICR clearing with that of CBS. The local

cheques are processed on T+121 working day basis and customers get the benefit of

withdrawal of funds on a T+1 or 2 basis. For the speed clearing service presenting

branches are currently permitted to levy charges at a rate not exceeding ` 150 per

cheque of above ` 1 lakh presented through Speed Clearing. While there are no

clearing charges are payable for cheques of value up to `1 lakh. At present only MICR

Cheques (no non-MICR, High Value cheques) having transaction codes 10, and 11 and

13 which are drawn on CBS-enabled bank branches are eligible for being presented in

Speed Clearing. Government cheques and Demand Drafts are not eligible for collection

under Speed Clearing.

21'T' denotes transaction day viz.


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4.5.9 Cheque Truncation System (CTS) in India

According to recommendations of Working Group on Cheque Truncation under

the Chairmanship of R.B. Barman (2003), The Cheque Truncation System (CTS) was

implemented in the National Capital Region in February 2008. Cheque Truncation

System (CTS) will be rolled out at Chennai.22

However, In most of the developed

countries cheque truncation system is in place since long. Countries like Denmark,

Belgium has adopted this system since more than 2 decades. Singapore has adopted this

system from the year 2002 (Ranjan Nayak, 2006). The present system of MICR cheque

clearing system requires the cheques to be physically moved from place to place for

their presentation. It is required as per the Negotiable Instruments Act, 1881 under

which the physical instrument had to be presented to the drawee branch for payment.

Now the law was amended during the year 2002 according to IT Act, 2000 to pavingthe way for the presentment of electronic images instead of the physical instrument.

Figure 4.2: Cheque Truncation Process

In this process electronic image of minimum standard prescribed by RBI (grey

scale 100 DPI 8 bit (256 level) in JFIF format with JPEG compression, and front and

back bi-tonal (black and white), 200 DPI TIFF image) of the cheque with

corresponding data contained in MICR line has used to cheque presentation. As onFeb., 2010 the RBI has issued more specific norms for scanning and imaging cheques

for truncation as "CTS-2010 Standard". This system beneficial because it provides:

Speeds in collection of cheques

Enhances customer service (T+1),

Reduces the scope for clearing related frauds,

Minimizes cost of collection of cheques,

Reduces reconciliation problems,

Eliminates logistics problems etc.

22http://www.banknetindia.com/banking/chqtruncation.htm


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4.6 Internet banking

Till 1993 internet was dose not used commercial purpose but after 1993 internet

has used as tool of commerce and trade. Internet banking began in 1993 the office of

the Thrift Supervision Chartered Security First Network Bank (SFNB) in Atlanta

(Georgia) and it opened for business in October 1995. In 1998 it was acquired by the

Royal Bank Financial Group, Canada (Desai, 2007 pp 2-3). Internet banking not

limited to the USA many banks in the developed and developing countries are using

this technology.

In India, ICICI Bank Ltd. was started internet banking service in 1997 as brand

name Infinity followed by HDFC Bank Ltd in Sept 1999 (Uppal and Jatana, 2007 pp.

132). However, of late many public sector banks and scheduled commercial banks have

taken a led in this area. Internet or web based banking is network of banks and financialinstitutes as well other sealers. It provides electronic payments and settlement services

to customers. It implies the most pragmatic use of information technology as medium

of universal communication. It has brought unprecedented changes in banking industry.

There are high increase indicates in internet users in India. According to market

research organization like Internet and Mobile Association of India (IAMAI) and

Internet World.com at present 81,000,000 peoples are using internet in India.

Table No.4.13 : Internet Users in India (Numbers of Population)

Year Population Internet Users % Pen. Usage Source2003 1,094,870,677 22,500,000 2.1 % ITU

2004 1,094,870,677 39,200,000 3.6 % C.I. Almanac

2005 1,112,225,812 50,600,000 4.5 % IAMAI

2006 1,112,225,812 40,000,000 3.6 % IWS

2007 1,129,667,528 42,000,000 3.7 % ITU

2009 1,156,897,766 81,000,000 7.0 % IAMAI

Source:-http://www.internetworldstats.com/stats.htm

The above data shows that there are 7.0 percent Indians are using internet as a

source of information and communication also. There are also 5,280,000 broadband

Internet connections as of June 2009 as per report of Telecommunication Regulatory

Authority of India (TRAI). According to report published by the Internet and Mobile

Association of India (IAMAI) and IMRB International 12 percent of internet users are

using internet as mean of banking i.e. internet banking.

4.7 Mobile banking

Mobile banking is simply application of mobile (Cell) phone dives as mean of

banking via Wireless Application Protocol (WAP) technology and short message

service (SMS) facilities. Mobile financial services is a term applied to a range of


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financial activities conducted using mobile devices, such as cellular phones or personal

digital assistants (Cheney, 2008). According to Ogawara, Jason and Pete (2002) the

concept of mobile payment originates in Finland. Sonera, a telecommunication

company in Finland, released a mobile payment system named Sonera Mobile Pay

(SMP) in 1999. In Germany a cellular payment service named PayBox started in 2000

to online shopping. In 2001 like SMP service Pro-tect has released the Mobile Money

System (MMS) in Japan. In USA over 1.6 million users in 2007, Bank of America,

reported having 5,00,000 active users of its mobile banking service by years end.

Mobile banking users are projected to reach almost 35 million by 2010. In order to

demand of mobile divides to use in m-banking almost of cellular device developer

companies alike Ericsson, Motorola, Nokia, LG, Siemens, Samsung, Sony etc. are

developing their mobile handset according to m-banking requirements. Most recenthandsets are enabled with CDMA, GSM, WAP, 3G, SMS, MMS, JAWA, GPRS,

Bluetooth, Infrared, and windows also.

Mobile banking has not widely accepted in India but there is significant growth

found in recent years after spread of mobile network. Since 1995, there is found

tremendous growth in mobile users in India. There are 233.62 millions of peoples are

using cellular services in Indias various states and union territories. The average

annual growth rate of subscriber base is 40.17 per cent in 2007. As per changing

scenario, Indian banks offering mobile banking services to their retail and corporate

customer. Now mobile banking is the hottest area of development in the Indian banking

sector and is expected to replace the credit and debit card system in future. In past two

years, mobile banking users have increased three times if we compare the use of either

debit card or credit card. Till June 30, 2009, 32 banks had been granted permission to

operate Mobile Banking in India, of which 7 belonged to the State Bank Group, 12 to

nationalised banks and 13 to private / foreign banks23. The RBI has adopted Bank Led

Model in which mobile phone banking is promoted through business correspondents of

banks.

4.8 Bank Ombudsman (BO) scheme in India

Indian banking institutions are following the social and customers oriented

banking in India. However, some mistakes always found due to machine errors,

inappropriate knowledge about technology, unskilled bank employees, negligence and

delay etc. While this mistakes or problems lead to dissatisfaction of customer and

23Report on Trends and Progress of Banking in India 2008-09, RBI.


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customer retention process also. Hence, the RBI has started The Banking Ombudsman

Scheme, in 1995 to provide for a system of redressal of grievances against banks. The

Scheme sought to establish a system of expeditious and inexpensive resolution of

customer complaints. It has conducting the complaints and solves the problem

according the provisions in banking regulation act, 1949 and customers protection act-

1986.

4.8.1 Customers complaints registered against banks in India

There is numbers of complaints passed to 69000 and their average growth rate

of increased to 61.83 per cent in 2003 to 2009. It realised that, modernised banking

services dose not succeeded to provide better and error free banking services in India.

In India, most of customers registered their complaints regarding credit cards, charges

without any information, remittances, failure to meet commitments and deposit relatedproblems. Graph No. 4.5 sows that all complaints other than notes and coins related are

related to alternative banking services. Because of wrong entres, calculation,

unexpected deduction etc. 6706 complaints are registered regarding deposits account in

2008-09, 5335 complaints relating to improper fund transfer, delay and losses, 7331

complaints related to loans principal deduction , interest calculation, fines, etc are

registered. Now the government has started e-pension facilities through selected banks

in India to provide quick pension distribution. But it also created problems to pension

holders, in 2008-09 total 2916 complaints about pension account has been registered.

Graph 4.5: Service wise Complaints Registered in BO Offices

Source: Report of the Banking Ombudsman Scheme, 2008-09

According to K. Lakshmi24 from last two years complaints regarding ATM

services also have been increased. As per the available data most of complaints

24K. Lakshmi, Banking ombudsman registers an increase in customer complaints ,The Hindu, Tuesday, May 26,2009


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registered regarding credit cards (17648) followed by failure to meet commitments

(11824). There are 0.19 complaints per thousand customers relating to credit cards in

India. One of the major cause found that after the global financial meltdown, credit card

issuers banks have become aggressive in their collection process25. Because of

increased customer complaints against commercial banks in India, the RBI has made

the amendments in BO scheme and the ombudsman to award a compensation of up to `

1 lakh in case of complaints arising out of credit card operations of banks since

February 2009. The amendments allowed the ombudsman to award a compensation of

up to ` 1 lakh in case of complaints arising out of credit card operations of banks.

4.8.2 Bank group wise customers complaints

The number of complaints against public sector banks, which meet some 70 per

cent or more of Indias banking needs, was the highest at 33,141, up from 25,694during 2007-08. There are 27 percent of complaints regarding nationalised banks (their

market share near about 50 percent) and 29 percent regarding SBI group are registered.

While average complaints per branch were lower than both private sector and foreign

banks. In the same period 28 percent of complaints against private banks, and 13

percent of complaints against foreign banks are registered in India. However, 01

percent of complaints against Scheduled Primary Co-op. Banks and 02 percent of

compliant against RRBs are registered till 2009. Graph No. 4.6 also indicates that rate

of complaints are decreased from 45 percent to 22 percent of complaints against

nationalised banks in India. While consideration of their shares in Indian banking

industry it is realized that public sector banks are not providing error free banking

services in India.

Graph No. 2.6: Bank Wise Complaints Registered in BO Offices

Source: Report of The Banking Ombudsman Scheme, 2008-09

Although as on 2008-09 there are high numbers of compliant (21,982)

registered against private sector banks followed by SBI group (18167) in India. One of

25Mahua Venkatesh, Complaints up on bank recovery, Hindustan Times, August 10, 2010


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the serious issue realised that the numbers of complaints against foreign banks reached

to 11700 in 2008-09. In 2005-06, has 783 complaints registered against ICICI Bank

followed by HDFC Bank with 374 complaints26. Among foreign banks, Citibank,

Standard Chartered Bank and ABN Amro Bank leads than other foreign banks operated

in India. Even the Finance Minister Mr. Pranab Mukharji also said that two private

banks ICICI Bank and HDFC Bank had repeatedly violated the guidelines of the

Reserve Bank of India (RBI)27. Among the individual banks, SBI tops with 18,167

complaints in the year 2008-09, followed by ICICI Bank (11,453), HDFC Bank

(6,584), HSBC (2,838) and Citibank (2,563). As compared to branches public, private

and foreign banks in India complaints against foreign banks are too high because

market share of foreign banks in India is only 5 percent but 17 percent complaints are

registered against them.

4.9 Code of banks commitment to customers (August 2009)

To provides protection to you and explains how banks are expected to deal with

you for your day-to-day operations BCSBI has issued Code of Banks Commitment to

Customers in August 2009. This is a voluntary Code, which sets minimum standards of

banking practices for banks to follow when bank are dealing with individual customers.

It provides protection to customers and explains how banks are expected to deal with

customers in day-to-day operations. Minimum Standards of Banking Practices is given

below:

1.

Ensuring that you are given clear information about our products and services,

the terms and conditions and the interest rates/service charges, which apply to

them

2. Display the information about Minimum balance requirement for accounts,

Name and address of the Zonal/ Regional Manager, Name and contact details of

the Banking Ombudsman under whose jurisdiction the branch falls, interest

rates/service charges

3. Correcting mistakes promptly and cancelling any bank charges that we apply

due to our mistake

4. Provide suitable alternative avenues to alleviate problems arising out of

technological failures.

5. Keep customers personal information as private and confidential

26Customers Complaints Higher for PSU Banks, The Times of India, Nov 15, 2006,27

Business Standard, New Delhi, 6 August, 2010


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6. To inform customers about changes in interest rates, charges, introduce a new

charge, minimum balance in the account and any other relevant changes by

notice at the branches, letters, e-mail, SMS, website and newspaper

7. All terms and conditions will be fair and will set out respective rights especially

with regard to nomination facility and liabilities and obligations clearly and as

far as possible in plain and simple language.

8. Tell about the clearing cycle for local instruments and the outstation instruments

including details kind for customers information

9. Reimburse amounts wrongly debited in failed ATM transactions within a

maximum period of 12 working days from the date of receipt of customers

complaint.

10.

Electronic11.Compensate losses in case of any delay or failure in executing the mandate

resulting in financial loss or additional cost due to mistake in Electronic

Clearing Service (ECS)] as per the compensation policy of the bank.

12.Accept and obey stop payment instruction from customers immediately in

respect of cheques issued and instruction related to block the ATM card, debit

card, smart card.

13.Inform to customer by SMS / e-mail followed by a confirmation in writing If

the limit on credit card is reduced or enhanced limit.

14.

Provide credit card transaction details either via monthly by mail and e-mail

15.Inform to customers about security procedure adopted by us for user

authentication and the legal risk, if any, associated with the mobile banking

including available services and terms and conditions.

16.

Inform strictly to customers visit our Internet banking site directly. Avoid

accessing the site through a link from another site or an e-mail and verify the

domain name displayed to avoid spoof websites. Ignore any e-mail asking for

your password or PIN

4.10 Alternative banking system and information technology act, 2000

New communication systems and digital technology have made dramatic

changes in the way we live and the means to transact our daily business. Business firms

are increasingly using computers to create, transmit and store information in electronic

form instead of traditional paper documents. This will crests some legal challenges for

the service providers and regulators also. The challenges are not confined to any single


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Statutory remedy against unauthorised access to computer system or network

including unauthorised copying of data.

Section 78 of the Act conferred power to a police officer not below the rank of

Deputy Superintendent of Police to investigate any offence committed under the

Act.

To falcate electronic fund transfer amongst the financial institutions and banks.

4.10.1 Security procedure under IT Act, 2000 to subscribers/customers

protection

Information asset must remain confidential, secure and retaining its integrity in

the business including banking industry. Even there is strong need of information

security in banking industry than other businesses. Bothe internet and intranet29as well

as virtual private network (VPN)30

are open to virus attack, hacking31

etc. The IT actmakes provisions of security procedure at users level to protect interests of authorised

users, account holders or service providers.

Private key and digital signature: Under the Rule 23, Digital signature

certificate shall be issued only after approval of application with valid proofs

(PAN Card, Voter ID Card, Passport etc.). Private Key is defined by section

2(1) (ze) which means the key of pier used to create a digital signature. A

private or secret key is an encryption/decryption key known only to the party orparties that exchange secret messages.

Duties of subscriber/customer: A subscriber is a customer or buyer of service

who pays to become one of the members. According to Chapter VIII of the IT

act, 2000 (section 40-42) The subscriber should generate his private key after

getting initial key provided by service providers. According to section 42 it is

the subscribers duty to prevent of the private key. By accepting certificate, the

subscriber assumes a dusty to retain control of the subscribers private key, to

29An intranet is a private computer network that uses Internet Protocol technologies to securely share any part of anorganization's information or network operating system within that organization. An intranet uses networktechnologies as a tool to facilitate communication between people or workgroups to improve the data sharingcapability and overall knowledge base of an organization's employees.30 A virtual private network (VPN) is a network that uses a public telecommunication infrastructure and their

technology such as the Internet, to provide remote offices or individual users with secure access to their

organization's network. It aims to avoid an expensive system of owned or leased lines that can be used by only one

organization. The goal of a VPN is to provide the organization with the same secure capabilities but at a much lower

cost.31A hacker is a person who breaks into computers and computer networks, either for profit or motivated by thechallenge. It is illegal access into another party's computer or Internet site carried out for malevolent or fraudulent

purposes or to make unauthorised amendments or just for fun. There are numbers of application developed byhackers to hack accounts either bank account or other i.e. Security exploit, Vulnerability scanner, Password cracking,Packet sniffer, Spoofing attack, Rootkit, Social engineering, Trojan horse, Worm, Key loggers


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use a trustworthy system, and to take reasonable precautions to prevent its loss,

discloser, modification or unauthorised use.

Penalty for damage to computer, computer system, etc.: Section 43-47 deal

with penalty for damages to computer, computer system, etc. If any person

without permission of the owner or any other person who is incharge of a

computer, computer system or computer network; downloads, copies or extracts

any data, computer data base or information from such computer, damages or

causes to be damaged any computer, computer system or computer network,

provides any assistance to any person to facilitate access to a computer. He /

She shall be liable to pay damages by way of compensation not exceeding one

crore rupees to the person so affected.

Cybercrime32

: Cyber Crimes are a new class of crimes to India rapidlyexpanding due to extensive use of internet (Talwant Singh). The sections 65-74

providing legal provisions relating to cyber crime and offences under IT Act.

The offences under section 65 to 70 (65-Tempring with computer source

documents, 66-Publishing of information which is obscene in electronic form,

67-Hacking with computer system, 68-Power of controller give derection,69-

Directions of controller to a subscriber to extend facilities to decrypt and 70-

protected system) are non- bailable and 71 to 74 (71- Mispresentation, 72-

Breach of confidentiality and privacy, 73-Publishing false Digital Signature

Certificate (DSC) and 74-Publications fraudulent purposes) are Non-cognizable

but bailable.

Electronic Cheques (E-Cheque33

) and Electronic Fund Transfer (EFT):

Section 81 of the IT Act provides detailed provisions about e-cheques and EFT.

The government of India has made amendments in the Negotiable Instruments

Act 1981 consultation with RBI for allow e-cheques and EFT. Section 81-A

made an attempt to facilitate the EFT by giving legal recognition to an

electronic cheque functional equivalent of formal cheques. For the purpose of

EFT and SEFT34 The amendment in the Reserve Bank of Indian Act-1934 in

32 Cyber crime definitions as Unauthorized access, Damage to computer data or programs, Computer sabotage,Unauthorized interception of communications and Computer espionage According United Nations Definition- It isany illegal behavior directed by means of electronic operations that targets the security of computer systems and thedata processed by them.33

E-cheque means a cheque which contains the exact mirror image of paper cheque, and is generated,

written and signed in a secure system ensuring the minimum safety standards with the use of digitalsignature and asymmetric crypto system.34

SEFT-Special Electronic Fund Transfer


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massages as ; you have owner of award of lottery or prizes of $ 400,00000,

5000,0000 please send your Name, Bank Name, Account Number etc. When

customer provides this information sender of the e-mail can hack bank account.

Although there is no any provision for such e-mails.

2.

Credit card fraud: There is no any provision for the credit card fraud in the IT

Act 2000. In the present scenario it is very important to protect interests of

credit card holders. According to the Bank Ombudsman report 2009 there are

most of complaint are registered relating to credit card offences in India.

Cloning or duplication of credit cards is the new type of crime which will keep

the copes and banking officials on their toes. Some small electronic gadgets also

available that can copy details of credit cards at the time of swiping credit card

at the time of payments. Some time anyone send you massage through

Documents

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