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i

INTRODUCTION TO

ELECTRONIC BANKING


ii

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Printed in India


iii

INTRODUCTION

TO

ELECTRONIC BANKING

By

Asifulla A

EDUCREATION PUBLISHING (Since 2011)

www.educreation.in


iv


v

About The Author

Mr. Asifulla A is a Teaching Assistant at Institute

of Management Studies, Davangere University,

Davangere. He passed MBA in Marketing from

Davangere University and Secured Fifth rank. He

has more than four years of teaching experience in

the domain of higher education (specifically in

MBA) and qualified UGC-NET exam. Presently

he is pursuing his Ph.D in Davangere University under the

guidance of Dr. B Bakkappa. He has written more than thirty

articles and presented in various national and international

conferences. His articles have published in various national and

international journals, Proceedings and edited volumes. He has

received one best paper award in National conference. He has

participated as a resource person at various institutes/Colleges.

*****


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vii

Preface

A sound and effective banking system is the backbone of an

economy. Technology is enabling banks to provide the

convenience of anytime-anywhere-banking. Banks are now

reengineering the way in which their services reached to their

customers by bringing in flexibility in their distribution channels.

The aim of this book is to provide a strong foundation on concepts

of banking system and advent use of IT and its role in Indian

banking systems. This book is useful for Commerce and

Management students of all Indian universities.

This book designed and prepared with utmost care to make it

extremely useful for all individuals interested in gaining

knowledge about electronic banking system. Most of the work

done in this book based on the review of literature from various

books, journals and E-source. For further references or study, we

recommend students and teachers to refer the links given in

reference list at the end.

I am thankful to my professor and guide Dr. B Bakkappa, senior

professor of Management in the state of Karnataka for his guidance

and continuous support in preparing this book. I extend a special

thanks to Dr. V Murugaiah, Professor and Chairman of (CDC)

Collegiate Development council, Davangere University and

Dr. J K Raju, Associate Professor, Davangere University, for their

motivation to me in preparing this book.

I welcome your suggestions.

Mr. Asifulla A

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viii

Acknowledgement

My debt to those who have helped me in one way or the other is

heavy indeed. While I take this opportunity to thank my beloved

guide Dr B Bakkappa, Senior Professor of Management in the state

of Karnataka for his support and motivation.

No words can adequately express my debt of gratitude to my

parents, for generating in me a perennial interest in higher studies.

I am thankful to my Father-in-law, Mother-in-law and all my

family members for their support and motivation in making my

efforts to bring this book.

I will be failing in my duty if I do not mention here the tremendous

cooperation I received from my wife, Mrs. Noor Ayesha Attar in

the completion of this book and I wish to thank for her continues

support, encouragement, her understanding and love helped me to

bring this effort to fruition.

I would like to thanks to the members of Educreation Publishers

for their active response, guidelines and for the great support in the

whole process of publication.

Mr. Asifulla Attar

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Introduction to Electronic Banking

Brief Table of Content

*****

S. No Content Page

No

1 About the Author v

2 Preface vii

3 Acknowledgement viii

4 Introduction to Banking 1

5 Electronic Banking 32

6 E- Banking Security 67

7 Banking Regulatory Framework 90

8 Banker and Customer Relationship 99

9 Bibliography

1. References 115


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Table of Contents

S.NO. Content Page

No.

Chapter 01 Introduction To Banking: 1

Introduction 2

Evolution of Indian Banking. 3

Brief history of Indian Banking

industry. 5

Meaning of a Bank 8

Definitions of Bank. 8

Types of Banks. 9

Functions of a Bank. 17

RBI and its Functions. 22

Principal provisions of banking

regulation Act. 24

Chapter Summary 31

Conclusion 31

Chapter 02 Electronic Banking 32

Introduction. 33

history of Internet Banking 34

Traditional banking and E-Banking. 36

Impact of E-Banking on Traditional

Banking. 38

Advantages and Disadvantages of E-

Banking. 39

Financial Benefits of E- Banking. 41

Product and services of E-Banking. 41

Risk Associated with E-Banking. 43

Pillars of E-Banking. 44

Characteristics/ Nature of E-Banking. 45

Delivery channels of E-Banking. 4+


xi

Types of Electronic Currency. 59

IT In Banks. 61

Benefits of IT to the Indian Banks. 64

Chapter Summary 64

Conclusion 65

Learning Questions 66

Chapter 03 E- Banking Security 67

Risk in E-Banking. 68

Security issues in E-Banking services. 70

Common security problems in E-

Banking. 72

Legal Issues in E-Banking. 74

Recommendations of the RBI for

security and Privacy in E- Banking. 77

Cyber Crimes- Introduction. 80

Effects of cyber-crimes. 81

Reasons for cyber-crimes. 81

Classification of Cyber Crimes. 82

Information System Security (ISS). 86

Chapter Summary 88

Conclusion 88


Chapter 04 Banking Regulatory

Framework 90

Banking Regulatory Framework at

Glance. 91

Laws Formed 91

Banking regulation Act 1949 92

RBI Act 1934. 94

Chapter Summary 97

Conclusion 97


Chapter 05 Banker and Customer Relation 99

Introduction 100

Meaning 100

Definitions. 101

Introduction: Banker and customer

Relationship. 103


xii

Classifications of Banker and Customer

Relationships 103

Termination of Banker and Customer

Relationship 111

Chapter Summary 113

Conclusion 114


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1

INTRODUCTION TO BANKING

Chapter 1– Introduction To Banking

Introduction

Evolution of Indian Banking.

Brief history of Indian Banking industry.

Meaning of a Bank

Definitions of Bank.

Types of Banks.

Functions of a Bank.

RBI and its Functions.

Principal provisions of banking regulation Act.

Chapter Summary

Conclusion

Learning Questions.


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Asifulla A

BANKING in India is as old as the mountains. A strong banking

system is an indicator for the economic development of any nation.

Indian banking is the lifeline of a nation and its people. A sound

and effective banking system is the backbone of an economy.

Banking has helped in developing vital sectors of the economy to

accompany in a new dawn of progress on the Indian horizon. The

sector has translated the hopes and aspirations of millions of

people into reality. Today, Indian banks can confidently compete

with modern banks of the world. As far back as the second or third

century A.D., Manu, the great Hindu jurist, devoted a section of his

work to deposits and advances and laid down rules relating to rates

of interest to be paid or charged. During the Mogul Period, the

indigenous bankers played a very important role in lending money

and financing of foreign trade and commerce. They were also

engaged in the profitable business of money changing. Every town,

big or small, had a sheth, also known as “shah”, ‟shroff” or

“chettiar” who performed a number of banking functions. The first

modern bank found in Italy in Genoa in 1406; its name was „Banco

di San Giorgio‟ (Bank of St. George). Banks in its crude form is an

old age phenomenon. It was in existence even in ancient times

Ravilpout, a French writer, for instance, mentions about bank and

bank notes in Babylon in 600 B.C. To strengthen the banking

sector, financial reforms initiated as a part of the economic reform

started in India since 1991 onwards. Reforms introduced in two

phases, based on the report of Narsimahan committee in the year of

1991 and 1997.

In India, the situation of the banks is quite different from the banks

overseas particularly in developed markets. Indian banks are not

facing huge write-downs or losses and are still quite well

capitalized. In India, however, this could be an opportune moment

for banks to focus on the internal processes and consolidate their

IT platforms across functionalities to use technology as an

effective strategic tool. The use of technology in India has

INTR ODUCTION


3


undergone rapid transformation. The last two decades have

witnessed a sea change in the nature of services offered by not only

banks but also the financial sector and even the Government - all

of which have had a positive impact on the customers of these

organizations and the public at large. All banks in India have

realized in the post-liberalization era that in order to remain

competitive and provide the best services to their customers, they

need to have the latest technology in place. Irrespective of their

ownership status (public sector or private sector), almost all of

them have given maximum importance to technological

development and deployment. In banking, in the past, the

technology strategy considered as subordinate to business strategy.

However, now with so much advancement in technology it has

become as important as business strategy. Technology has

provided an altogether new way of interacting and providing

service to bank customers rather than merely replicating activities

of the bank employees.

EVOLUTION OF INDIAN BANKING INDUSTRY

Banking in India originated in the first decade of 18th century with

the General Bank of India coming into existence in 1786. This

followed by Bank of Hindustan. Both these banks are now defunct.

After this, the Indian government established three presidency

banks in India. The first of the three was the Bank of Bengal in

1809, the other two banks, viz., the Bank of Bombay and the Bank

of Madras, were establish in 1840 and 1843, respectively. The

three presidency banks subsequently amalgamated into the

Imperial Bank of India (IBI) under the Imperial Bank of India Act,

1920, which is now the State Bank of India (SBI). A couple of

decades later, foreign banks like Credit Lyonnais started their

Calcutta operations in the 1850s. That time, Calcutta was the most

active trading port, mainly due to the trade of the British Empire

and due to which banking activity took roots there and prospered.

The first fully Indian owned bank is the Allahabad Bank, which

was establish in 1865.


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Asifulla A

By the 1900s, the market expanded with the establishment of

banks such as Punjab National Bank (PNB), in 1895 in Lahore and

Bank of India (BOI), in 1906 in Mumbai, both of which founded

under private ownership. The Reserve Bank of India (RBI)

formally took on the responsibility of regulating the Indian

banking sector from 1935. After India‟s independence in 1947 RBI

nationalized and given broader powers.

The banking industry is entering a new phase, where there is

increasing competition from non-banks, not only in the domestic

market but also in the international markets. The operational

structure of banking in India expected to undergo a deep change

during the next decade. With the upcoming new private sector

banks, the private banking sector has become enriched and

diversified with focus on wholesale as well as retail banking. The

existing banks have wide branch network and geographic spread,

whereas the new private sector banks have massive capital, lean

personnel component, the perfection in developing good financial

products.

In the late 1960s the Government of India nationalized all the

major commercial banks by transferring the ownership from

private ownership to government ownership. A second round of

nationalization of banks happened in the late seventies. As a result,

during the seventies and eighties the nationalized banks, which

owned by the government, together accounted for 95 percent of the

market share for all banks in the country, the remaining five

percent being contributed mainly by banks in the private sector and

some multinational banks whose presence was limited to the large

cities. This scenario continued until the early 1990s, when the

Government of India, as part of its overall financial-sector reforms,

decided to grant banking licenses to start nine new banks in the

private sector.

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. In view of this, technology has changed the

contours of three major functions performed by banks, i.e., access

to liquidity, transformation of assets and monitoring of risks.


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Further, information technology and the communication

networking systems have a crucial bearing on the efficiency of

money, capital and foreign exchange markets.

BRIEF HISTORY OF INDIAN BANKING

“The Bank of Hindustan” was the first bank in India, established in

1770. Since, 1770, the journey of Indian Banking System can be

bifurcated into three distinct Phase. Three distinct phases identified

in the history of Indian banking.

They are:

1. Pre-Nationalization period prior to 1969

2. Nationalization of banks and the period prior to banking

sector reforms up to 1991

3. Banking sector reforms after 1991.

1. Pre-Nationalization period prior to 1969

The banking system of India started with the establishment of the

first joint stock bank, The General Bank of India, in the year 1786.

After this, banks such as Hindustan Bank and Bengal Bank came

into existence. East India Company established three banks- The

Bank of Bengal in 1809, The Bank of Bombay in 1840, and the

Bank of Madras in 1843. These three Presidency Banks

reconstituted under Presidency Banks Act, 1876. After the First

World War the Presidency Banks amalgamated as „The Imperial

Bank of India‟ in 1921. In 1935, the Reserve bank of India

constituted as the country‟s central bank under the RBI Act of

1934.

When the country attained independence in 1947 Indian Banking

was exclusively in the private sector, relatively small and

extremely weak. It mainly characterized by the following:

The banks largely confined to urban areas, extending loans

mainly to trading sector dealing with agricultural produce.

Virtually no banking services were available at rural and semi

urban areas.


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Asifulla A

These institutions did not play their due role in the planned

development of the country.

Deposit mobilization was slow as public lacked confidence in

banks because of frequent bank failures.

The Government of India, concerned by frequent failures and the

resultant miseries faced by small depositors and others enacted the

Banking Companies Act 1949 and the title was changed as

„Banking Regulation Act, 1949‟ as per amendment in 1965.

2. Nationalization of banks

In the year 1955 Imperial Bank of India was nationalized to form

State bank of India with the stated objective of „extension of

banking facilities on a large scale, more particularly in the rural

and semi urban areas and for diverse other public purposes‟. The

seven banks now forming subsidiaries of SBI nationalized in the

year 1960. This brought one-third of the banking segment under

the direct control of the Government of India. The first phase of

financial reforms resulted in the nationalization of 14 major banks

in 1969 and resulted in a shift from class banking to mass banking.

This, in turn, resulted in a significant growth in the geographical

coverage of banks. Every bank had to earmark a minimum

percentage of its loan portfolio to sectors identified as „priority

sectors‟. The manufacturing sector also grew during the 1970s in

protected environs and the banking sector was a critical source.

The next wave of reforms saw the nationalization of 6 more

commercial banks in 1980 taking the number of nationalized banks

to 27. Since then the number of scheduled commercial banks

increased four-fold and the number of bank branches increased

eight-fold.

Problems faced by the banks prior to 1991-92

Before 1991-92, the financial sector characterized by segmented

and under-developed financial markets as well as by the paucity of

instruments. The structure of interest rates was complex and their

levels regulated by the administration. The sector lacked


7


transparency, accountability and prudential norms, while

information on debtors and the ability to recover doubtful assets

was very weak, leading to an increasing number of non-performing

assets (www.delind.cec.eu.int, 2008).

Before 1991 banking sector in India was facing several problems

such as:

i. Eroding productivity and efficiency of public sector banks

which led to continuous losses,

ii. Increasing NPAs and deteriorated portfolio quality,

iii. Poor customer service and obsolete work technology,

iv. Inability to face competition effectively.

In order to remove the above-mentioned deficiencies, Narasimham

committee appointed in 1991 and it submitted its report within

three months in November 1991 with measures to improve

productivity and efficiency of the banking sector (Uppal and Kaur,

2007). The aim was to improve efficiency, productivity and

profitability of the Indian financial sector. The recommendations

among other things laid emphasis on revitalizing overall

3. Banking Sector Reforms (1991-2000) In 1991, the liberalization wave changed the banking sector

completely. Unprofitable branch expansion, non-performing

priority sector lending (PSL) and loan melas had left large gaps in

the banks‟ balance sheets. To handle the crisis of late in 1980s, a

programme of liberalization, privatization and globalization (LPG)

initiated in July 1991, with the main aim of improvement in

productivity, efficiency and competitiveness. In this context, the

government decided to review the banking policy and the first

Narsimham Committee was planned in 1991 which worked out

like a road map for the banking sector reforms. The successful

execution of its various recommendations has given a new

dynamism to the banking sector since 1991.


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Asifulla A

MEANING OF BANK

The name bank derives from the Italian word banco “desk/bench”,

used during Renaissance by Florentines bankers, who used to make

their transactions above a desk covered by a green tablecloth.

However, there are traces of banking activity even in ancient times.

In fact, the word traces its origin back to the Ancient Roman

Empire, where moneylenders would set up their stalls in the

middle of enclosed courtyards called macella on a long bench

called a „bancu‟, from which the words banco and bank are

derived. As a money-changer, the merchant at the bancu did not so

much invest money as merely convert the foreign currency into the

only legal tender in Rome that of the Imperial Mint. A banker or

bank is a financial institution whose primary activity is to act as a

payment agent for customer and to borrow and lend money. A

bank is like a reservoir into which flow the savings, the idle

surplus money of households and from which loans are given an

interest to businessman and others who need them for investment

or productive uses.

DEFINITIONS

A Banking Company (or a bank) is defined as “Any company

which transacts the business of banking in India.” [Section

5(1)] 2) “Banking” is defined as accepting, for the purpose of

lending or investment, deposits of money from the public,

repayable on demand or otherwise and withdraw able by

cheque, draft, order or otherwise. [Section 5(2)]

According to Japanese Banking Act, 1927: Bank means an

institution which can perform an activity to give and receive

the credits.”

According to Prof. Coucher : A bank is a financial institution

which can accept the surplus savings from the individuals in

the form of deposits and when the depositor demands the

money, the institution can immediately pay the amount

invested.”


9


TYPES OF BANKS:

Financial requirement in a modern economy are of a diverse

nature. Hence, different types of banks have instituted to cater to

the varying needs of the community. Banks in the organized sector

classified into the following major forms:

1. Commercial banks:

Commercial Banks are very renowned almost in every country

because of the services they provide to individuals, commerce and

industry. Amongst the banking institution in the organized sector,

the commercial banks are the oldest institutions having a wide

network of branches commanding utmost public confidence and

having the lion‟s share in the total banking operations.

A Commercial Bank defined as a financial institution that accepts

deposits of money from the public and utilizes those deposits for

lending activities. In simple words, Commercial Banks are Joint

Stock Companies dealing in money and credit. The most

distinctive function of a commercial bank is that it accepts deposits

called demand deposits from the public, which can be withdrawn.

Only, acceptance of deposits, however does not give it the status of

a bank. Another crucial activity that Banks undertake is to make

use of these deposits for proper lending. Commercial Banks

occupy a dominant place in the money market, as such banks

usually provides short-term loans and advances. The Indian

Banking Regulation Act, 1949, governs the Commercial Banks in

India. In fact, they form the biggest component of the banking

structure of any country.

Functions of Commercial Bank:

Functions of commercial bank classified in two, they are;

1. Primary Function. 2. Secondary Function.

1. Primary Function:

b. Raising of Funds:

Fixed Deposit Account


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Asifulla A

Current Deposit Account

Savings Deposit

Recurring Deposit

Other Accounts

b) Lending of Money:

Cash Credit

Overdraft

Loans

c) Money Transfer.

2. Secondary Function:

Discounting Of Bills

Agency Services

Issuing of Credit Instruments, Cheque and Circular Notes

Execution of Standing Orders

Purchase & Sale of Securities

Payment & Collection of Dividend & Interest

Remittance of Funds

Bank Drafts

Mail Transfer

Telegraphic Transfer

2. Co-operative Banks:

Co-operative Banks are essentially Co-operative Credit Societies

organized by members to meet their short term and medium term

financial requirements. Co-operative Banks are a group of

financial institutions organized under the provisions of the Co-

operative Societies Act. The main object of Co-operative Banks is

to provide cheap credit to its member. They are based on the

principles of self-reliance and mutual co-operative. Co-operative


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Sample Copy. Not For Distribution. - Book Publishing House · 8 Banker and Customer Relationship 99 9 ... Classifications of Banker and Customer Relationships 103 Termination of Banker