INDIAN BANKING SYSTEM A Transition from Traditional Banking to Mobile Banking BY: Abhilasha Sharma Indian Banking system: An Overview Banking in India originated in the last decades of the 18th century. The oldest bank in existence in India is the State Bank of India, a government-owned bank that traces its origins back to June 1806 and that is the largest commercial bank in the country. Central banking is the responsibility of the Reserve Bank of India, which in 1935 formally took over these responsibilities from the then Imperial Bank of India, relegating it to commercial banking functions.
After India’s independence in 1947, the Reserve Bank was nationalized and given broader powers. In 1969 the government nationalized the 14 largest commercial banks; the government nationalized the six next largest in 1980. Currently, India has 88 scheduled commercial banks (SCBs) – 27 public sector banks (that is with the Government of India holding a stake), 31 private banks (these do not have government stake; they may be publicly listed and traded on stock exchanges) and 38 foreign banks. They have a combined network of over 53,000 branches and 17,000 ATMs.
According to a report by ICRA Limited, a rating agency, the public sector banks hold over 75 percent of total assets of the banking industry, with the private and foreign banks holding 18. 2% and 6. 5% respectively Early history Banking in India originated in the last decades of the 18th century. The first banks were The General Bank of India, which started in 1786, and the Bank of Hindustan, both of which are now defunct. The oldest bank in existence in India is the State Bank of India, which originated in the Bank of Calcutta in June 1806, which almost immediately became the Bank of Bengal.
This was one of the three presidency banks, the other two being the Bank of Bombay and the Bank of Madras, all three of which were established under charters from the British East India Company. For many years the Presidency banks acted as quasi-central banks, as did their successors. The three banks merged in 1925 to form the Imperial Bank of India, which, upon India’s independence, became the State Bank of India. Indian merchants in Calcutta established the Union Bank in 1839, but it failed in 1848 as a consequence of the economic crisis of 1848-49.
The Allahabad Bank, established in 1865 and still functioning today, is the oldest Joint Stock bank in India. It was not the first though. That honor belongs to the Bank of Upper India, which was established in 1863, and which survived until 1913, when it failed, with some of its assets and liabilities being transferred to the Alliance Bank of Simla. When the American Civil War stopped the supply of cotton to Lancashire from the Confederate States, promoters opened banks to finance trading in Indian cotton.
With large exposure to speculative ventures, most of the banks opened in India during that period failed. The depositors lost money and lost interest in keeping deposits with banks. Subsequently, banking in India remained the exclusive domain of Europeans for next several decades until the beginning of the 20th century. Foreign banks too started to arrive, particularly in Calcutta, in the 1860s. The Comptoire d’Escompte de Paris opened a branch in Calcutta in 1860, and another in Bombay in 1862; branches in Madras and Pondichery, then a French colony, followed.
HSBC established itself in Bengal in 1869. Calcutta was the most active trading port in India, mainly due to the trade of the British Empire, and so became a banking center. The Bank of Bengal, which later became the State Bank of India. The first entirely Indian joint stock bank was the Oudh Commercial Bank, established in 1881 in Faizabad. It failed in 1958. The next was the Punjab National Bank, established in Lahore in 1895, which has survived to the present and is now one of the largest banks in India.
Around the turn of the 20th Century, the Indian economy was passing through a relative period of stability. Around five decades had elapsed since the Indian Mutiny, and the social, industrial and other infrastructure had improved. Indians had established small banks, most of which served particular ethnic and religious communities. The presidency banks dominated banking in India but there were also some exchange banks and a number of Indian joint stock banks. All these banks operated in different segments of the economy. The exchange banks, mostly owned by Europeans, concentrated on financing foreign trade.
Indian joint stock banks were generally under capitalized and lacked the experience and maturity to compete with the presidency and exchange banks. The period between 1906 and 1911, saw the establishment of banks inspired by the Swadeshi movement. The Swadeshi movement inspired local businessmen and political figures to found banks of and for the Indian community. A number of banks established then have survived to the present such as Bank of India, Corporation Bank, Indian Bank, Bank of Baroda, Canara Bank and Central Bank of India.
The period of World War II and post independence of India was especially tumultuous for the banks. Some of the banks could come out of those times unscathed but some banks collapsed and hence ceased to exist. Post-independence partition took a severe toll on the Indian economy. The Government of India decided to envisage Indian economy as a mixed economy. Several steps were taken to regulate the banking system and one of them was the setting up of the Reserve Bank of India (RBI). It is a nationalized institution, owned by the government of India.
The RBI regulates the money supply in the Indian economy and inspects, regulates and controls the various banks in India. It is the RBI that decides the CRR, repo-rate, reverse repo rate, etc. The Banking Regulation Act also provided that no new bank or branch of an existing bank could be opened without a license from the RBI, and no two banks could have common directors. However, despite these provisions, control and regulations, banks in India except the State Bank of India, continued to be owned and operated by private persons.
This changed with the nationalisation of major banks in India on 19 July, 1969. Nationalisation of banks By the 1960s, the Indian banking industry had become an important tool to facilitate the development of the Indian economy. At the same time, it had emerged as a large employer, and a debate had ensued about the possibility to nationalize the banking industry. Indira Gandhi, the-then Prime Minister of India expressed the intention of the GOI in the annual conference of the All India Congress Meeting in a paper entitled “Stray thoughts on Bank Nationalisation. The paper was received with positive enthusiasm. Thereafter, her move was swift and sudden, and the GOI issued an ordinance and nationalized the 14 largest commercial banks with effect from the midnight of July 19, 1969. Jayaprakash Narayan, a national leader of India, described the step as a “masterstroke of political sagacity. ” Within two weeks of the issue of the ordinance, the Parliament passed the Banking Companies (Acquisition and Transfer of Undertaking) Bill, and it received the presidential approval on 9 August, 1969. A second dose of nationalization of 6 more commercial banks followed in 1980.
The stated reason for the nationalization was to give the government more control of credit delivery. With the second dose of nationalization, the GOI controlled around 91% of the banking business of India. Later on, in the year 1993, the government merged New Bank of India with Punjab National Bank. It was the only merger between nationalized banks and resulted in the reduction of the number of nationalized banks from 20 to 19. After this, until the 1990s, the nationalized banks grew at a pace of around 4%, closer to the average growth rate of the Indian economy.
Liberalisation 1980s, suggests that the root cause of the crisis was the large and growing fiscal imbalance. Large fiscal deficits emerged as a result of mounting government expenditures, particularly during the second half of the 80s. These fiscal deficits led to high levels of borrowing by the government from the Reserve Bank of India (RBI), IMF, World Bank which in turn led to negative balance of payment. Over the 1980s, government expenditure in India grew at a phenomenal rate, faster than what government earns as a revenues.
The subsidies grew at a rate faster than government expenditures. Expenditure on subsidies rose from Rs. 19. 1 billion in 1980-81 to Rs. 107. 2 billion in 1990-91. Although, a large part of the problem concerning external imbalances in India could be attributed to extraneous developments, such as two oil-shocks during the last decade (when Iraq invaded Kuwait) and the price of oil soon doubled. In addition, many Indian workers resident in Persian Gulf states either lost their jobs or returned home out of fear for their safety, thus reducing the flow of remittances).
The direct economic impact of the Persian Gulf conflict was exacerbated by domestic social and political developments. In the early 1990s, there was violence over two domestic issues: the reservation of a proportion of public-sector jobs for members of Scheduled Castes and the Hindu-Muslim conflict at Ayodhya. The central government fell in November 1990 and was succeeded by a minority government. The cumulative impact of these events shook international confidence in India’s economic viability, and the country found it increasingly difficult to borrow internationally.
As a result, India made various agreements with the International Monetary Fund and other organizations that included commitments to speed up liberalization. The Indian economy was indeed in deep trouble. This was a characteristic of a developing economy struggling for reconstruction and modernization of its economy. Foreign reserves were lacking and gold reserves became empty. Before 1991, India was a closed economy. A closed economy prohibits imports and exports, and prohibits any other country from participating in their stock market.
The government was close to default and its foreign exchange reserves had reduced to the point that India could barely finance three weeks’ worth of imports. The Government of India headed by Chandra Shekhar decided to usher in several reforms that are collectively termed as liberalisation in the Indian media with Man Mohan Singh whom he appointed as a special economical advisor. License Raj was the regulations that were required to set up business in India between the years 1947-1990. License Raj is a system, where all aspects of the economy are controlled by the state and licenses were given to a select few.
The License Raj is considered to have been dismantled in 1990. With the end of license raj, ended many public monopolies, allowing automatic approval of foreign direct investment in many sectors. Hence liberalization had set up a next stage for the Indian banking with the proposed relaxation in the norms for Foreign Direct Investment, where all Foreign Investors in banks may be given voting rights which could exceed the present cap of 10%, at present it has gone up to 49% with some restrictions. The new policy shook the Banking sector in India completely.
Bankers, till this time, were used to the 4-6-4 method (Borrow at 4%; Lend at 6%; Go home at 4) of functioning. The new wave ushered in a modern outlook and tech-savvy methods of working for traditional banks. All this led to the retail boom in India. People not just demanded more from their banks but also received more. Hence the foundation of modern banking was laid. Plastic Money CREDIT CARD Credit cards are financial instruments, which can be used more than once to borrow money or buy products and services on credit.
Basically banks, retail stores and other businesses issue these. The concept of credit card was used in 1950 with the launch of charge cards in USA by Diners Club and American Express. Credit card however became more popular with use of magnetic strip in 1970. The first card was issued in India by Visa in 1981. The country’s first Gold Card was also issued from Visa in 1986. The first international credit card was issued to a restricted number of customers by Andhra Bank in 1987 through the Visa program, after getting special permission from the Reserve Bank of India.
The credit cards are shape and size, as specified by the ISO 7810 standard. It is generally of plastic quality. It is also sometimes known as Plastic Money. Credit card in India became popular with the introduction of foreign banks in the country. Major Banks issuing Credit Card in India • State Bank of India credit card (SBI credit card) • Bank of Baroda credit card or BoB credit card • ICICI credit card • HDFC credit card • IDBI credit card • ABN AMRO credit card • Standard Chartered credit card • HSBC credit card • Citibank Credit Card Global player in credit card market MasterCard
MasterCard is a product of MasterCard International and along with VISA are distributed by financial institutions around the world. Cardholders borrow money against a line of credit and pay it back with interest if the balance is carried over from month to month. Its products are issued by 23,000 financial institutions in 220 countries and territories. In 1998, it had almost 700 million cards in circulation, whose users spent $650 billion in more than 16. 2 million locations. VISA Card VISA cards is a product of VISA USA and along with MasterCard is distributed by financial institutions around the world.
A VISA cardholder borrows money against a credit line and repays the money with interest if the balance is carried over from month to month in a revolving line of credit. Nearly 600 million cards carry one of the VISA brands and more than 14 million locations accept VISA cards. American Express The world’s favorite card is American Express Credit Card. More than 57 million cards are in circulation and growing and it is still growing further. Around US $ 123 billion was spent last year through American Express Cards and it is poised to be the world’s No. 1 card in the near future.
In a regressive US economy last year, the total amount spent on American Express cards rose by 4 percent. American Express cards are very popular in the U. S. , Canada, Europe and Asia and are used widely in the retail and everyday expenses segment. Diners Club International Diners Club is the world’s No. 1 Charge Card. Diners Club cardholders reside all over the world and the Diners Card is a alltime favourite for corporates. There are more than 8 million Diners Club cardholders. They are affluent and are frequent travelers in premier businesses and institutions, including Fortune 500 companies and leading global corporations.
JCB Cards The JCB Card has a merchant network of 10. 93 million in approximately 189 countries. It is supported by over 320 financial institutions worldwide and serves more than 48 million cardholders in eighteen countries world wide. The JCB philosophy of “identify the customer’s needs and please the customer with Service from the Heart” is paying rich dividends as their customers spend US$43 billion annually on their JCB cards. Grace / Interest Free Period The number of days you have on a card before a card issuer starts charging you interest is called grace period.
Usually this period is the number of days between the statement date and the due date of payment. Grace periods on credit cards are usually 2-3 weeks. However, there is likely to be no grace for balances carried forward from previous month and fresh purchases thereafter if any. The following are some of the varieties of credit cards in India • ANZ – Gold • ANZ – Silver • Bank Of India – Indiacard • Bol – Taj Premium • Bol – Gold • BoB – Exclusive • BoB – Premium • Canara Bank – Cancard • Citibank – Gold • Citibank – Silver • Citibank WWF Card Citibank Visa Card for Women • Citibank Cry Card • Citibank Silver International Credit Card • Citibank Women’s International Credit Card • Citibank Gold International Credit Card • Citibank Electronic Credit Card • Citibank Maruti International Credit Card • Citibank Times Card • Citibank Indian Oil International Credit Card • Citibank Citi Diners Club Card • HSBC – Gold • HSBC – Classic • ICICI Sterling Silver Credit Card • ICICI Solid Gold Credit Card • ICICI True Blue Credit Card • SBI Card • Stanchart – Gold • Stanchart – Executive • Stanchart – Classic Thomas Cook Standard Chartered Global Credit Card Pros and Cons make purchases without the hassle of carrying cash. [pic] expensive proposition because of high interest rates charged. DEBIT CARDS Debit cards, also known as check cards look like credit cards or ATM cards (automated teller machine card). It operates like cash or a personal check. Debit cards are different from credit cards. Credit card is a way to “pay later,” whereas debit card is a way to “pay now. ” When we use a debit card, our money is quickly deducted from the bank account.
Debit cards are accepted at many locations, including grocery stores, retail stores, gasoline stations, and restaurants. It is an alternative to carrying a checkbook or cash. With debit card, we use our own money and not the issuer’s money. In India almost all the banks issue debit card to its account holders. Debit cards are PIN-based cards that provide protection against identity theft. Returns on Debit cards can be tricky, because retailers treat transactions like cash. Pros & Cons INTERNET BANKING The 90s saw the banking industry embracing technology in a massive way, led in particular by the new private banks and MNC banks.
Among these series of technology innovations, Internet banking for the retail segment is a recent phenomenon that has generated a lot of interest in the Indian banking industry. Private and foreign banks have been the early adopters while the PSU banks are also beginning to latch on to the bandwagon. India has a little less than a million active Internet banking users. And though this is just 0. 096 percent of the total population, it represents 15 percent of the India’s Internet user population. Thus, indicating that the concept of Internet banking is surely catching on.
Impressive as these figures might be, the truth is that India lags behind other countries in Internet banking. In the US, the number of commercial banks with transactional websites is 1,275 or 12 percent of the total number of banks. Of these, seven could be called ‘virtual banks. ’ Ten traditional banks have established Internet branches or divisions that operate under a unique brand name. At present, in the US approximately 78 percent of all commercial banks with assets more than $5 billion, 43 percent of banks with $500 million to $5 billion in assets, and 10 percent of banks under $500 million in assets have transactional websites.
ICICI Bank kicked off online banking way back in 1996 and a host of other banks soon followed suit. But even for the Internet as a whole, 1996 to 1998 marked the adoption phase, while usage increased only in 1999—due to lower ISP online charges, increased PC penetration and a tech-friendly atmosphere. After ICICI, Citibank, IndusInd Bank and HDFC Bank and Timesbank (now part of HDFC Bank), were the early ones to bite the technology bullet in 1999. Costs of banking service through the Internet amount to a fraction of the costs through conventional methods.
Industry estimates assume teller cost at Re 1 per transaction, ATM transaction costs at Re 0. 45, phone banking at Re 0. 35, debit cards at Re 0. 20 and Internet banking at Re 0. 10 per transaction. Prohibitive costs of real estate make Internet banking a much more viable option in the long run than physical banks. The PSU banks have been laggards in adopting internet banking. This can be attributed to the fact that the average customer profile of PSU banks is also comfortable with the traditional banking system and is not too keen on adopting an online model.
Typically, most PSU banks have the majority of their customer base in the smaller cities or towns and even in remote villages. Even in bigger cities, a large proportion of their customers are either senior citizens or at least 50+ who have a natural aversion towards adopting new technology. This not the case with private or MNC banks, where the clientele is mostly urban-based falling in the 20-40 age group and who have a higher exposure to technology. India’s Net banking almanac Bank Name |Technology Vendor |Service offering | |ABN AMRO Bank |Infosys (BankAway) |NetBanking | |Abu Dhabi Commercial Bank |Infosys (BankAway) |ADCB NetLink | |Bank of India |I-flex |BOIonline | |Centurion Bank |Logica |MyCBOL | |Citibank |Orbitech (now Polaris) |Citibank Online | |Corporation Bank I-flex |CorpNet | |Deutsche Bank | |db direct | |Federal Bank |Sanchez |FedNet | |Global Trust Bank |Infosys (BankAway) |[email protected] | |HDFC Bank |i-flex/ Satyam |NetBanking | |HSBC | |[email protected] | |ICICI Bank |Infosys, ICICI Infotech |Infinity | |IDBI Bank |Infosys (BankAway) |i-net banking | |IndusInd Bank |CR2 |IndusNet | |Punjab National Bank |Infosys (BankAway) | | |Saraswat Bank | | | |Standard Chartered Bank |In-House |Me Standard Chartered Online | |State Bank of India |Satyam/Broadvision |onlinesbi. com | |UTI Bank |Infosys (BankAway) |iConnect | Pros & Cons sometime to learn it. MOBILE BANKING “The account that travels with you”. This is needed in today’s fast business environment with unending deadlines for fulfillment and loads of appointments to need and meetings to attend. With mobile banking facilities, one can bank from anywhere, at anytime and in any condition or anyhow. The system is either through SMS or through WAP.
Mobile Banking is the hottest area of development in the banking sector and is expected to replace the credit/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. Moreover 85-90% mobile users do not own credit cards. Mobile banking uses the same infrastructure like the ATM solution. But it is extremely easy and inexpensive to implement. It reduces the cost of operation for bankers in comparison to the use of ATMs. Using compact HTML and WAP technologies, the following operations can be conducted through advanced mobile phones which can is further viewed on channels such as the Internet via the Channel Manager. •Bill payments •Fund transfers Check balances •Any many more which is also available in SMS Banking SMS Banking Businesses are in move. So is to be your money. You may have to thank the banks which are providing banking at the send-of-your-sms. The technology is at its highest level to move your money while you are on the move. If you are having non-WAP enabled mobile handset, you can use the facility of SMS services. The following operations can be easily used by the service provider: • Balance enquiry • Last three transactions • Cheque payment status • Cheque book request • Statement request • Demat – Free Balance Holding • Demat – Last two Transactions • Bill Payment
The SMS facility brings peace of mind to customers and opens doors to many more technological possibilities and innovative services. It is very similar to how an ATM works. To use ATM, a card is necessary and to use SMS service, a mobile phone is needed. In both the cases, secret number is necessary to access. SMS banking is also very much safe. First, one authenticates the mobile number with the authentications key. Second, the customer uses secret Mobile Personal Identification Number (MPIN). A new concept has been developed by Bank of Punjab Ltd. They call it “Mobile Wallet”. With the support of this technology, a customer can make payment and receive payment of account of buy/sell (merchants) through SMS.
In this system, a buyer sends a message for buying and the bank in return sends a message confirming the purchase both to the merchant as well as to the buyer. Debit card number is the key field which is used for the authenticity of the customer. Generally with 3 invalid login attempts, SMS Banking services are locked. Immediately contact the branch for unlocking the services. In case one forgets the password, obtain a new password from the branch. To log out, choose the “Log out” option in the handset and SMS Banking session ends. [pic] ———————– Standard Chartered Bank, following the acquisition of Grindlays Bank launched Debit Card and Net Banking in India in the year 2001.
It rationalized and repositioned its branches according to the demographic changes in India by merging or closing some of its branches. The merger and closing of branches depended upon the demographic factors and the volume of business those branches could generate. The bank sought the mandatory RBI approval for introducing net banking. Standard Chartered Bank found itself at the receiving end of such a credit card fraud in the year 2001. A person was arrested in Vadodara for unauthorized use of Standard Chartered Bank’s credit card. He had cashed on the credit card against the limit and purchased goods worth Rs. 59,000 from retail shops. He worked as a credit card agent for the bank and was entrusted the job of enlisting customers and cancelling credit cards.
Though he had ceased to be an agent a couple of months ago, he contacted some customers and got their credit cards on the plea of cancelling them. Then he got to know the codes and forged signatures to make purchases on credit. Standard Chartered Bank and VISA launched India’s first ever mobile credit card, the m-Wallet in the year 2005. It was a pioneer in ushering the mobile commerce technology in India. It was a substitute to credit card because over the payment counter the m-Wallet users just have to ‘beam’ their mobile phones at the payment counter to complete their purchase. The m- Wallet is free to use at it employs the infrared mode in phones to operate.