INNOVATIONS AND

REFORMS IN BANKING
Conventional Banking v/s E- banking
CONVENTIONAL E-BANKING
● People to people interaction ● No such interaction
● Follows Fixed Time Schedule ● 24/7 availability
● Time consuming and Costly ● Speedy and less costly
● Available within limited ● Accessible everywhere
geographical location only ● Prone to hacking, spyware,
● More safe than e-banking viruses e.t.c
E-banking
● Refers to doing banking business electronically through
channels like ATM, debit/credit cards, internet banking,
mobile banking, telebanking, Electronic Fund Transfer
(EFT), etc.
● Facilitated bank customers with anytime and anywhere
banking services.
Benefits of E-banking
● Convenience
● Reduced Costs
● Accuracy
● Healthy Competition
● Time Saving
Modes of E-banking
● ATM Cards
● Cash Deposit Machine (CDM)
● Home banking
● Internet banking
● Tele banking
● Mobile banking
● Electronic Fund Transfer (EFT)
● Real Time Gross Settlement (RTGS)
● National Electronic Fund Transfer (NEFT)
● Electronic Clearing Service (ECS)
● Society for Worldwide Interbank Financial Telecommunication(SWIFT)
Automatic Teller Machines (ATM)
● Computerised banking terminal
● Operated by customer himself
● Provides 24 hrs banking facility
● ATM machines are linked to

computer server of the bank.

Advantages of ATM
● 24*7*365 service
● Quick and speedy customer service
● Customers can operate it themselves
● Free from human errors
● Banking facilities made available in places without a bank branch
● Relieves customers from standing in long queues
● Accounts are updated immediately after each transaction
● Reduces excessive pressure on bank staff
● Ensures privacy of transactions
● Attracts more customers
CASH DEPOSIT MACHINE (CDM)
● Self service terminals like ATM
● Customers can deposit cash to their accounts
● Amount deposited is instantly credited
● CDM generates a receipt confirming the updated balance

FEATURES:

● Quick and convenient

● 24*7*365 availability
● Need not fill deposit slips
● No extra charges
Features of CDM (cont.d)
● Need not sort on the basis of denomination
● Accepts denominations of 100, 500 and 2000
● Accepts min deposit of Rs.100 .
● Max deposit- restricted to Rs.49900 per day, if Permanent Account
Number is not registered with bank
● Other services: pin change, balance enquiry, mini statement etc.
Operation of a CDM
● DEPOSIT USING DEBIT CARD
● DEPOSIT BY ENTERING BANK ACCOUNT NUMBER
HOME BANKING
● Practice of conducting banking transactions from home, rather than
at bank branches, using electronic communications
● Either banking over telephone or internet
INTERNET BANKING
INTERNET BANKING
● Refers to banking transaction routed through internet
● Also called as virtual banking, online banking, or anywhere banking
● Enables a customer to bring the bank to his computer, at the place
and time of his choice.
● Can perform all routine transactions such as money transfer, balance
enquiry, bill payments,etc.
● Online transactions are classified as
➔ TRANSACTIONAL: fund transfer, payments, purchase and sale of
securities, loan application and repayment etc.
➔ NON TRANSACTIONAL: no fund based transactions.eg: balance
enquiry, online statements etc.
INTERNET BANKING-FEATURES
● Use of internet for delivery of banking products and services
● Replaced time consuming paper based aspects of traditional banking
● Any time-anywhere access
● Expansion of customer base through increased geographical reach
● Serves millions of customers at a time
● Built in security features such as encryption, authorisations and
transaction limits
● Quick and speedy information
● More convenient
● Generates income, attracts new customers, enhance image, reduced
customer attrition rate and combat competition
Factors responsible for growth of Internet Banking
● COMPETITION
● COST EFFICIENCY
● WIDER REACH
● RELATIONSHIP MARKETING
● ROUND THE CLOCK ACCESS
Advantages to Customers
● Low transaction costs
● Numerous transactions settled on a click
● Access to up to date information
● Speedy transactions
● Easy to navigate; comprehensive help menus and simple software
requirements
● Relieved from traveling to the bank branch
● Round the clock accessibility
● Privacy ensured
● Can make bill payments for shopping,travel, donations etc.
Advantages to Banks
● Reduced pressure on employees; reduced administration cost
● Easy promotion of banking products and services
● Opportunity to have access to large markets
● Less time consuming, reduced errors and overhead costs
● Improves competitive position
● Eliminates costly paper processing
● Economies of scale since able to provide more services at low costs
● Tool for improving customer satisfaction
● Opportunity for banks to tailor products and services as per
customer’s requirements.
Disadvantages
● Poor internet accessibility
● Technical illiterate customers
● Fear of security in minds of customers
● Customers might be doubtful about quality of products and services
they will receive
● Banking products such as loans, mortgages,withdrawal of cash etc
required to be delivered in physical form
● Lack of human interface.
TELE BANKING
● Customers can call the bank any time and enquire balances or
transaction details and to transfer funds between one account to
another account
● Computers at the bank are connected to a telephone link with the
help of a modem.
● Voice mail send by customers are routed directly to the department
concerned of the bank
● Also permits customer to leave a message for the person concerned,
if he is not present
Services available under Tele banking
GENERAL ENQUIRY-

● Made by customers and others

● Eg: Interest rate,facilities etc

SPECIFIC ENQUIRY

Made by customers

● Balance enquiry
● Status of cheques issued and deposited
● Account statements
● Issue of drafts
● Request for issuing cheque books
MOBILE BANKING
● Term used for performing banking transactions via mobile phones.
● Often uses SMS or mobile internet
● Mobile banking services provided:
➔ Balance enquiry
➔ Fund transfer
➔ Placing stop payment on a cheque
➔ Requesting cheque book
➔ Requesting account statement
➔ Cheque status inquiry
➔ Bill payments
➔ FD inquiry
➔ Demat Enquiry
ELECTRONIC FUND TRANSFER
DEFINITION:

“Any transfer of funds initiated through an electronic terminal, telephone

instrument, or computer or magnetic tape so as to order, instruct, or
authorise a financial institution to debit or credit an account”

● System of transferring money from one bank account directly to

another, without physical exchange of paper money.Includes:
➔ Cardholder initiated transactions: debit/credit card,ATM, POS
➔ Electronic payments by business, including salary payments
➔ Electronic cheque clearing
ELECTRONIC FUND TRANSFER
FIRPS:Foreign Inward Remittance Payment Scheme

● Scheme of remittance by FEDAI (Foreign Exchange Dealer’s

Association of India), for easy remittance of money from foreign
countries.
● NRI/ foreign citizens can remit money in foreign currencies to any
person in India, through his bank abroad.
● The bank in India will convert foreign currency into indian rupee at
prevailing market rates and issue a document called FIRP instrument

EFT from one account to another is made by one bank to another through
RBI in three ways: RTGS, NEFT, ECS
REAL TIME GROSS SETTLEMENT (RTGS)
● Fastest possible money transfer through banking channel
● Become operational on 20th March 2004
● Can make settlement on a continuous basis during the processing day
i.e. payments are settled as soon as they are processed
● Gross settlement-settlement of funds on a transaction by transaction
basis, without adjusting debits against credits
TYPES OF INTER BANK FUND TRANSFER
ON BASIS OF
SETTLEMENT TIME

DESIGNATED TIME REAL TIME

SETTLEMENT SETTLEMENT

Fixed time for settlemet Transactions are processed continuously

Eg: 9:30am, 10:30am, 12.00nn etc throughout the business hours
TYPES OF INTER BANK FUND TRANSFER

SETTLEMENT
SYSTEM

NET SETTLEMENT GROSS SETTLEMENT

SYSTEM SYSTEM

Debits are adjusted against Debits are not adjusted against

credits credits
FEATURES OF RTGS
● Takes place on a real time and gross settlement
● Meant for large value transactions (min:2 lakhs)
● No restriction for maximum amount
● Does not require CORE banking facility among participant banks
● Remitting bank receives a message from RBI, that money remitted
has been credited to receiving bank
● RTGS service window for customer transactions is available from
9.00-16.00 on week days and 9.00-12.00 on saturdays.For
interbank transactions, the service window is available from
9.00-17.30 on weekdays and 9.00-14.00 on saturdays
● RBI has waived processing charges for all e-payments till 31st March
2009.Banks are given discretion to levy service charges
● Nation-wide electronic payment system, that uses secure mode of
transferring funds from one bank to another
● Introduced in October, 2005
● Uses Public Key Infrastructure (PKI), to ensure end-to-end security
● Rides on the INdian FInancial NETwork(INFINET), to connect bank
branches
● Bank branches should be NEFT enabled
● No limit on min/max amounts
● Used for remitting Indian Rupee only
NEFT
● Fund transfer takes place on hourly batches; 11 settlements from
9am to 7pm on weekdays & 5 settlements from 9am to 1pm on Sat.
● People without an account too can deposit; have to furnish full details
( complete address, ph number, etc)
● But beneficiary must have an account with NEFT enabled bank in the
country
Process of NEFT
● STEP:1- Filling of application form, providing details of the
beneficiary(name, branch,IFSC, A/C type, A/C No).Remitter
authorises his bank to debit his a/c and remit the specified amount
to the beneficiary
● STEP:2- Originating bank prepares a message & send it to pooling
centre (NEFT Service centre)
● STEP:3- Pooling centre forwards the message to the NEFT Clearing
Centre
● STEP:4- Clearing Centre sorts the fund transfer transactions,
destination bank-wise and prepares accounting entries to receive
funds from the originating banks and give the funds to destination
banks. Bank-wise remittance messages are also forwarded to
Process of NEFT
destination banks through pooling centre

● STEP:5- Destination banks receive the inward remittance messages

from the Clearing Centre and pass on the credit to beneficiary
accounts.
● Mode of fund transfer through clearing houses of RBI
● Used for bulk transfers from one account to many accounts or
vice-versa in the form of ECS-credit & ECS- debit

ECS- CREDIT

● Used for making bulk payments like dividend, interest, salary etc
● Transactions can be done after registering with an approved clearing
house
● ECS user should prepare a list of beneficiaries and hand over it to
the clearing house
● Clearing house makes a single debit to account of ECS user’s bank &
credits the a/c of beneficiary’s bank form making onward credit to
ECS
the accounts of individual beneficiaries

● No limit on the amount of individual transactions

ECS-DEBIT

● Used when an institution need to recover an amount, by raising a

debit, at a prescribed frequency from many customers
● ECS user has to collect an authorisation which is called ECS mandate
for raising such debits
● User has to submit the data in specified form through sponsor bank
to the clearing house
● Clearing house would pass on the debit to the customers through
ECS
clearing system and credit the sponsor bank’s a/c for onward credit to
a/c of ECS user.
Society for Worldwide Interbank Financial Telecommunication

● Organisation in Brussels, formed in 1973 to establish some common

processes & standards for financial transactions
● Messaging network that financial institutions use to securely transmit
info & instructions through a system of standard codes
● Assigns each financial institution a unique code
● Ie. Bank Identifier Code (BIC), SWIFT Code

SWIFT ID etc
Features of SWIFT
● International money transfer via SWIFT International payment
network
● Provides a secure network that allows more than 10000 financial
institutions in 212 countries to send and receive information about
financial transactions to each other
● Mainly used by banks, but also used by trading institutions, money &
security brokers, clearing system & investment management
institutions
Features
● Institution must hold a banking license to be a SWIFT member
● Doesn’t actually transfer funds, but sends payment orders between
institutions using SWIFT Code
● It was SWIFT that standardised IBAN ( International Bank Account
Numbers ) and BIC (Bank Identifier Codes)
CORE Banking
● Term used to describe the services provided by group of networked
branches
● Enables customers to avail banking services from any branch,
irrespective of where their a/c is
● Convenient, efficient, and high quality service
● Customer is treated as a bank’s customer and not the customer of a
particular branch
● All branches are interconnected and information is stored
centrally,which can be accessed by all branches
Services Offered
● Balance enquiries, verification of debit & credit entries
● Withdraw cash by tendering a cheque
● Deposit a cheque for collection
● Deposit cash into the account
● Deposit cash/cheque into the a/c of some other person who has a/c
in a core banking branch
● Obtain settlement of account
● Transfer of fund( both a/c in core banking branches)
CHEQUE TRUNCATION SYSTEM
● Avoid delays in clearing cheques
● Facilitates quick settlement
● Reducing clearing cycle to provide faster clearance of local &
intercity cheques

PROCESS-

● On receiving a cheque, the collecting banker keeps physical cheque in

his custody and electronic records of its contents are generated
through digital image process
● Digital image is then transmitted by collecting banker to clearing
house
Cheque Truncation
● Clearing house will do image routing & processing to send it to the
drawee bank
● The drawee bank will follow image based inward & outward return
including verification of signature images of drawer already held in
electronic form with the drawee bank
● In the outward return, the returned instrument is allocated a fresh
unique identifier.This can be used by customer to represent the
cheque
Advantages
● Greater efficiency in managing funds; better service
● Reduced clearing time
● Eliminated need for transporting millions of cheques
● Removes inconvenience to customers due to loss of instrument in
transit, during clearing cycle
● Jurisdiction of clearing house can be extended to the entire country
● Minimises cost of collection of cheques
● Enables card holders to avail credit facilities for a specified period,
without any security
● Used to settle hotel bills,railway/airway tickets, hospital bills etc
● Also called as plastic money
● Card holder can make purchases without immediate cash payment
● Credit cards are issued to customers based on their income, credit
worthiness,reputation etc.
FEATURES
● Type of customer loan where, customers can make payments without
having any balance in current/savings a/c
● Payment is limited to the credit limit, determined by banks
● Used for cash withdrawals from ATM
● Credit availed by the cardholder should be repaid within the given
time; and credit limit gets renewed automatically

CLASSIFICATION OF CREDIT CARDS

➔ General Purpose Cards: accepted by merchants

➔ Proprietary cards: used only in retailer’s store
PRIVILEGES OF CREDIT CARD HOLDER
● Cash withdrawal through ATM
● Special discounts
● Use by a person other than the card holder
● Issue of drafts and pay order
● Insurance coverage
● Flexible repayment options
● Other privileges
OPERATION OF CREDIT CARDS
● After purchasing, card is swiped at PoS. At times PIN is to be typed
● System communicates with the card issuing bank to ensure that the
amount swiped is within the credit limit
● If amount is within the credit limit, transaction is authorised by the
bank
● Card holder will put his signature on the receipt as his consent to the
transaction and will pay the amount to the card issuing bank
● Every month, the bank will send a statement of transactions,which
indicates total amt due,amount of interest etc.
PROCEDURE OF OBTAINING A CREDIT CARD
➔ SUBMISSION OF APPLICATION FORM
➔ ASSESSMENT OF CREDIT WORTHINESS
➔ ISSUE OF CREDIT CARD

Advantages:

● Removes burden of carrying huge amount of cash

● Convenience & Security
● Need not approach bank for credit facility, always
● Relieved from danger of pick pocketing
● Useful during business trips & holiday
● Enhances the purchasing power of the card holder
● No interest payment, if payment done on time
Advantages & Disadvantages
● Settled every month; reduces burden of visiting bank always
● Eliminates burden of carrying foreign currencies while travelling
● Discounts on international brands

DISADVANTAGES:

● Risk of overspending
● Financial indiscipline
● High Interest rate
● Risk of fraud
TYPES
DIRECT DEBIT CARD:

● Requires e-authorisation of every transactions

● Allows only online transactions;immediate transfer
● System immediately checks sufficiency of funds in the a/c

DEFERRED DEBIT CARD:

● Allows offline transactions

● Requires 2-3 days to reflect cardholders a/c balances
Advantages
● Useful for people who are less creditworthy to get a credit card
● No problem of financial indiscipline and overspending
● Accepted by merchants with less identification & scrutiny
● Relieves the burden of carrying cash/cheque book
● Much helpful to international travellers
● No question of interest, late fee etc
● Used to withdraw from ATM
● Introduced in Aug 1998
● Issued by Indian banks to farmers for providing adequate & timely
financial support
● Owner cultivators or those engaged in allied agricultural activities are
eligible
● Holders are sanctioned a credit limit, based on their landholdings,
cropping pattern,scales of finance approved for the area etc
FEATURES
● Aims at providing adequate, timely and hassle free credit support to
farmers
● Issued by all public sector banks, co-operative banks & RRBs
● Issued for a period of 3 yrs subject to annual review
● Beneficial for both banks & issuing farmers
● Apart from cultivation expenses, consumption loan of a certain
percentage limit is also given for household expenses
● Eligible farmers are given a KCC & a pass book or card cum pass book
● Withdrawals are through slips/cheques accompanied by card & pass book
OTHER E-BANKING TERMINOLOGIES
HI-TECH BANKING

● Use of technology & communication systems in delivering banking

products & services
● Traditional system confined to branches are replaced
● Uses internet & tele communication as the delivery channel to conduct
banking activities
● Customers can process a transaction from anywhere @ anytime
E- purse
● Cash is stored electronically on a microchip
● Designed to replace cash for small transactions
● Money is stored into e-purse by transfer from a/c
● Payments can be done by using cards @ POS

FEATURES:

● Maintains money on card; used for purchases

● Relieved from burden of carrying money for small transactions
● More suitable than cheques and debit cards
● Data security through encryption keys
● Provides card security through PIN code
● Privacy & freedom from recording expenditures in cheque book
VIRTUAL BANKING
●
VIRTUAL BANKING
● Also known as cyber banking, e-banking, home banking or online banking
● Provides access to various banking services virtually
● Doesn’t have branches or own ATM machines and offers some or all
services that traditional brick & mortar banks do
● Typically charge lower fees & pay higher interest because of low
overhead
● Highly safe and ensures integrity of customer data
OTHER E- BANKING TERMINOLOGIES
● PC BANKING- Accessing online banking from a PC
● SMS BAKING- push & pull messages
● ANYWHERE BANKING
● ANY TIME BANKING
Credit Information Bureau (India) ltd (CIBIL)
● India’s first credit information company
● Maintains records of all credit related activity of individuals, and
companies including loans & credit cards
● CIBIL has consumer bureau & commercial bureau
● CIBIL doesn’t make any lending decisions
● Credit details of individuals & companies are submitted to CIBIL by
registered member banks and other financial institutions on monthly
basis
● CIBIL issues report and a credit score
CIBIL Credit Report
Comprehensive document that details an individual’s or company’s
borrowing history and repayment record.Its a crucial resource for banks
& other financial institutions to evaluate credit worthiness of a borrower,
to make a lending decision.It contains:

● Name, age, gender and address of the applicant

● Employment details & income
● Number of enquiries made by potential lenders on receipt of loan/
credit card information
● Details regarding past & current loans along with payment records
● Details of defaults on loan/ credit card payment
● Details of settled loans
● CIBIL Score
CIBIL Credit Report- Importance
● Provides the lenders an idea about a customer’s spending discipline and
ability to fulfil loan obligations
● Helps in making lending decisions
● Information to customers on their credit strengths & weaknesses and
helps to improve the creditworthiness
● Helps customers to know reasons why their loan application has been
rejected
● Ensures transparency in loan approval process
● RBI instructed all commercial banks to know their customers and their
financial dealings to prevent fraud
● Main objective is to prevent banks for fraudulent activities such as
identity fraud, money laundering, terrorist financing etc
● Before opening an a/c , banks should verify the customer’s identity &
address inorder to ensure that he is genuine
● Proper ID & Address proof should be submitted