E-Banking
History of banking sector in India
The “Presidency Banks”
 The Bank of Bengal obtained its charter with a capital
base of Rs 50 lacs in the year 1809.
 It was given the power of note issue in 1823 and in 1839
the power to open branches and to deal in inland
exchange.
 On the same line two other Presidency Banks , the Bank
of Bombay and the Bank of Madras , which were
subsequently merges to form the Imperial Bank of Indiathe predecessor of the present State Bank of India.
 Constituted under the State Bank of India Act , 1955 .
Classification of banking development in
India
Foundation phase ( 1950-1969)
 The need of the hour was to reorganize and to
consolidate the prevailing banking network.
 Enactment of Banking Regulations Act,1949.
 Impetus given to both heavy and SSI.
 Credit extended to agriculture and small borrowers.
 Branches were expanded at an annual growth of 1.6%
during the period from 1950 -1960, with deposit and
credit growth of 6.9% and 8.2% respectively.
 The population served per branch was as high as 65,000
as at the end of foundation phase.
Rapid expansion phase (1970-1984)
 Two historic events took place in the year 1969 that
revolutionized the entire banking scenario in the country.
 Social control on banking companies.
 Nationalization of 14 major Indian banks
 During 1970-1980, the branch expansion was 12% per
annum and during 1980-85, it was around 8.8% per
annum.
 On 15 April 1980, the second dose of nationalization of
six more commercial banks was affected taking the
number of nationalized banks to 20 out of 28 PSU banks
including SBI and its subsidiaries.
Consolidation phase (1985-1990)
 This was a phase of consolidation, which marked slow
down in branch expansion.
 During this period ,expansion of bank branches came to
a halt. Profit, which was the major thrust area during the
consolidation phase, grew significantly.
Reforms phase (1991 onwards)
 In 1991 the Government appointed a high level
committee headed by M.Narsimhan to examine the
existing Indian Financial System.
 Out of 28 PSU Banks , New Bank of India was merged
with PNB in 1993 reducing the number of PSU to 27.
 Guidelines in terms of the Narsimhan Committee
recommendations for setting up of new Private Sector
Banks in India.
 Bank of Punjab, HDFC bank, ICICI bank, IDBI bank, UTI
bank, Centurion bank…
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1955 : Nationalization of State Bank of India.
1959 : Nationalization of SBI subsidiaries.
1969 : Nationalization of 14 major banks.
1980 : Nationalization of seven banks with deposits over
200 crores.
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Central Bank of India
Bank of Maharashtra
Dena Bank
Punjab National Bank
Syndicate Bank
Canara Bank
Indian Bank
Indian Overseas Bank
Bank of Baroda
Union Bank
Allahabad Bank
United Bank of India
UCO Bank
Bank of India
INDIAN BANKING : the changing
scenario
Commercial banks have diversified in
three different ways:
Horizontal diversification
 Wherein banks have added new products & services that
appeal to their existing customers and have spread into
new geographical areas.
 The areas in which commercial banks have diversified
includes: - consumer credit, credit card business and
housing finance.
Concentric diversification
 Wherein banks have diversified their business to some
other activity, which is related to existing one.
 Like providing financial support to meet term capital
needs of industrial enterprisers and extending medium
and long term loans to farmers, and to industrialist.
Conglomerate diversification
 Wherein banks adds new products that are entirely
different from present product line or markets and
technologies different from present one.
 Like diversification in non banking functions such as
merchant banking, leasing and mutual funds.
Merchant Banking Activities –
PNB
 The Bank is registered with SEBI as Category – I
Merchant Banker for providing all the major Merchant
Banking services. Our gamut of Merchant Banking
services includes:
 Issue Management Services – to act as Book Running
Lead Manager/Lead Manager for the IPOs/FPOs/Right
issues/Debt issues
 Project appraisal
 Corporate Advisory Services
 Underwriting of equity issues
 Banker to the Issue/Paying Banker
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Refund Banker
Monitoring Agency
Debenture Trustee
Marketing of the issue through a strong network of
QIBs/HNIs/Corporates and Retail investor. The Bank
itself is one of the major investor in the market having a
treasury of 45000 crores.
The following are the Scheduled Banks
in India (Public Sector):
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State Bank of India
State Bank of Bikaner and Jaipur
State Bank of Hyderabad
State Bank of Indore
State Bank of Mysore
State Bank of Saurashtra
State Bank of Travancore
Andhra Bank
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Allahabad Bank
Bank of Baroda
Bank of India
Bank of Maharashtra
Canara Bank
Central Bank of India
Corporation Bank
Dena Bank
Indian Overseas Bank
Indian Bank
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Oriental Bank of Commerce
Punjab National Bank
Punjab and Sind Bank
Syndicate Bank
Union Bank of India
United Bank of India
UCO Bank
Vijaya Bank
The following are the Scheduled Banks
in India (Private Sector):
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ING Vysya Bank Ltd
Axis Bank Ltd
Indusind Bank Ltd
ICICI Bank Ltd
South Indian Bank
HDFC Bank Ltd
Centurion Bank Ltd
Bank of Punjab Ltd
IDBI Bank Ltd
The following are the Scheduled
Foreign Banks in India:
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American Express Bank Ltd.
ANZ Gridlays Bank Plc.
Bank of America NT & SA
Bank of Tokyo Ltd.
Banquc Nationale de Paris
Barclays Bank Plc
 Citi Bank N.C.
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Deutsche Bank A.G.
Hong Kong and Shanghai Banking Corporation
Standard Chartered Bank.
The Chase Manhattan Bank Ltd.
Dresdner Bank AG.
Reasons for diversification of banking
functions:
 1) The branch expansion policy coupled with target –
oriented credit policies have brought about dimensional
and geographical diversifications.
 2) The refinement in rural lending policies such as
evolution of the concept of direct lending, liberalization of
norms and simplifications of lending procedures.
 3) Fast changes in the environment and revolution in the
computer and telecommunications technology have led
to geographical and functional integration of financial
markets beyond the national boundaries.
 4) Deregulations and intensification of competition
among banks as also with non – banking financial
sectors have led to the emergence of a more diversified
and unified financial systems.
 5) The search for new profit opportunities and the desire
to diversify to new areas.
 6) The emergence of highly attractive non banking
deposit instruments and large scale entry of prime
corporate borrowers in the new issue market has
compelled banks to diversify.
 7) The financial disinter mediation process whereby the
corporate borrowers have preferred to raise resources
directly from the market rather than to borrow from banks
resulting in decline in profitability led the banks to
embark on diversification.
The major services apart from traditional
banking functions:
Issue of bank guarantees
Tender/Bid Guarantee
 Supports the Principal/Applicant’s obligation to execute a
contract if the Principal/Applicant is awarded a bid.
Advance Payment Guarantee
 Supports an obligation to account for an advance
payment made by the Beneficiary to the
Principal/Applicant. an Advance Payment Guarantee
contain a clause that the guarantee is inoperative until
the Advance Payment has been received by the
Principal/Applicant, as well as a clause allowing for
reductions of the guarantee amount.
Bill of Lading-/Steamship Guarantee
 Supports the shipping company for any financial
damages caused by the goods being delivered
without the bill of lading. The guarantee is valid
until the bill of lading is presented, or until the
shipping company releases the bank from its
liability.
Maintenance Guarantee
 Supports remedies and any defects which become
apparent after delivery of the goods or after completion
of a plant.
Performance Guarantee
 Supports an obligation to pay for losses which may arise
as a consequence of the Principal/Applicant failing to
fulfill his obligations under the contract
Retention Guarantee
 Supports an obligation to account for retention money
paid by the Beneficiary to the Principal/ Applicant. the
Retention Guarantee explicitly stipulates that is does not
come into effect until the retention money has been
received by the Principal/Applicant.
Warranty Guarantee
 Supports the Beneficiary’s costs should the
Principal/Applicant fail to meet his warranty obligations
as per the contract terms.
Payment Guarantee
 Supports the payment obligation of the Beneficiary for
goods/services delivered by the Principal/ Applicant.
Loan Guarantee
 Supports the repayment of a credit or credit facility
including amortization and interest. The guarantee
applies from the date the loan is made until it has been
repaid.
What should a bank guarantee contain?
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A definition of the parties involved
A reference to
The guarantee amount
Effective clause
The guarantee amount
The period of validity
Documentation
A reduction clause
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Additional points to consider before signing
a contract
• Who pays the Issuing Bank’s charges/
commission/fees?
• How should the guarantee be drafted?
• Which law and jurisdiction should apply?
Letter of credit
Letter of credit
 A standard, commercial letter of credit is a document
issued mostly by a financial institution, used primarily in
trade finance, which usually provides an irrevocable
payment undertaking.
 The LC can also be the source of payment for a
transaction, meaning that redeeming the letter of credit
will pay an exporter.
 Letters of credit are used primarily in international trade
transactions of significant value, for deals between a
supplier in one country and a customer in another.
 Almost all letters of credit are irrevocable, i.e., cannot be
amended or canceled without prior agreement of the
beneficiary, the issuing bank and the confirming bank, if
any.
 In executing a transaction, letters of credit incorporate
functions common to giros and Traveler's cheques.
 Typically, the documents a beneficiary has to present in
order to receive payment include a commercial invoice,
bill of lading, and documents proving the shipment was
insured against loss or damage in transit.
 After a contract is concluded between buyer and seller,
buyer's bank supplies a letter of credit to seller.
 Seller consigns the goods to a carrier in exchange for a
bill of lading.
 Seller provides bill of lading to bank in exchange for
payment. Seller's bank exchanges bill of lading for
payment from buyer's bank. Buyer's bank exchanges bill
of lading for payment from the buyer.
 Buyer provides bill of lading to carrier and takes delivery
of goods.
Trade Online Features
 Submit an online application for a Letter of Credit
 View details of all letter of credit and bank guarantees
opened by the bank and status of the same.
 View the details of inward and outward bills discounted
with ICICI Bank.
 Track outstanding forward contracts entered with the
ICICI Bank.
The main instruments of remittance are:
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Demand drafts
Mail transfers
Telegraphic transfer
Electronic fund transfer
Traveler cheques
Gift cheques
Merchant banking
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Management of customer’s securities
Portfolio management
Credit syndication
Acceptance credit
Counseling
Insurance etc.
Dr Rangarajan committee report (1989)
 A 16 member committee with Dr C Rangarajan was
formed in 1988 to make recommendations for
computerization in banking industry in general and
Nationalized banks in particular.
Major recommendations:
 Regional office/ zonal office / head office should be
computerized.
 All branches located in top 30 centers should be
computerized.
 Branches having average 750 vouchers per day should
be computerized.
 Banknet and Swift to be used by banks.
 Online terminals should be given at the premises of
corporate customers.
Total branch automation (TBA)
 In contrast to partial automation which involves
computerization of front offices ( i.e. SB,CD, Term
deposit) or back office ( i.e. day book , GL ,MIS etc.) total
branch automation involves computerization of all
operations in the branch.
Main features:
 Server : it is the main device , which stores data of large
capacity and process the request of all users.
 Work stations: in a TBA branch all operations can be
done from any terminals as they are connected to each
other and also to the server. A customer desiring to
operate his SB account can to so from any counter and
not necessarily from SB counter.
Networking
 Networking means linking computers with each other by
means of cable so that they can share information and
resources and can communicate with each other.
LAN
 LOCAL AREA NETWORK
 When a network serves a small area, such as one
building or a group of building.
 You might have a LAN for example on a University
campus or between office blocks in an office park.
WAN
 WIDE AREA NETWORK
 When computers located in far off distances are
networked .
RBINET
 Connects all offices of RBI and corporate headquarters
of commercial banks became functional in December
1994
SWIFT
 Founded in Brussels in 1973, the Society for the
Worldwide Interbank Financial Telecommunication
(SWIFT) is a co-operative organization dedicated to the
promotion and development of standardized global
interactivity for financial transactions
 Swift's original mandate was to establish a global
communications link for data processing and a common
language for international financial transactions.
 The Society operates a messaging service for financial
messages, such as letters of credit, payments, and
securities transactions, between member banks
worldwide.
 Swift's essential function is to deliver these messages
quickly and securely -- both of which are prime
considerations for financial matters
 Member organizations create formatted messages that
are then forwarded to SWIFT for delivery to the recipient
member organization. SWIFT operates out of its
Brussels headquarters and processes data at centers in
Belgium and the United States.
How is the SWIFT network accessed?
 Users can either enter the network via a leased line, dialup connection or Public Data Network connection to
regional processors that link up to the SWIFT network.
Each user site has its own terminal for entering the
network and entering messages once connected.
 Access normally requires both a username and
password to be entered, and uses Smart Card
technology.
Can anyone become a member of
SWIFT?
 No, the organization must hold a Banking License in
order to become a member. Members pay a joining fee
and are then charged for each message they send.
Why was SWIFT created?
 Because of the limitations of the then used system,
Telex. Telex was considered too slow, too insecure and
didn't have a standardized format for the data it
transferred, all of which added up to an inefficient
system.
 Access normally requires both a username and
password to be entered, and uses Smart Card
technology.
 As a result seven major international banks met in 1974
to discuss a suitable replacement for Telex. A society
was formed in 1977 and 230 banks from five countries
went live with the system. SWIFT currently has around
7,000 members from nearly 200 countries.
How many messages does SWIFT
handle a day?
 Since its inception in the late 1970s, SWIFT has had to
increase the number and type of messages it handles to
cope with the expansion in the type of financial
transactions that are possible. It now handles around five
million messages a day.
 ISO 9362 (also known as SWIFT-BIC, BIC code, SWIFT
ID or SWIFT code) is a standard format of Bank
Identifier Codes approved by the International
Organization for Standardization (ISO).
 It is the unique identification code of a particular bank.
 These codes are used when transferring money between
banks, particularly for international wire transfers, and
also for the exchange of other messages between
banks.
 The codes can sometimes be found on account
statements.
The SWIFT code is 8 or 11 characters,
made up of:
 4 characters - bank code (only letters)
 2 characters - ISO 3166-1 alpha-2 country code (only
letters)
 2 characters - location code (letters and digits) (if the
second character is '1', then it denotes a passive
participant in the SWIFT network)
 3 characters - branch code, optional ('XXX' for primary
office) (letters and digits)
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SWIFT BIC Code
BANK
US
Institution Country
Code
code
33
[XXX]
Location
Branch
code
code
 Deutsche Bank is an international bank, with its head
office in Frankfurt, Germany. The SWIFT code for its
primary office is DEUTDEFF:
 DEUT identifies Deutsche Bank
 DE is the country code for Germany
 FF is the code for Frankfurt
 Deutsche Bank uses an extended code of 11 digits and
has assigned branches or processing areas individual
extended codes.
 This allows the payment to be directed to a specific
office.
 For example, DEUTDEFF500 would direct the payment
to an office of Deutsche Bank in Bad Homburg.
 Mumbai SWIFT Code: SBININBB110
 Delhi SWIFT Code: SBININBB104
 PUNBINBB DIB
Advantages of SWIFT message
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Security
Cheaper cost
Speed
Side access
SWIFT for banks
 SWIFT was formed more than 35 years ago by, 239
banks in 15 countries. Today, meeting the operational
requirements of banks remains a core focus for us.
 1) The need to reduce costs: payment and cash
management businesses (except in Asia) are growing
slowly and revenue per transaction is declining. SWIFT
provides reach, reusability and standardization to help
reduce your costs.
 2) The need to reduce fraud and risk: you are facing
new regulation and industry initiatives such as SEPA and
TARGET2 which demand high investments and squeeze
margins. SWIFT can help with the regulation and we
offer security and reliability to help you reduce your
operational risk.
 Real time gross settlement systems (RTGS)
are a funds transfer mechanism where transfer
of money takes place from one bank to another
on a "real time" and on "gross" basis.
 Settlement in "real time" means payment
transaction is not subjected to any waiting
period.
 The transactions are settled as soon as they are
processed. "Gross settlement" means the
transaction is settled on one to one basis without
bunching with any other transaction
 RTGS systems covering multiple countries:
 TARGET resp. TARGET2 (Trans-European Automated
Real-time Gross Settlement Express Transfer System) in
26 countries of the European Union
A Single Euro Payments Area - SEPA
 SWIFT is actively supporting its members and customers
in their implementation of SEPA by developing standards
and providing a set of products and services to
facilitate operation and interoperability across the
industry.
 The Single Euro Payments Area (SEPA) is the area
where citizens, companies and other economic players
will be able to make and receive payments in euros
(whether between or within national boundaries) under
the same basic conditions, rights and obligations,
regardless of their location.
 Every citizen, merchant, public administration and
corporation with a banking relationship in the euro-area
ultimately will be impacted by SEPA, as will everyone in
the payments supply chain.
3) The ability to create new revenue streams: as
commoditization continues, one way you can distinguish
yourself in the market is through superior customer
service. SWIFT supports this with solutions like
Exceptions and Investigations and Workers’
Remittances.
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4) Globalization of the supply chain: you need cross
border payments and trade finance solutions. SWIFT
offers both, including the industry-leading Trade Service
Utility.
What can I do with my SWIFT
connection?
a) For payments
 Bulk Payments
Harmonizing bulk payment practices across communities
 Cash Reporting
Supporting your real-time account information needs
 Exceptions and Investigations
Making investigations pay
 Workers' Remittances
Fast, efficient, and cost-effective clearing and settlement
of person-to-person payments
b) For treasury
 Accord
Enabling real-time matching and exception handling for
foreign exchange, money market and derivative
confirmations.
 Affirmations
Providing a cost-effective way of enhancing STP across
the treasury and derivative markets.
 Swift's CLS Third Party Service
Providing a global FX settlement solution for non-CLS
members
Cont.. STP
Straight Through Processing (STP)
"The processing of a trade, whose data
is compliant with internal and external
requirements, through systems from
post-execution through settlement
without manual intervention".
c) For trade
 Trade Services Utility
Helping banks meet the supply chain challenge
Automated teller machine
 An automated teller machine (ATM) is a computerized
telecommunications device that provides the customers
of a financial institution with access to financial
transactions in a public space without the need for a
human clerk or bank teller.
 On most modern ATMs, the customer is identified by
inserting a plastic ATM card with a magnetic stripe or a
plastic smartcard with a chip, that contains a unique card
number and some security information, such as an
expiration date or CVVC (CVV). Security is provided by
the customer entering a personal identification number
(PIN).
 ATMs rely on authorization of a financial transaction by
the card issuer or other authorizing institution via the
communications network.
 This is often performed through an ISO 8583 messaging
system.
An ATM is typically made up of the
following devices:
http://money.howstuffworks.com/personalfinance/banking/atm.htm
a) Hardware
 CPU (to control the user interface and transaction
devices)
 Magnetic and/or Chip card reader (to identify the
customer)
 PIN Pad (similar in layout to a Touch tone or Calculator
keypad), often manufactured as part of a secure
enclosure.
 Secure crypto processor, generally within a secure
enclosure.
 Display (used by the customer for performing the
transaction)
 Function key buttons (usually close to the display) or a
Touch screen (used to select the various aspects of the
transaction)
 Record Printer (to provide the customer with a record of
their transaction)
 Vault (to store the parts of the machinery requiring
restricted access)
b) Software
Financial networks
in ATMs
 Most ATMs are connected to inter bank networks,
enabling people to withdraw and deposit money from
machines not belonging to the bank where they have
their account or in the country where their accounts are
held (enabling cash withdrawals in local currency).
 Some examples of inter bank networks include PULSE,
PLUS, Cirrus, Interac, Inters witch, STAR (inter bank
network), and LINK.
 Cirrus is a worldwide inter bank network operated by
MasterCard Worldwide, and was founded in 1986. It
links MasterCard, Maestro, Diners Club credit, debit and
prepaid cards to a network of over 1,000,000 ATMs in 93
countries
 Pulse is an inter bank electronic funds transfer (EFT)
network in the United States
 PLUS (also known as Visa PLUS) is an inter bank
network that covers all VISA credit, debit, and prepaid
cards, as well as ATM cards issued by various banks
worldwide. Currently, there are one million PLUS-linked
ATMs in 170 countries worldwide
Growth in Internet Banking
 Some of the market factors that may drive a bank’s
strategy include the following:
 1) Competition — Studies show that competitive
pressure is the chief driving force behind increasing use
of Internet banking technology, ranking ahead of cost
reduction and revenue enhancement, in second and
third place respectively.
 Banks see Internet banking as a way to keep existing
customers and attract new ones to the bank.
 2) Cost Efficiencies — National banks can deliver
banking services on the Internet at transaction costs far
lower than traditional brick-and-mortar branches.
 The actual costs to execute a transaction will vary
depending on the delivery channel used.
 For example, according to Booz, Allen & Hamilton, as of
mid- 1999, the cost to deliver manual transactions at a
branch was typically more than a dollar, ATM and call
center transactions cost about 25 cents, and Internet
transactions cost about a penny.
 These costs are expected to continue to decline.
 3) Geographical Reach — Internet banking allows
expanded customer contact through increased
geographical reach and lower cost delivery channels.
 In fact some banks are doing business exclusively via
the Internet — they do not have traditional banking
offices and only reach their customers online.
 Other financial institutions are using the Internet as an
alternative delivery channel to reach existing customers
and attract new customers.
 4) Branding — Relationship building is a strategic priority
for many national banks. Internet banking technology
and products can provide a means for national banks to
develop and maintain an ongoing relationship with their
customers by offering easy access to a broad array of
products and services.
 5) Customer Demographics — Internet banking allows
national banks to offer a wide array of options to their
banking customers.
 Some customers will rely on traditional branches to
conduct their banking business. For many, this is the
most comfortable way for them to transact their banking
business.
 Those customers place a premium on person-to-person
contact. Other customers are early adopters of new
technologies that arrive in the marketplace.
 The demographics of banking customers will continue to
change.
 The challenge to national banks is to understand their
customer base and find the right mix of delivery channels
to deliver products and services profitably to their various
market segments.
Types of Internet Banking
 1) Informational — This is the basic level of Internet
banking. Typically, the bank has marketing information
about the bank’s products and services on a stand-alone
server.
 The risk is relatively low, as informational systems
typically have no path between the server and the bank’s
internal network.
 This level of Internet banking can be provided by the
bank or outsourced. While the risk to a bank is relatively
low, the server or Web site may be vulnerable to
alteration.
 Appropriate controls therefore must be in place to
prevent unauthorized alterations to the bank’s server or
Web site.
 2) Communicative — This type of Internet banking
system allows some interaction between the bank’s
systems and the customer.
 The interaction may be limited to electronic mail, account
inquiry, loan applications, or static file updates (name
and address changes).
 Because these servers may have a path to the bank’s
internal networks, the risk is higher with this
configuration than with informational systems.
 Appropriate controls need to be in place to prevent,
monitor, and alert management of any unauthorized
attempt to access the bank’s internal networks and
computer systems.
 Virus controls also become much more critical in this
environment.
 3) Transactional — This level of Internet banking allows
customers to execute transactions.
 Since a path typically exists between the server and the
bank’s or outsourcer’s internal network, this is the
highest risk architecture and must have the strongest
controls.
 Customer transactions can include accessing accounts,
paying bills, transferring funds, etc.
Convenience or inconvenience banking
 Risk : it is the possibility that an intruder may be
successful in attempting to access your local area
network.
 Threat : threat is posed when anyone with the motivation
, attempts to gain unauthorized access to a network or
anyone has authorized access to your network.
Internet Banking Risks
 1) Credit Risk
 Credit risk is the risk to earnings or capital arising from
an obligor’s failure to meet the terms of any contract with
the bank or otherwise to perform as agreed.
 Credit risk is found in all activities where success
depends on counterparty, issuer, or borrower
performance.
 It arises any time bank funds are extended, committed,
invested, or otherwise exposed through actual or implied
contractual agreements, whether on or off the banks
balance sheet.
 Internet banking provides the opportunity for banks to
expand their geographic range.
 Customers can reach a given institution from literally
anywhere in the world.
 In dealing with customers over the Internet, absent any
personal contact, it is challenging for institutions to verify
the bonafides of their customers, which is an important
element in making sound credit decisions.
 Verifying collateral and perfecting security agreements
also can be challenging with out-of-area borrowers.
 Unless properly managed, Internet banking could lead
to a concentration in out-of-area credits or credits within
a single industry.
 Moreover, the question of which state’s or country’s laws
control an Internet relationship is still developing.
 2) Interest Rate Risk
 Interest rate risk is the risk to earnings or capital arising
from movements in interest rates.
 From an economic perspective, a bank focuses on the
sensitivity of the value of its assets, liabilities and
revenues to changes in interest rates.
 Evaluation of interest rate risk must consider the impact
of complex, illiquid hedging strategies or products, and
also the potential impact that changes in interest rates
will have on fee income.
 3) Liquidity Risk
 Liquidity risk is the risk to earnings or capital arising from
a bank’s inability to meet its obligations when they come
due, without incurring unacceptable losses.
 Liquidity risk includes the inability to manage unplanned
changes in funding sources.
 Liquidity risk also arises from the failure to recognize or
address changes in market conditions affecting the
ability of the bank to liquidate assets quickly and with
minimal loss in value.
 Internet banking can increase deposit volatility from
customers who maintain accounts solely on the basis of
rate or terms. Increased monitoring of liquidity and
changes in deposits and loans may be warranted
depending on the volume and nature of Internet account
activities.
 4) Price Risk
 Price risk is the risk to earnings or capital arising from
changes in the value of traded portfolios of financial
instruments. This risk arises from market making,
dealing, and position taking in interest rate, foreign
exchange, equity, and commodities markets.
 Banks may be exposed to price risk if they create or
expand deposit brokering, loan sales, or securitization
programs as a result of Internet banking activities.
 Appropriate management systems should be maintained
to monitor, measure, and manage price risk if assets are
actively traded.
 5) Foreign Exchange Risk
 Foreign exchange risk is present when a loan or portfolio
of loans is denominated in a foreign currency or is
funded by borrowings in another currency.
 In some cases, banks will enter into multi-currency
credit commitments that permit borrowers to select the
currency they prefer to use in each rollover period.
 Foreign exchange risk can be intensified by political,
social, or economic developments.
 The consequences can be unfavorable if one of the
currencies involved becomes subject to stringent
exchange controls or is subject to wide exchange-rate
fluctuations.
 Banks may be exposed to foreign exchange risk if they
accept deposits from non-U.S. residents or create
accounts denominated in currencies other than U.S.
dollars. Appropriate systems should be developed if
banks engage in these activities.
 6)Transaction Risk
 Transaction risk is the current and prospective risk to
earnings and capital arising from fraud, error, and the
inability to deliver products or services, maintain a
competitive position, and manage information.
 A high level of transaction risk may exist with Internet
banking products, particularly if those lines of business
are not adequately planned, implemented, and
monitored Banks that offer financial products and
services through the Internet must be able to meet their
customers’ expectations
 Banks must also ensure they have the right product mix
and capacity to deliver accurate, timely, and reliable
services to develop a high level of confidence in their
brand name.
 Customers who do business over the Internet are likely
to have little tolerance for errors or omissions from
financial institutions that do not have sophisticated
internal controls to manage their Internet banking
business.
 Likewise, customers will expect continuous availability of
the product and Web pages that are easy to navigate.
 7) Compliance Risk
 Compliance risk is the risk to earnings or capital arising
from violations of, or nonconformance with, laws, rules,
regulations, prescribed practices, or ethical standards.
 Compliance risk also arises in situations where the laws
or rules governing certain bank products or activities of
the bank’s clients may be ambiguous or untested.
 Compliance risk exposes the institution to fines, civil
money penalties, payment of damages, and the voiding
of contracts.
 Compliance risk can lead to a diminished reputation,
reduced franchise value, limited business opportunities,
reduced expansion potential, and lack of contract
enforceability.
 Most Internet banking customers will continue to use
other bank delivery channels.
 Accordingly, national banks will need to make certain
that their disclosures on Internet banking channels,
including Web sites, remain synchronized with other
delivery channels to ensure the delivery of a consistent
and accurate message to customers.
 8) Strategic Risk
 Strategic risk is the current and prospective impact on
earnings or capital arising from adverse business
decisions, improper implementation of decisions, or lack
of responsiveness to industry changes.
 This risk is a function of the compatibility of an
organization’s strategic goals, the business strategies
developed to achieve those goals, the resources
deployed against these goals, and the quality of
implementation.
 The resources needed to carry out business strategies
are both tangible and intangible.
 The organization’s internal characteristics must be
evaluated against the impact of economic, technological,
competitive, regulatory, and other environmental
changes.
 Management must understand the risks associated with
Internet banking before they make a decision to develop
a particular class of business.
 In some cases, banks may offer new products and
services via the Internet.
 It is important that management understand the risks
and ramifications of these decisions.
 Sufficient levels of technology and MIS are necessary to
support such a business venture.
 Because many banks will compete with financial
institutions beyond their existing trade area, those
engaging in Internet banking must have a strong link
between the technology employed and the bank’s
strategic planning process.
 Before introducing a Internet banking product,
management should consider whether the product and
technology are consistent with tangible business
objectives in the bank’s strategic plan.
 The bank also should consider whether adequate
expertise and resources are available to identify, monitor,
and control risk in the Internet banking business.
 The planning and decision making process should focus
on how a specific business need is met by the Internet
banking product, rather than focusing on the product as
an independent objective.
 9) Reputation Risk
 Reputation risk is the current and prospective impact on
earnings and capital arising from negative public opinion.
 This affects the institution’s ability to establish new
relationships or services or continue servicing existing
relationships.
 This risk may expose the institution to litigation, financial
loss, or a decline in its customer base.
 Reputation risk exposure is present throughout the
organization and includes the responsibility to exercise
an abundance of caution in dealing with customers and
the community.
 A bank’s reputation can suffer if it fails to deliver on
marketing claims or to provide accurate, timely services.
 This can include failing to adequately meet customer
credit needs, providing unreliable or inefficient delivery
systems, untimely responses to customer inquiries, or
violations of customer privacy expectations.
Risk Management
1)
 The risk planning process is the responsibility of the
board and senior management.
 They need to possess the knowledge and skills to
manage the bank’s use of Internet banking technology
and technology-related risks.
 The board should review, approve, and monitor Internet
banking technology-related projects that may have a
significant impact on the bank’s risk profile.
 They should determine whether the technology and
products are in line with the bank’s strategic goals and
meet a need in their market.
 Senior management should have the skills to evaluate
the technology employed and risks assumed.
 Periodic independent evaluations of the Internet banking
technology and products by auditors or consultants can
help the board and senior management fulfill their
responsibilities
2)
 Implementing the technology is the responsibility of
management.
 Management should have the skills to effectively
evaluate Internet banking technologies and products,
select the right mix for the bank, and see that they are
installed appropriately.
 If the bank does not have the expertise to fulfill this
responsibility internally, it should consider contracting
with a vendor who specializes in this type of business or
engaging in an alliance with another provider with
complementary technologies or expertise.
3)
 Measuring and monitoring risk is the responsibility of
management.
 Management should have the skills to effectively
identify, measure, monitor, and control risks associated
with Internet banking.
 The board should receive regular reports on the
technologies employed, the risks assumed, and how
those risks are managed.
 Monitoring system performance is a key success factor.
 As part of the design process, a national bank should
include effective quality assurance and audit processes
in its Internet banking system.
Internal Controls
 Consistency of technology planning and strategic goals,
including efficiency and economy of operations and
compliance with corporate policies and legal
requirements.
 Data availability, including business recovery planning.
 Data integrity, including providing for the safeguarding of
assets, proper authorization of transactions, and
reliability of the process and output.
 Data confidentiality and privacy safeguards.
 Reliability of MIS.
The three control categories can be found
in the basic internal controls discussed
above.
 Preventive Controls — Prevent something (often an error
or illegal act) from happening. An example of this type of
control is logical access control software that would allow
only authorized persons to access a network using a
combination of a user ID and password.
 Detective Controls — Identify an action that has
occurred. An example would be intrusion detection
software that triggers an alert or alarm.
 Corrective Controls — Correct a situation once it has
been detected. An example would be software backups
that could be used to recover a corrupted file or
database.
 Examples of these controls could include:
 Monitoring transaction activity to look for anomalies in
transaction types, transaction volumes, transaction
values, and time-of-day presentment.
 Monitoring log-on violations or attempts to identify
patterns of suspect activity including unusual requests,
unusual timing, or unusual formats.
 Using trap and trace techniques to identify the source of
the request and match these against known customers.
 Regular reporting and review of unusual transactions will
help identify:
 Intrusions by unauthorized parties.
 Customer input errors.
 Opportunities for customer education.
Issues in Internet Banking
 1) Security is an issue in Internet banking systems.
 Some national banks allow for direct dial-in access to
their systems over a private network while others provide
network access through the Internet.
 Although the publicly accessible Internet generally may
be less secure, both types of connections are vulnerable
to interception and alteration.
 2) Authentication is another issue in a Internet banking
system.
 Transactions on the Internet or any other
telecommunication network must be secure to achieve a
high level of public confidence.
 In cyberspace, as in the physical world, customers,
banks, and merchants need assurances that they will
receive the service as ordered or the merchandise as
requested, and that they know the identity of the person
they are dealing with.
 3) Trust is another issue in Internet banking systems.
 As noted in the previous discussion, public and private
key cryptographic systems can be used to secure
information and authenticate parties in transactions in
cyberspace.
 A trusted third party is a necessary part of the process.
That third party is the certificate authority.
 4) Nonrepudiation is the undeniable proof of
participation by both the sender and receiver in a
transaction.
 It is the reason public key encryption was developed,
i.e., to authenticate electronic messages and prevent
denial or repudiation by the sender or receiver.
 5) Privacy is a consumer issue of increasing
importance.
 National banks that recognize and respond to privacy
issues in a proactive way make this a positive attribute
for the bank and a benefit for its customers.
 6) Availability is another component in maintaining a
high level of public confidence in a network environment.
 All of the previous components are of little value if the
network is not available and convenient to customers.
 Users of a network expect access to systems 24 hours
per day, seven days a week.
Significance of computerization in banks
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Any time banking
Anywhere banking
Home banking
Corporate banking
Mobile banking
Mobile payment
Security
 Technology
Finance portals for the banking industry
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User interface
Contents and services
Backend transactions
Enabling functions
Constraints in e banking
 Start up cost
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Initial cost
Connection cost of internet
Cost of hardware and software
Cost of setting up organizational activities
Training and maintenance
Lack of skilled personnel
Restricted clientele and technical problem
Security
Controls
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Authenticity control
Accuracy control
Completeness control
Redundancy control
Privacy control
Firewall control
Encryption control
Legal issues in e banking
 Considering the legal position prevalent, there is an
obligation on the part of banks not only to establish the
identity but also to make enquiries about integrity and
reputation of the prospective customer.
 Therefore, even though request for opening account can
be accepted over Internet, accounts should be opened
only after proper introduction and physical verification of
the identity of the customer.
 From a legal perspective, security procedure adopted by
banks for authenticating users needs to be recognized
by law as a substitute for signature.
 Under the present regime there is an obligation on banks
to maintain secrecy and confidentiality of customers‘
accounts. In the Internet banking scenario, the risk of
banks not meeting the above obligation is high on
account of several factors.
 ss
 Despite all reasonable precautions, banks may be
exposed to enhanced risk of liability to customers on
account of breach of secrecy, denial of service etc.,
because of hacking/ other technological failures.
 The banks should, therefore, institute adequate risk
control measures to manage such risks.
 In Internet banking scenario there is very little scope for
the banks to act on stop-payment instructions from the
customers. Hence, banks should clearly notify to the
customers the timeframe and the circumstances in which
any stop-payment instructions could be accepted.
 The Consumer Protection Act, 1986 defines the rights of
consumers in India and is applicable to banking services
as well.
 Currently, the rights and liabilities of customers availing
of Internet banking services are being determined by
bilateral agreements between the banks and customers.
 Considering the banking practice and rights enjoyed by
customers in traditional banking, banks’ liability to the
customers on account of unauthorized transfer through
hacking, denial of service on account of technological
failure etc. needs to be assessed and banks providing
Internet banking should insure themselves against such
risks
Regulatory and Supervisory Issues

As recommended by the Group, the existing regulatory
framework over banks will be extended to Internet
banking also. In this regard, it is advised that:
 Only such banks which are licensed and supervised in
India and have a physical presence in India will be
permitted to offer Internet banking products to residents
of India.
 Thus, both banks and virtual banks incorporated outside
the country and having no physical presence in India will
not, for the present, be permitted to offer Internet
banking services to Indian residents.
 The products should be restricted to account holders
only and should not be offered in other jurisdictions.
 The services should only include local currency
products.
 The ‘in-out’ scenario where customers in cross border
jurisdictions are offered banking services by Indian
banks (or branches of foreign banks in India) and the
‘out-in’ scenario where Indian residents are offered
banking services by banks operating in cross-border
jurisdictions are generally not permitted and this
approach will apply to Internet banking also.
 The existing exceptions for limited purposes under
FEMA i.e. where resident Indians have been permitted to
continue to maintain their accounts with overseas banks
etc., will, however, be permitted.
 Overseas branches of Indian banks will be permitted to
offer Internet banking services to their overseas
customers subject to their satisfying, in addition to the
host supervisor, the home supervisor.
Evolution of Payment Systems in India
 Payment instruments and mechanisms have a very long
history in India.
 The earliest payment instruments known to have been
used in India were coins, which were either punchmarked or cast in silver and copper.
 While coins represented a physical equivalent, credit
systems involving bills of exchange facilitated interspatial transfers.
 Another instrument in use during the Muslim period was
the Pay order.
 Pay orders were issued from the Royal Treasury on
one of the District or Provincial treasuries.
 They were called Barattes and were akin to present day
drafts or cheques
 The most important class of credit Instruments that
evolved in India were termed Hundis.
 Their use was most widespread in the twelfth century,
and has continued till today.
 In a sense, they represent the oldest surviving form of
credit instrument. Hundis were used :
 * as remittance instruments (to transfer funds from one
place to another)
 * as credit instruments (to borrow money [IOUs])
 * for trade transactions (as bills of exchange)
 Paper money, in the modern sense, has its origin in the
late 18th century with the note issues of private banks as
well as semi-government banks.
 Amongst the earliest issues were those by the Bank of
Hindoostan, the General Bank in Bengal and Behar, and
the Bengal Bank.
 Later, with the establishment of three Presidency Banks,
the job of issuing notes was taken over by them.
 Each Presidency Bank had the right to issue notes within
certain limits The private banks and the Presidency
Banks introduced other payment instruments in the
Indian money market. Cheques were introduced by the
Bank of Hindoostan, the first joint stock bank established
in 1770.
Payment Instruments in India
 The NI Act, 1881, defines a Negotiable Instrument as a
promissory note, Bill of Exchange or cheque.
 A Bill of Exchange is an instrument in writing containing
an unconditional order, signed by the maker, directing a
certain person to pay a certain sum of money only to, or
to the order of, a certain person or to the bearer of the
instrument.
 A Hundi is a Bill of Exchange in an Indian language,
governed by customs and local usage. The NI Act,
however, does not govern Hundis.
 A Bill of Exchange may therefore, include a Hundi, but
Hundi may not be a Bill of Exchange.
 A cheque is a Bill of Exchange drawn on a specified
banker and not expressed to be payable otherwise than
on demand.
 The maker of a cheque is called the 'drawer', and the
person directed to pay is the 'drawee'.
 The person named in the instrument, to whom or to
whose order the money is, by the instrument directed, to
be paid, is called the 'payee'.
 A cheque is a Negotiable Instrument, which can be
further negotiated by means of endorsement and is
payable on demand.
 The Demand Draft is a pre-paid Negotiable Instrument,
wherein the drawee bank undertakes to make payment
in full when the instrument is presented by the payee for
payment.
 The demand draft is made payable on a specified branch
of a bank at a specified centre. In order to obtain
payment, the beneficiary has to either present the
instrument directly to the branch concerned or have it
collected by his / her bank through the clearing
mechanism.
In essence, the payment systems are
required for the following purposes:
 1. For protecting key existing assets of the banking
system:
 2. For strengthening the customer base:
 3: For Reducing existing costs and generating new
income:
Institutional Arrangements
Clearing Process:
 The clearing process begins with the deposit of a cheque
in a bank. The cheque (along with other cheques) is
delivered to the bank/branch where it is drawn.
 The cheque is passed for payment if the funds are
available and the banker is satisfied about the
genuineness of the instrument.
 The cheques that are unpaid are returned to the
presenting bank through another clearing called the
Return Clearing.
 The realization of the funds occurs after the completion
of return clearing and by the absence of an unpaid
cheque.
Settlement of Funds:
 The settlement of funds in clearing occurs at several
levels. The aggregate amount or value of cheques
presented by a bank on other banks represents the claim
by that bank on other banks.
 Similar claims are made by all the banks on every other
bank in the clearing. A net settlement is arrived at the
clearing house and the debit or credit position of the
bank is determined.
 These are booked in their current accounts maintained
by the settling bank. This represents the inter- bank
settlement.
 The settlement of funds between the service branch and
the branch concerned represents the transfer of funds to
the branch level.
 The payment process is completed only when the funds
are debited from the drawer's account and credited to
the payee's account. This occurs after the completion of
the return clearing mentioned earlier.
Return Clearing
 Realization of a cheque i.e. payment occurs after the
cheque that is returned unpaid takes place in this
clearing.
 The aggregate of all items unpaid is debited to the
original presenting bank and credited to the drawee
bank.
 The same process is mirrored in the inter-branch
settlement at the service branch of a bank.
 The credit given to the payee on account of the cheque
is reversed.
Inter-branch clearing
 Cheques presented by customers drawn on different
branches of the same bank need not be sent to the
clearing house as the transfer of funds is internal to the
bank.
 The service branch usually acts as a settlement branch
for the branches and the instruments are sent to the
drawee branches while the inter-branch accounts are
credited or debited internally
Notational Money
 While notes are considerably more convenient than gold
coins, they are still difficult to exchange in large
amounts, and transport or store securely.
 Currently, most money consists not of pieces of paper
currency, but rather of notations in the ledgers of
depository institutions such as banks.
 We refer to this as notational money to distinguish it from
token money or currency.
 Exchanges based on notational money require the
debiting of one party's account and the crediting of
another party's account.
 Today, the amount of money which exists solely in the
records of depository institutions vastly exceeds the
value of currency in circulation
 A variety of instruments are used to instruct a bank to
transfer notational money between accounts; the most
common is a check.
 A complex system involving the Federal Reserve as a
clearinghouse supports check clearing when accounts
are held at different banks.
 Institutions accepting demand deposits are required by
law to be prepared to convert these notational deposits
into currency on demand, thus providing convertibility
between demand deposits and currency.
 In the last several decades, instructions to transfer
notational money between accounts are increasingly
sent electronically: wire transfers, ATM transactions, or
more generally, Electronic Funds Transfer.
 Notational and token currency are boundary conditions.
For example, cashiers checks are notational money, but
they share some of the properties of token money.
 There are also interfaces between the two: ATM
machines and bank tellers exchange notational currency
for token currency.
Cash: Physical Token Money
Checks: Physical Transfers of
Notational Money
Credit and Debit Cards: Electronic
Transfers of Notational Currency
Digicash: Electronic Token Money
Payment methods
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Cash
EFT
ATMs
Plastic money – Debit cards, credit cards & smart cards
ECS – credit and debit clearing
Electronic Cash (Ecash)
 An anonymous electronic cash system; equivalent to
"cash" or "printed bank notes" except that it is transferred
through networks with bits of information, in essence it is
just another representation of monetary value; anonymity
is preserved through public key cryptography, digital
signatures, and blind signatures.
Electronic Cash Payment Systems
 A short list of providers:
 Pay Pal - A U.S.-based system that allows individuals in
the United States to send money to each other via email.
 First-E - A European, Internet-only bank.
 Mondex - Electronic cash that is made available via
"smart card."
 eCash (formerly Digi Cash) - One of the early developers
of electronic payment systems.
How it is used:
 Ecash is used over the Internet, email, or personal
computer to other workstations in the form of secured
payments of "cash" that is virtually untraceable to the
user. It is backed by real currency from real banks.
 The way ecash works is similar to that of electronic fund
transfers done between banks. The user first must have
an ecash software program and an ecash bank account
from which ecash can be withdrawn or deposited.
 The user withdraws the ecash from the account onto her
computer and spends it in the Internet without being
traced or having personal information available to other
parties that are involved in the process. The recipients of
the ecash send the money to their bank account as with
depositing "real" cash.
Example- What is Mondex®?
 Mondex, part of the MasterCard Worldwide suite of
smart card products, enables cardholders to carry, store
and spend cash value using a payment card. It is faster
than handling conventional currency, and in many cases
safer. It behaves exactly like cash, offering immediate
transfer of value while requiring no signature, PIN or
transaction authorization. The unique Mondex platform
allows its use in multiple channels where cash cannot be
used including:
 Internet
 Mobile phones
 Interactive television
How it Works

Mondex stores value as electronic
information on a microchip, rather than as
physical notes and coins. Value is
exchanged securely from the chip on the
card to a chip in a terminal/card reader.
Key Benefits
 Security - Above all, Mondex is a safe way to carry money. A lock
function, available on the card with a Mondex device, enables the
cardholder to prevent unauthorized access. The code is chosen by
the cardholder, and it can be changed at any time.
 Convenience - Mondex offers cardholders a quick and easy method
of payment. There is no need to fumble for change or search for a
pen, no need to wait for authorization, no need even to go to a bank
or ATM.
 Flexibility - Mondex cash can be used for purchases of any size,
from a chocolate bar to a suit of clothes. Technically, there is no
practical limit to the amount of cash which could be held in and
transferred from a Mondex card, but there will be limits set within
each country consistent with local regulation and market demand.
 Control - With Mondex, cardholders can only spend what is on their
card, so there is no risk of going into debt. The 'purse' keeps an upto-the-minute record of the amounts and places of expenditure.
EFT
 EFT is short for Electronic Funds Transfer.
 An EFT is a method of transferring money from one
bank account directly to another account without
any paper money actually changing hands. The two
accounts do not have to be in the same bank.
 One of the most common EFT programs that are
used is Direct Deposit. This program allows an
employee’s paycheck to be directly deposited into their
bank account.
 However, EFT is more than simply direct deposit. EFT
refers to any direct transfer of funds that are initiated
through any terminal, such as credit card, ATM, Fed
wire, and point of sale (POS) transactions.
 It is used for both credit transfers, such as a payroll
payment, and for debit transfers, such as a mortgage
or credit card payment.
ATM
Applications of ATM
Plastic money
 Plastic money are the alternative to the cash or the
standard 'money'. Plastic money is used to refer to the
credit cards or the debit cards that we use to make
purchases in our everyday life.
 Be it credit cards, debit cards, add-on cards, charge
cards, co-branded cards, affinity cards or Diners Club
cards. More and more Indians are using them as a
convenient mode of payment.
 What is a credit card?
 A credit card is plastic money that is used to pay for
products and services at over 20 million locations around
the world. All you need to do is produce the card and
sign a charge slip to pay for your purchases. The
institution which issues the card makes the payment to
the outlet on your behalf; you will pay this 'loan' back to
the institution at a later date.
 What is a debit card?
 Debit cards are substitutes for cash or check payments,
much the same way that credit cards are. However,
banks only issue them to you if you hold an account with
them. When a debit card is used to make a payment, the
total amount charged is instantly reduced from your bank
balance.
 What is a charge card?
 A charge card carries all the features of credit cards.
However, after using a charge card you will have to pay
off the entire amount billed, by the due date. If you fail to
do so, you are likely to be considered a defaulter and will
usually have to pay up a steep late payment charge.
 When you use a credit card you are not declared a
defaulter even if you miss your due date. A 2.95 per cent
late payment fees (this differs from one bank to another)
is levied in your next billing statement.
 What is an Amex card?
 Amex stands for American Express and is one of the
well-known charge cards. This card has its own
merchant establishment tie-ups and does not depend on
the network of MasterCard or Visa.
 This card is typically meant for high-income group
categories and companies and may not be acceptable at
many outlets. There are a wide variety of special
privileges offered to Amex cardholders.
 What are MasterCard and Visa?
 MasterCard and Visa are global non-profit organizations
dedicated to promote the growth of the card business
across the world. They have built a vast network of
merchant establishments so that customers world-wide
may use their respective credit cards to make various
purchases.
 What is a smart card?
 A smart card contains an electronic chip which is used to
store cash. This is most useful when you have to pay for
small purchases, for example bus fares and coffee. No
identification, signature or payment authorization is
required for using this card.
 The exact amount of purchase is deducted from the
smart card during payment and is collected by smart
card reading machines. No change is given. Currently
this product is available only in very developed countries
like the United States and is being used only sporadically
in India.
 What is the Diners Club card?
 Diners Club is a branded charge card. There are a wide
variety of special privileges offered to the Diners Club
cardholder. For instance, as a cardholder you can set
your own spending limit. Besides, the card has its own
merchant establishment tie-ups and does not depend on
the network of MasterCard or Visa.
 However, since this card is typically meant for highincome group categories, it may not be acceptable at
many outlets. It would be a good idea to check whether a
member establishment does accept the card or not in
advance.
 What is a co-branded card?
 Co-branded cards are credit cards issued by card
companies that have tied up with a popular brand for the
purpose of offering certain exclusive benefits to the
consumer.
 For example, the Citi-Times card gives you all the
benefits of a Citibank credit card along with a special
discount on Times Music cassettes, free entry to Times
Music events, etc.
 What is an affinity card?
 The card issuer ties up with popular organizations/
institutions which are often non-profit organizations (CitiWWF card or the Stanchart-Cricket cards) to offer an
affinity card. When the card is used, a certain
percentage is contributed to the organization /institution
by the card issuer.
 What is an add-on card?
 An add-on card allows you to apply for an additional
credit card within the overall credit limit.
 You can apply for this card in the name of family
members like your father/ mother/ spouse/ brother/
sister/ all children above 18 years of age.
 Your billing statement would reflect the details of
purchases made using the add-on card.
 You are liable to make good all the payments for the
purchases made using the add-on card's).
What is Electronic Clearing Service
(ECS)?
 It is a mode of electronic funds transfer from one bank
account to another bank account using the services of a
Clearing House.
 This is normally for bulk transfers from one account to
many accounts or vice versa.
 This can be used both for making payments like
distribution of dividend, interest, salary, pension, etc. by
institutions or for collection of amounts for purposes such
as payments to utility companies like telephone,
electricity, or charges such as house tax, water tax, etc
or for loan installments of financial institutions/banks or
regular investments of persons.
Types of ECS
 ECS (Credit) is used for affording credit to a large
number of beneficiaries by raising a single debit to an
account, such as dividend, interest or salary payment.
 ECS (Debit) is used for raising debits to a number of
accounts of consumers/ account holders for crediting a
particular institution
Working of ECS Credit System
Who can initiate an ECS (Credit)
transaction?
 ECS payments can be initiated by any institution (called
ECS user) who have to make bulk or repetitive payments
to a number of beneficiaries.
 They can initiate the transactions after registering
themselves with an approved clearing house.
 ECS users have also to obtain the consent as also the
account particulars of the beneficiary for participating the
ECS clearings.
 The ECS user's bank is called as the sponsor bank
under the scheme and the ECS beneficiary account
holder is called the destination account holder. The
destination account holder's bank or the beneficiary's
bank is called the destination bank.
How does the ECS Credit system
work?
 The ECS users intending to effect payments have to
submit the data in a specified format to one of the
approved clearing houses. The list of the approved
clearing houses or the list of centre where the ECS
facility has been provided is available at www.rbi.org.in.
 The clearing house would debit the account of the ECS
user through the account of the sponsor bank on the
appointed day and credit the accounts of the recipient
banks, for affording onward credit to the accounts of the
ultimate beneficiaries.
What are the advantages to the
ultimate beneficiary?
 The end beneficiary need not make frequent visits to his
bank for depositing the physical paper instruments.
 He need not apprehend loss of instrument and
fraudulent encashment.
 The delay in realization of proceeds after receipt of
paper instrument.
How does the scheme benefit the ECS
user-like corporate bodies/
institutions?
 The ECS user saves on administrative machinery for
printing, dispatch and reconciliation.
 Avoids chances of loss of instruments in postal transit.
 Avoids chances of frauds due to fraudulent access to the
paper instruments and encashment.
 Ability to make payment and ensure that the
beneficiaries' account gets credited on a designated
date.
What are the advantages to the banks?
 Banks handling ECS get freed of paper handling.
 Paper handling also creates lot of pressure on banks as
they have to encode the instruments, present them in
clearing, monitor their return and follow up with the
concerned bank and customers.
 In ECS banks simply get the payment particulars relating
to their customers. All they need to do is to match the
account particulars like name, a/c number and credit the
proceeds
 Wherever the details do not match, they have to return it
back, as per the procedure
How can the customer track-down
these payments?
 Banks have been advised to ensure that the passbooks/statements given to the customers reflect the
particulars of the transaction provided by the ECS users.
Customers can match these entries with the advice
received by them from the payment institution
What is ECS (Debit) scheme?
 It is a scheme under which an account holder with a
bank can authorize an ECS user to recover an amount at
a prescribed frequency by raising a debit in his account.
 The ECS user has to collect an authorization which is
called ECS mandate for raising such debits. These
mandates have to be endorsed by the bank branch
maintaining the account
How does the scheme work?
 Any ECS user desirous of participating in the scheme
has to register with an approved clearing house.
 The list of approved clearing houses is available at RBI
web-site www.rbi.org.in. He should also collect the
mandate forms from the participating destination account
holders, with bank's acknowledgement.
 A copy of the mandate should be available with the
drawee bank.
 The ECS user has to submit the data in specified form
through the sponsor bank to the clearing house.
 The clearing house would pass on the debit to the
destination account holder through the clearing system
and credit the sponsor bank's account for onward
crediting the ECS user.
 All the unprocessed debits have to be returned to the
sponsor bank within the time frame specified.
 Banks will treat the electronic instructions received
through the clearing system on par with the physical
cheques.
What are the advantages to the
ultimate beneficiary?
 Trouble free- Eliminates the need to go to the collection
centre/banks by the customers and no need to stand in
long ‘Q’s for payment
 Peace of mind- Customers also need not track down
payments by last dates.
 The debits would be monitored by the ECS users.
How does the scheme benefit the ECS
user-like corporate bodies/
institutions?
 The ECS user saves on administrative machinery for
collecting the cheques, monitoring their realization and
reconciliation
 Better cash management.
 Avoids chances of frauds due to fraudulent access to the
paper instruments and encashment.
 realize the payments on a single date instead of
fractured receipt of payments.
What are the advantages to the banks?
 Banks handling ECS get freed of paper handling.
 Paper handling also creates lot of pressure on banks as
they have to encode the instruments, present them in
clearing, monitor their return and follow up with the
concerned bank and customers.
 In ECS banks simply get the mandate particulars relating
to their customers. All they need to do is to match the
account particulars like name, a/c number and debit the
accounts.
 Wherever the details do not match, they have to return it
back, as per the procedure.
Which are the institutions eligible to
participate in the ECS Debit
scheme?
 Utility service providers such as telephone companies,
electricity supplying companies, electricity boards, credit
card collections, collection of loan installments by banks
and financial institutions, and investment schemes of
Mutual funds, etc.
Online & call centre banking
 Online
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To cut cost
Attract new customers
Unprofitable
Marketing personally
 Call centre
 Classification

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
Voice call centre
Email
Web based
Regional
Global call centre
 Benefits
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Customer base
Economical means
Focused attention
Round the clock

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Para banking
Coffee pub banking
E lobby
Mobile vans
Narrow banking
Financial networks in India
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RBI – INFINET
SWADHAN, the shared payment network service
BANKNET
SWIFT
RTGS Concepts and Working of the
RTGS System
 An RTGS payment system is one in which payment
instructions between banks are processed and
settled individually and continuously throughout the
day.
 This is in contrast to net settlement systems (such as
paper-based clearing houses and their more modern
electronic equivalents), where payment instructions are
processed ("cleared") throughout the day but Inter-bank
settlement (i.e. the movement of the funds between the
banks) takes place only afterwards, typically at the end
of the day.
 The attraction of the RTGS systems is that payee banks
and their customers receive funds with certainty, or socalled finality, during the day, enabling them to use the
funds immediately without exposing themselves to risk.
 A lag between the time at which information is made
available to receiving banks and the time at which
settlement takes place may have important risk
implications in large-value funds transfer systems.
 Even in the RTGS environment, where both processing
and final settlement are made in real-time, several
circumstances can be identified in which the treatment of
payment messages or the associated information could
be a source of risk.
 To initiate a funds transfer, the sending bank dispatches
a payment message which is subsequently routed to the
central bank and to the receiving bank as the system
processes and settles the transfer.
 Arrangements for routing payment messages in the
majority of RTGS systems are based on a so-called Vshaped message flow structure.
 In this structure the full message with all the information
about the payment (including, for example, the details of
the beneficiary) is initially passed to the central bank and
is sent to the receiving bank only after the transfer has
been settled by the central bank.
 Some RTGS systems, and particularly those that use the
S.W.I.F.T. network, apply an alternative structure, known
as a Y-shaped structure.
 In this case, the payment message is transmitted by the
sending bank to a central processor.
 The central processor takes a subset of information that
is necessary for settlement from the original message
and routes this core subset to the central bank (the
original message being kept in the central processor).
 Upon receipt of the core subset, the central bank checks
that the sending bank has sufficient covering funds on its
account and informs the central processor of the status
of the transfer, for instance, queued or settled.
 Once settled, the full message containing the
confirmation of settlement is rebuilt by the central
processor and sent to the receiving bank. The business
information exchanged between the sending and
receiving bank is, therefore, not known by the
settlement agent
 A third structure (so far adopted only by CHAPS) is Lshaped structure, which is conceptually similar to a Yshaped structure.
 The payment message dispatched by the sending bank
is held at a system "gateway" attached to the sending
bank's internal processing system and a subset of
information contained in the original message (a
settlement request) is sent to the central bank.
 If the sending bank has sufficient covering funds on its
account, settlement is completed and the central bank
sends back a confirmation message to the sending
bank's gateway.
 Upon receipt of this confirmation (and only then), the
original payment message is released automatically
from the gateway of the sending bank and sent to
the receiving bank.
 These different structures reflect differences in both the
network configuration of the system and the operational
role of the central bank.
 In both the V and Y-shaped structures, all messages
from the sending bank are routed first to a central entity
(S.W.I.F.T., a central processor or the central bank itself)
and, after settlement; all messages to the receiving bank
are sent by that central entity.
 By contrast, there is no central entity for delivering
messages in the L-shaped structure, where message
routing is based on the bilateral exchange of information
between banks, reflecting the decentralized architecture
of the CHAPS system.
 In terms of its operational role in the system, the central
bank is directly involved in both the settlement and
processing of payment messages in the V-shaped
structure, while in the Y and L-shaped structures the
process of message routing can be handled by the
network operator or the banks themselves, with the
central bank only acting as the settlement agent
 These above three types of structure share the
common feature that the receiving bank will receive
the full payment message only after the transaction
has been settled by the central bank. In these
structures, therefore, the message flow structure per
se cannot give rise to the possibility that the
receiving bank will act upon unsettled payments
 Alternatively, RTGS systems could apply a T-shaped
structure, in which the sending bank routes payment
messages directly to the receiving bank (through the
message carrier), with copies (made by the message
carrier) sent simultaneously to the central bank.
 This means that the receiving bank will first receive the
full, unsettled payment message immediately after the
sending bank has dispatched it and will subsequently
also receive a confirmation message from the central
bank once settlement has taken place.
 The T-shaped structure has generally been viewed
as being incompatible with the basic principle of
RTGS that a funds transfer should be passed to a
receiving bank, if and only if, it has been settled
irrevocably and unconditionally by the central bank
 Reserve Bank of India has chosen Y – shaped structure
to meet strategic objectives i.e. possibility to hive-off the
Inter-bank Funds Transfer Processor (IFTP), which strips
and retains the customer-related information and
forwards the payment and settlement particulars to the
RTGS, to an independent industry service provider.
Benefits of RTGS
For the economy
 Reduces systematic risk
 Provides confidence of outside agencies like World Bank
on Indian economy
 It enables efficient settlement and avoids settlement
days
For the banks
 It offers immediate and irrecoverable settlement
 It provides high value intra bank and inter bank fund
transfer
 It provides new opportunities for formulation of
innovative products
For the customers
 It provides sophisticated online banking services
 It offers reliable high value funds transfer
 It improves personal image with beneficiary
How RTGS is different from Electronic Fund Transfer
System (EFT) or National
Electronics Funds Transfer System (NEFT)?
 EFT and NEFT are electronic fund transfer modes that
operate on a deferred net settlement (DNS) basis which
settles transactions in batches. In DNS, the settlement
takes place at a particular point of time.
 All transactions are held up till that time.
 For example, NEFT settlement takes place 6 times a day
during the week days (9.30 am,10.30 am, 12.00 noon.
1.00 pm, 3.00 pm and 4.00 pm) and 3 times during
Saturdays (9.30 am, 10.30 am and 12.00 noon).
 Any transaction initiated after a designated settlement
time would have to wait till the next designated
settlement time. Contrary to this, in RTGS, transactions
are processed continuously throughout the RTGS
business hours.
Is there any minimum / maximum amount stipulation
for RTGS transactions?
 The RTGS system is primarily for large value
transactions. The minimum amount to be remitted
through RTGS is Rs.1 lakh. There is no upper ceiling for
RTGS transactions. No minimum or maximum stipulation
has been fixed for EFT and NEFT transactions
What is the time taken for effecting funds transfer from
one account to another
under RTGS?
 Under normal circumstances the beneficiary branches
are expected to receive the funds in real time as soon as
funds are transferred by the remitting bank. The
beneficiary bank has to credit the beneficiary's account
within two hours of receiving the funds transfer message.
Would the remitting customer receive an
acknowledgement of money credited
to the beneficiary's account?
 The remitting bank receives a message from the
Reserve Bank that money has been credited to the
receiving bank. Based on this the remitting bank can
advise the remitting customer that money has been
delivered to the receiving bank.
 Would the remitting customer get back the money if
it is not credited to the beneficiary's account?
When?
 Yes. It is expected that the receiving bank will credit the
account of the beneficiary instantly. If the money cannot
be credited for any reason, the receiving bank would
have to return the money to the remitting bank within 2
hours. Once the money is received back by the remitting
bank, the original debit entry in the customer's account is
reversed.
Till what time RTGS service window is
available?
 The RTGS service window for customer's transactions is
available from 9.00 hours to 15.00 hours on week days
and from 9.00 hours to 12.00 noon on Saturdays i.e. to
accept the customer transactions for settlement at the
RBI during 9.00 hours to 15.00 hours on week days and
between 9.00 hours and 12.00 noon on Saturday.
 However, the timings between these hours would vary
depending on the customer timings the branches have.
For inter-bank transactions, the service window is
available from 9.00 hours to 17.00 hours on week days
and from 9.00 hours to 14.00 hours on Saturdays.
What is the essential information that the remitting
customer would have to
furnish to a bank for the remittance to be effected?
 The remitting customer has to furnish the following
information to a bank for effecting RTGS remittance:
1. Amount to be remitted
2. His account number which is to be debited
3. Name of the beneficiary bank
4. Name of the beneficiary customer
5. Account number of the beneficiary customer
6. Sender to receiver information, if any
7. The IFSC code of the receiving branch
How much volume and value of transactions are routed
through RTGS on a
typical day?
 On a typical day, RTGS handles about 14000
transactions a day for an approximate value of
Rs.1,50,000 crore.
Pros & Cons and comparison with
other settlement systems
Operating Concept :
 The distinction between Real Time Gross Settlement
(RTGS) systems and deferred (or designated-time) net
settlement systems (DNS) concerns the form and timing
of settlement, not the way that payment messages are
processed or transmitted.
 DNS systems can handle payment messages in real
time but they settle in batches on a net basis at
designated times, which could be during the operating
day or, more typically, at the end of the day.
 RTGS systems, on the other hand, settle payments on a
transaction-by-transaction basis as soon as they are
accepted by the system.
Risk:
 At the designated time, DNS systems settle multiple
payments that have already been accepted by the
system for settlement.
 This causes the system’s participants to be exposed to
financial risks for the period during which settlement is
deferred.
 If not sufficiently controlled, these risks can affect not
only direct counterparties but also other participants,
because one participant’s inability to settle could cause
the positions of other participants to change, opening up
the possibility that they too might fail to meet their altered
obligations.
 RTGS systems, however, do not create credit risk for the
receiving participant because they settle each payment
individually, as soon as it is accepted by the system for
settlement.
 For any payments not accepted, liquidity risks remain, as
well as the possibility of risks being shifted outside the
system.
Intraday Liquidity Requirements:
 RTGS systems can require relatively large amounts of
intraday liquidity because participants need sufficient
liquidity to cover their outgoing payments.
 Liquidity can come from various sources, including
opening balances, or reserve balances at the central
bank, incoming payments and intraday credit (which is
usually provided by the central bank).
 Adequate liquidity, relative to the value and distribution of
payments, makes a smooth flow of payments possible
through such systems, helping to avoid delays to
individual payments and minimizing liquidity risks.
What is the role of RBI in payment
systems?
 The RBI, apart from the role of regulator and supervisor
of payment systems, plays the role of a Settlement Bank
apart from being a catalyst, an operator and a user.
 The RBI has been taking initiatives in introducing new
modes of more efficient and safe means of effecting
payments in the country on a continuous basis.
 The RBI introduced the system of Magnetic Ink
Character Recognition (MICR) based cheque clearing
during late 80's for four metropolitan cities (Mumbai,
New Delhi, Chennai and Kolkata). During mid 90s,
electronic payment systems like ECS and EFT were
introduced. During 2004-05, RTGS was introduced.
 Besides introducing these newer mechanisms or
systems, the RBI has also been constantly ensuring that
the existing systems are upgraded / refined to increase
their efficiency and to meet the requirements of
customers.
 Taking advantage of advancements in technology, the
RBI has brought in additional safety measures in these
systems to make them secure and also to maintain the
integrity of such transactions.
 Besides operating the various components of payments
systems, RBI also participates in these systems as a
user. RBI acts as a service provider and after the system
stabilizes, the responsibility is handed over to other
banks / institutions for further development. RBI also has
the role of regulating and supervising the various
payment systems.
How does RBI regulate payment
systems?
 The Board for regulation and supervision of Payment
and Settlement Systems (BPSS) is a sub-committee of
the Central Board of the RBI and is the highest policy
making body on payment system.
 The Board is assisted by a technical committee called
National Payments Council (NPC) with eminent experts
in the field as members.
 The Board as well as the council are assisted by a newly
created department the Department of Payment and
settlement Systems (DPSS).
 The Board has been entrusted with the responsibility to
authorize, prescribe policies and set standards for all
existing and future payment systems in the country. The
Board also has the powers to determine membership
criteria to these systems and related policies.
Emerging new instruments
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Electronic payment media
Electronic money
Digital money
Smart cards
Pseudo – cash
Digital cheques
International standards on payment
systems
 The Committee on Payment and Settlement Systems
(CPSS) contributes to strengthening the financial market
infrastructure through promoting sound and efficient
payment and settlement systems
 It serves as a forum for central banks to monitor and
analyze developments in domestic payment, settlement
and clearing systems as well as in cross-border and
multicurrency settlement schemes.
 The CPSS undertakes specific studies in the field of
payment and settlement systems at its own discretion or
at the request of the G10 Governors.
 Working groups are set up as required. In recent years
the Committee has developed relationships with other
central banks, particularly those of emerging market
economies, in order to extend its work outside the G10.
Core banking solutions
Core Banking
 Core Banking is normally defined as the business
conducted by a banking institution with its retail and
small business customers.
 Many banks treat the retail customers as their core
banking customers, and have a separate line of business
to manage small businesses.
 Larger businesses are managed via the Corporate
Banking division of the institution. Core banking basically
is depositing and lending of money.
 Normal core banking functions will include deposit
accounts, loans, mortgages and payments. Banks make
these services available across multiple channels like
ATMs, Internet banking, and branches.
Core Banking Solutions
 Core Banking solutions are banking applications on a
platform enabling a phased, strategic approach that lets
people improve operations, reduce costs, and prepare
for growth.
 Implementing a modular, component-based enterprise
solution ensures strong integration with your existing
technologies.
 An overall service-oriented-architecture (SOA) helps
banks reduce the risk that can result from multiple data
entries and out-of-date information, increase
management approval, and avoid the potential disruption
to business caused by replacing entire systems.
 Core Banking Solutions is new jargon frequently used in
banking circles.
 The advancement in technology, especially internet and
information technology has led to new ways of doing
business in banking.
 These technologies have cut down time, working
simultaneously on different issues and increasing
efficiency.
 The platform where communication technology and
information technology are merged to suit core needs of
banking is known as Core Banking Solutions.
 Here computer software is developed to perform core
operations of banking like recording of transactions,
passbook maintenance, interest calculations on loans
and deposits, customer records, balance of payments
and withdrawal are done.
 This software is installed at different branches of bank
and then interconnected by means of communication
lines like telephones, satellite, internet etc.
 It allows the user (customers) to operate accounts from
any branch if it has installed core banking solutions.
 This new platform has changed the way banks are
working.
 Core banking
 Core banking is all about knowing customers' needs.
Provide them with the right products at the right time
through the right channels 24 hours a day, 7 days a
week using technology aspects like Internet, Mobile
ATM.'
 The CBS is an online customer centric transaction
processing system , which provides Central accounting
 Customer information system
 Real time processing of core banking operations
The CBS automates core aspects of
banking operations and enables
 24 hours banking, 7 days a week
 Anytime, anywhere, any mode banking
 Integration of multi service delivery channels- ATMs,
internet, phone and mobile banking.
 Efficiency in operations
 Integration with strategic areas like Trade finance,
treasury, ALM, corporate balance sheet.
 Strengthening of MIS
 Clean and consistent data at one place which can
become input for other information system.
 Change in business processes – value addition to bank
and customers
 The CBS is centralized at Bank – level rather than at
Branch level and is the fundamental platform for all
banking benefits.
To customers:

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Anytime ,anywhere banking
Multiple channel access
Cost reduction in transactions with the bank
A single view of all their accounts
Speedy remittances across the country
A one stop shop for all their banking needs
Entire bank’s service at their disposal
In sum, EMPOWERMENT THROUGH IMPROVED
SERVICE QUALITY
To branches
 Modern communication with customers
 Better lay - out and in - branch facilities
 Reduced back office work – quality time for business
development
 Daily snapshots of operations
In sum, BRANCHES WOULD DO LESS AND LESS OF
BACK OFFICE WORK ANF FOCUS ATTENTION ON
MARKETING AND CROSS SELLING
To bank
 Group synergy – cross – selling and market expansion
bank balance sheet
 Single view of the customer
 Pricing / segmentation on the basis of relationship –
value added services.
 Rationalization of fees and charges and customer
profitability
 Quicker response to changes in environment
 Funds management – banks and customer’s
 ALM / treasury – risk and asset management
Steps to acquire CBS

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Analysis
80:20 rule
Network plan
Basic solution
Back –office MIS
Flexibility
Government banking
E channels
Response time
Document management
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Data warehousing solutions
Archival and purging solutions
Ease of use
Extendibility
Plug on modules
Central bank reporting
Version control and migration
Scalability
Security