Chapter 2: Evolution of Banking services in India

2.1 Evolution of Money and Banking

The concept of banking has been around for centuries and has had to evolve with changing
human needs. In today’s digital age we have seen a major transformation in the financial
services industry. What was for many decades a largely unchanging industry is now
constantly evolving, with many banks battling to keep up.

The beginning of banks

The practice of safe-keeping dates back to 2000BC. Ancient cultures had ways of depositing
and storing wealth. They funded this through lending fees and taxes. Merchant banks were
the original banks, with merchants trading in commodities like grain, loaning it to farmers
and traders who carried goods between cities.

The birth of currency

Currency grew out of taxation. In the early days of the ancient empires, healthy pigs would be
used as tax. As empires grew this was no longer suitable, so coins were introduced. But the
coins needed to be kept in a safe place, so wealthy people held accounts in their temples.
There were fewer withdrawals of coins than there were deposits, so wealthy merchants took
to lending these coins, with interest.

Goldsmiths of London

Modern banking and the practice of issuing banknotes emerged in the 17th century. Wealthy
merchants began storing their gold with goldsmiths of London in secure vaults, and at a fee.
The goldsmiths would issue a receipt for each deposit based on quality and quantity.

If a customer wanted to spend the money they could use the piece of paper to draw coins
from the bank. In time they were able to simply use the paper as payment in shops. Paper
receipts were soon seen as being as good as metal, and paper money was born.

The modern bank

In 1695 the Bank of England was the first bank to issue permanent banknotes. These were
initially handwritten and issued on deposit or as a loan. They would pay the bearer the value
of the note on demand. By the 18th century, banks offered clearing facilities, security
investments, cheques and overdraft protections. Cheques were widely used from then on, and
changed the way money was transferred. Now let us see in details the process of evolution of
banking services.

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Subsequent to the barter system, which was the initial form of trade during the beginning of
civilization, metals like gold, silver and copper were discovered by man for the trade. Banks
have been around since the first currencies were minted — perhaps even before that, in some
form or another. Currency, particularly the use of coins, grew out of taxation. These coins,
however, needed to be kept in a safe place. Ancient homes didn't have the benefit of a steel
safe, therefore, most wealthy people held accounts at their temples. Numerous people, like
priests or temple workers whom one hoped were both devout and honest, always occupied
the temples, adding a sense of security.

There are records from Greece, Rome, Egypt and Ancient Babylon that suggest temples
loaned money out, in addition to keeping it safe. The fact that most temples were also the
financial centres of their cities is the major reason that they were ransacked during wars.
Coins could be hoarded more easily than other commodities, such as 300-pound pigs, so there
emerged a class of wealthy merchants that took to lending these coins, with interest, to people
in need. Temples generally handled large loans, as well as loans to various sovereigns, and
these new money lenders took up the rest.

In the early days of ancient empires, a tax of one healthy pig per year might be reasonable,
but as empires expanded, this type of payment became less desirable. Additionally, empires
began to need a way to pay for foreign goods and services, with something that could be
exchanged more easily. Coins of varying sizes and metals served in the place of fragile,
impermanent paper bills. The Romans, great builders and administrators in their own right,
took banking out of the temples and formalized it within distinct buildings. During this time,
moneylenders still profited, but most legitimate commerce — and almost all governmental
spending — involved the use of an institutional bank.

Julius Caesar, in one of the edicts changing Roman law after his takeover, gives the first
example of allowing bankers to confiscate land in lieu of loan payments. This was a
monumental shift of power in the relationship of creditor and debtor, as landed noblemen
were untouchable through most of history, passing debts off to descendants until either the
creditor's or debtor's lineage died out.

The Roman Empire eventually crumbled, but some of its banking institutions lived on in the
form of the papal bankers that emerged in the Holy Roman Empire, and with the Knights
Templar during the Crusades. Small-time moneylenders that competed with the church were
often denounced for usury. Eventually, the various monarchs that reigned over Europe noted
the strengths of banking institutions. As banks existed by the grace, and occasionally explicit
charters and contracts, of the ruling sovereign, the royal powers began to take loans to make
up for hard times at the royal treasury, often on the king's terms. This easy finance led kings
into unnecessary extravagances, costly wars, and an arms race with neighbouring kingdoms
that would often lead to crushing debt.

In 1557, Phillip II of Spain managed to burden his kingdom with so much debt (as the result
of several pointless wars) that he caused the world's first national bankruptcy — as well as
the world's second, third and fourth, in rapid succession. This occurred because 40% of the
country's gross national product (GNP) was going toward servicing the debt. The trend of

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turning a blind eye to the creditworthiness of big customers, continues to haunt banks up into
this day and age.

Whenever people made transactions, the metal coins used as the payment were examined and
weighed. The use of these precious metals gave rise to coins as a mode of payment. Gold was
considered as highly valued coin whereas silver and copper were used for lesser values for
many centuries. As trade and commerce expanded and as people made more transactions, the
use of precious metals became very inconvenient. Their weight made it difficult to use them
during transactions, especially when long journeys were involved. Later, during transactions
paper was used when there were not enough coins to make payments. This marked the
beginning of using paper money as a mode of exchange.

The practice of safe-keeping and savings flourished in the temple of Babylon as early as 2000
B.C. The word “bank‟ is originated from “Banco‟–an Italian word, which referred to a bench
meant for keeping, lending and exchanging of money or coins in market place. It was the
„merchant‟ who first evolved the system of banking by trading in commodities than money.
The next stage in the growth of banking was mainly due to goldsmith. It is learned that
merchants paid the goldsmiths to look after their surplus cash, in return these goldsmiths
issued receipts to the merchants for their deposits. Goldsmith found that on an average the
withdrawals of coins were much less than the deposits with them, which took the process to
the next level of money lending. They started advancing the coins on loan by charging
interest. Also, they started giving incentives to merchants to encourage them to deposit the
money with them. This became the starting point of saving or deposit scheme in the banks.

The banking system started in Venice in 1587, where transaction in terms of deposits and
withdrawal of money was available. Later, during 1619 Banco di Giro‟ started cheque
facility to manage the flow of funds. Also, gold and silver items were accepted as deposit in
banks for which they issued receipts. These receipts were used as currency notes. During
1781, the first bank was setup in Philadelphia, U.S.A. The Brazilian bank, Banco di Brasil
started issuing bank notes for the first time in 1810. During the initial periods, receiving
money and advancing loan on interest were the two primary functions of the banks. As the
banking system started widening its operations, they started performing many other functions
like acting as an agent to their customer, providing general utility services etc. Later, during
the 20thcentury, other facilities like credit cards, foreign currency exchange, locker facilities
etc. were also added to the portfolio of banking services.

The continuous up-gradations in the technology have brought a huge significant impact on
business operations and carried out a paradigm shift in the banking operations across the
globe. The banking sector is the back bone of any economy, also frames out the progress of
the entire country. Economic activities are significantly influenced by the operations of
banking services, which became an indispensable part of day-to-day life of the people.

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2.2 Evolution of Banking System in India

Banking sector is a vital part for the function of the any country’s economy including India,
as it aids in the flow of economic activity by providing credits, collecting deposits to states,
businesses, households and individual people and much more. Like any aspect of economy,
the banking System in India has also evolved gradually.

The Indian banking industry had its foundations in the 18th century, and had a diverse
metamorphic experience since then. Initially the banks in India were primarily traders‟ banks,
whose main function was to engage only in financing activities. The pre-independence period
predominantly portrayed the presence of private banks, organized as joint stock companies.
During the first half of the 19th century, three banks were established in India by British East
India Company. Bank of Bengal was established in 1809, Bank of Bombay was established in
1840 and the Bank of Madras was established in 1843. Later during January 1921, these three
banks were merged and were named as Imperial Bank. During 1995, the Imperial Bank was
taken over by the State Bank of India in 19551

The “Great Depression‟ of 1929-1934 affected the Indian banking system due to their bad
loans.2 To have a successful banking system in the economy, it was felt that there is a
necessity to take care of the continuous failure of banks. The lack of firm regulatory system
was the major cause of continuous failure of banks during this period. As a result, a need was
felt to put a strong administration in place. Some of other reasons for continuous failure for
banks were their small size and not being scheduled, which demanded regular monitoring. To
overcome the prevailing condition of continuous failures of banks and to meet the urging
need of agriculture sector of the economy, various committees3 have recommended setting up
of a central bank in India. To bring great control and harmonize the loosely connected
banking system, establishment of a central bank was felt essential.

The Reserve Bank of India Act 1934 was enacted for setting up of the Reserve Bank of India
in 1935. It empowered the Reserve Bank to issue and regulate the bank notes and to act as a
custodian to the cash reserves of commercial banks. The main functions of Reserve Bank of
India 4are to act as a banker to the Government, central clearance and account settlement,
issuing currency notes, to act as a banker to other banks, to maintain the exchange ratio, and
as controller of credit.

The commercial banks were categorized as Public Sector Banks, New Private Sector Banks,
Old Private Sector Banks and Foreign Banks. The Reserve Bank of India had an essential role
in taking care of liquidity of the short-term assets of commercial banks, although RBI had a
limited control on banks. Due to the provision of selling government securities freely to the

1
From Imperial Bank to State Bank. (2014). Retrieved July 25, 2019, from
https://rbidocs.rbi.org.in/rdocs/content/PDFs/90028.pdf
2
Report on currency and finance (2008),Chapter III
3
The Indian Central Banking Enquiry Committee (1931)
4
RBI: Functions and Working
https://rbidocs.rbi.org.in/rdocs/Publications/PDFs/FU1F7610B232D146E6967C41FCD3E4D016.PDF

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Reserve Bank, the commercial banks had adequate liquidity in the initial years. During 1935
to 1950, the main focus of RBI was to uplift the agricultural sector by fostering the rural co-
operative credit movement. The prevailing essence of hardship and underdevelopment along
with the inappropriate administration posed a serious concern for effective banking regulation
in India. Due to laisez faire policy which allowed free entry and exit of banks resulted in a
highly competitive situation. A very high growth was observed in the banking sector after the
laisez faire policy which resulted in mushrooming growth of small banks. Due to the absence
of adequate governance in banks, various regulatory issues evolved. To stress the need for
comprehensive banking regulation for the country, a report on the non-scheduled banks
concerning their sources of funds and application of funds was submitted to the Central
Board of Reserve Bank of India during October 19396. The major issue faced by the banking
sector was the presence of non-scheduled banks which remained outside the jurisdiction of
the Reserve Bank of India.

The banking scenario in early independence phase (1947 to 1967) possessed three different
traits. First, the continuous breakdown of banks had lifted the issues of soundness and
stability of banking system. Second, huge amount of deposits were concentrated in the hands
of just a few big business groups and families. The funds raised by banks were lent to their
controlling members only. Third, banks somewhat neglected the focus on the agriculture. A
major development observed during this period was the enactment of the Banking Regulation
Act for empowering the Reserve Bank of India. This period also posed several challenges
including market failure in the rural sector. Further, the non-availability of adequate assets
worsened the situation. The performance of the banks continued to fail even after the
Independence.

The RBI achieved a success in enhancing the financial soundness of the Indian banking
system as lot many wobbly banks were weeded out through amalgamation and liquidation.
During the post-independence period, string connection between industry and banks was
observed which neglected the growth of the agricultural sector. Significant attempts were
made to spread banking to rural and other neglected areas especially through expansion of
branch. The number of bank branches rose from 4151 in 1951 to 7025 in 1967 which was
mainly due to increase in the number of branches of scheduled commercial banks.

Although the Indian banking system has come into shape by achieving some growth in
deposit in 1950s and 60s, but it was robust mainly in urban areas. Nationalization of 14 banks
in 1969 and six more in 1980 were the two major developments in Indian Banking Sector
during the period from 1967 to 19915. Under the Banking Companies (Acquisition and
Transfer of Undertakings) Ordinance of July 19, 1969, the Central Government acquired 14
major Commercial Banks with deposits of not less than Rs.50 crores each. The
nationalization of banks was done with for the purpose of planned development using limited
resources of the banking system. These 14 banks with a total paid up capital of Rs.28.5 crores
had 4134 branches with Rs.2627 crores of deposits and Rs.1813 crores of advances at the
time of nationalization.

5
Gandhi, R. (2015, January 12). Public Sector Banks: At Cross Road. Speech presented at Summit on “Indian
PSU Banking Industry: Road Ahead” in Bengal Chamber of Commerce, Kolkata.

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The main objective of the nationalization of banks was to create a new phase in the
implementation of India avowed objectives and policies. Instead of using bank deposit for
certain industries and business houses, the need was felt to use the deposits for the economic
development of the whole country. Mobilization of deposits on a large scale and lending it for
all productive activities, particularly to the weaker sections of the society was set as an
immediate task for the nationalized banks. The nationalization of banks brought considerable
reorientation of bank lending to accelerate the process of development, particularly to the
priority sectors of the economy, which were ignored earlier.

In 1980, six more banks, each with demand and time liabilities of not less than Rs.200 crores
were nationalized to enhance the ability of the banking system, to meet the needs of the
development of the economy and to promote the welfare of the people more adequately6.
These six banks together had 2686 branches with Rs.2110 crores of deposits and Rs.1375
crores of advances as on March 1980. Overall, the nationalization of commercial banks in
India went through four stages -State Bank of India on 1st July 1955, seven associate banks
in 1959-60 fourteen banks on 19th July 1969 and six banks on 15th April 1980. Currently
there are 27 banks operating as public banks in Indian Banking system. After nationalization,
the focus shifted from industry to agriculture.

Development of Indian Banking sector received global compliments after the nationalization.
It gained substantial strength in supporting nation building programs. With massive
nationalization movements and increased share of government ownership in the financial
system, pre deregulation era of the banking industry was mainly characterized with excessive
government interventions, constrained competitions and inefficiency etc. which resulted in
financial repression. Realizing the state of the inefficiency of banking and financial sector,
the government subsequently initiated the series of reforms including interest rate
deregulation and relaxation of regulation on entry and direct credit.

Financial sector reforms which were introduced as a part of economic liberalization in 1991
brought most significant transformation in the Indian banking sector. The main objective of
the financial sector reform was to have a strong and resilient banking system. The Reserve
Bank of India made significant efforts towards the adoption of international benchmark
which were suitable to the Indian conditions in a gradual manner.

Prudential norms, risk management, supervision, corporate governance and transparency and
disclosures were main areas that were focused on bringing international standards. Also,
further focus on deregulation and liberalization has encouraged Indian banking sector to
become more resilient and capable of facing global challenges. The banking sector in India
has two distinct phases. The first phase of reforms which was introduced after the
announcement of Report of the Committee on Financial System 1991mainly focused on
increasing the role of private banks, market access to foreign banks to foster competition,
enhancing competitiveness through addressing issues related to non-performing assets and
capital adequacy etc.

6
Subbarao, D. (2013). Banking Structure in India Looking Ahead by Looking Back. Speech presented at
FICCI-IBA Annual Banking Conference , Mumbai

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The financial health of the system had deteriorated to a point where it had an adverse impact
on depositor and investor confidence, unless remedial measures were taken immediately.
Accordingly, Narasimhan Committee I recommended the following suggestions7:

Statutory Liquidity Ratio (SLR) should be brought down to 25 percent,

Interest rates should be deregulated and enabling open market operations to control the
secondary expansion credit,

Banks should achieve the minimum of 8 percent capital in relation to risk weighted assets

Implementation of sound and uniform accounting practices with regard to income

recognition,

Provisioning against doubtful debts, and valuation of investments, an asset reconstruction

fund should be established to enable the banks to finance the bad and doubtful debts,

Branch licensing should be abolished,

Opening for foreign banks and private banks should be liberal,

End of the dual control of banking operations by the RBI and the Ministry of Finance

The prime controlling authority for banking system should be RBI.

The recommendations were expected to bring overall development regarding growth in

Indian Banking sector. The major achievement observed during the first phase of reform was
a significant increase in the profitability of the banking sector. It was also observed that asset
quality, capital position and competitive conditions had shown improvement, although there
was major scope for further improvement.

7
Committee on Banking Sector Reforms (Narasimhan Committee I), 1991

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Table 2.1: Stages of Evolution of Indian Banking Sector

YEAR STATUS

1921-1934  The sector was very small and closed

 Establishment of State owned Imperial Bank of India
1935  Establishment of Reserve Bank of India

1936-1955  Expansion of 480 Branches of Imperial Bank

 Conversion Imperial Bank to State Bank of India

1956-2000  Nationalization of banks in 1969 and 1980)

 The industry faced two major financial reforms in 1991 and 1998
 Gradual technical up-gradation in PSU banks

2001-2015  Whole financial industry faced global meltdown in 2008, which

demanded lot of change but Indian banking system remained fairly
resilient during the crisis
 173 commercial banks operated in India by 2012 including RRBs
and LABs, out of which PSU banks accounted for 67.2%

2016-2018  India recorded highest reserves of approximately USD 355.9 in

March
 Foreign exchange further increased to USD 363.12 in April
 Foreign banks are allowed to invest in local private lenders and
super-national institutions like LIC, upto a limit of 10 percent in
May
 Announcement of the demonetization for Rs. 500 & Rs. 1000 notes
in November

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The second phase of reforms, which was introduced in 1998 8focused on further
strengthening the banking norms, structural measures, standard of disclosures and high level
of transparency to make Indian banking sector competitive with International standards.The
Major Recommendations of Narasimhan Committee II9are,

Increase in Capital adequacy ratio from 8percent to 10percent,

Sticky advances should be classified as NPAs.Net NPAs for all banks to be less than
5percent by the year 2000 and 3percent by 2002,

Banks should focus on increasing the revenues and reducing the expenses,

Banks should focus on increasing managerial quality by inducting one or more additional
full-time director(s) on the board.

Minimum government shareholders in nationalized banks and RBI in State Bank of India to
be fixed at 33percent.

The significant achievement during the second phase was reduction of non-performing assets
sharply in the banking sector. Due to asset quality improvement banks have started expanding
their credit portfolio. It was also observed that there was a significant improvement in capital
position and intensified competitions. Despite the severe competition, banks were able to
improve their profits due to improvement in asset quality. A significant increase inflow of
credit to the agriculture and SME sectors was seen as another major achievement during this
phase. Also, during 2006 & 2007 nearly 13 million `no frills‟ accounts were opened.
Increased use of technology during this phase has improved customer services.

Commercial banks are the most popular and oldest of all type of banks. It plays a major role
in India’s economy by facilitating the financial inclusions for the public at large. It has very
powerful and strong influence on the Indian financial system. Indian commercial banks are
dominated by the public sector with maximum share of State Bank of India and its associated
banks. Several private and foreign banks were allowed to operate their business in the Indian
financial system after liberalization. Due to deterioration of operational and allocate
inefficiencies in PSBs during the end of the 1980s the restructuring measures were introduced
mainly in the areas of recapitalization, debt recovery and partial privatization with the aim to
enhance the profitability. Despite the recommendation of the Narasimhan Committee to
rationalize PSBs, the Government has decided to create a good start based on improving
operations before a possible privatization.

Due to poor risk management skills and directed lending practices, the NPA shave
significantly accumulated in PSBs. It was felt that there is need to clean up the balance sheet
of public sector banks by injection of capital before any privatization. During 1991 to1993,
the government has injected almost Rs.40 billion to clear the balance sheets of public sector
banks. Further, Rs.120 billion were injected during 1993 to 1999. The amount of

8
Reserve Bank of India. (2001). Report on Banking Sectors Reform (Narasimhan Committee II, 1998),p 1-35.
Retrieved from Reserve Bank of India website http://rbidocs.rbi.org.in/rdocs/PublicationReport/Pdfs/24157.pdf
9
From the Report of Committee on Banking Sector Reforms (Narasimhan Committee II), 1998

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recapitalization is estimated to be 2% of GDP. State Bank of India Act (1955) was amended
in 1993 to promote private shareholding/ SBI became the first to raise equity in the capital
markets. Amendment of the Banking Regulation Act allowed public sector banks to rise to
49% of their equity from the public. Partial privatization of eleven more public sector banks
was the result of this amendment.

The Indian government has announced the demonetization of Rs. 500 and Rs. 1000 bank
notes on 8thNov. 2016. The objective of demonetization move was to curtail the shadow
economy and hamper the funding to illegal activity and terrorism. Also, exposing the
circulation of fake currency in the Indian economy was another main reason for
demonetization. The whole economy was affected by this sudden announcement by the
Government which reflected a drastic decline in the BSE and NSE after the demonetization
announcement. BSE Bank has dropped to three month low price.

By the end of December 2016, Rs. 12.44 lakh crores of old currency were deposited with
banks. The share prices of leading banks such as Punjab National Bank, SBI, IDBI, Axis
Bank HDFC Bank have recorded a sharp decline. On the other hand, banks were benefitted in
many ways, particularly surge in amount of deposits in current account and saving account
(CASA). Around 86% of the currency was withdrawn from the economy and people were
forced to opt the cashless mode of transaction. Despite RBI’s initiatives, the NPAs have
shown a remarkable growth even after demonetization. NPAs have gone up by 135% in last
two years10and five banks reported their gross NPAs are more than 15%. These banks are
Indian Overseas Bank, UCO Bank, United Bank of India, IDBI Bank and Bank of
Maharashtra.

10
up by 135% in last two years24and five banks reported their gross NPAs are more than 15%. These banks are
Indian Overseas Bank, UCO Bank, United Bank of India, IDBI Bank and Bank of Maharashtra.

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2.3 Evolution of E-banking
Internet Banking services were introduced in the early 80s by the Nottingham Building
Society and the Bank of Scotland. Online banking had a grand opening in late 1980‟s. During
1981, Citibank, Chase Manhattan, Chemical and Manufacturers Hanover started online
banking system using the videotext system for the first time in New York. During 1983,
Nottingham Building Society (NBS) started the online banking services in UK.
Unfortunately these services were discontinued as the bank customers were wary and not
fully ready to accept internet banking. With the rapid growth of IT in the 90s, banks launched
internet banking again and this time, it met such an astonishing success that these electronic
services ended up becoming industry standards.

Internet banking is the newest delivery channel that enables bank customers, through safe and
appropriate systems, to gain access to general bank information on products and services
offered and their account, internet banking can be defined as the “internet portal through
which customers can use different kinds of banking services ranging from bill payment to
making investment”. This happens through the bank’s website “without any intervention or
inconvenience of sending faxes, letters, original signatures and telephone confirmations”.
Through the bank’s website, the bank customers can carry out activities such as balance
reporting, inter-account transfers, bill payment via a telecommunication network without
having to leave their work or home with just a simple click of the mouse, Internet banking
gives customers access to almost all types of bank transactions, apart from ultimate
transaction, that is, the withdrawal of cash. Using Internet as an alternative channel for the
distribution of financial services has become a necessity in order to achieve competitive
advantage with the arrival of globalization and more hostile competition

It provided the customer an option to make bill payment for electricity, telephone and gas
companies and also transfer money to other bank accounts. There has been an evolution in
the development of internet banking across the globe. The evolution of e-banking can be
easily understood in the form of three stages, which are informational, communicative and
transactional. Under informational level, banks setup of a web page to give information about
its product and services to the customers. At communicative level, electronic banking allows
interaction between the bank’s systems and the customer.

At transactional level, electronic banking allows bank customers to electronically transfer

funds from their accounts, receive funds to their accounts, pay bills and conduct other
banking transactions online. The risk is higher at the transactional level as compared with
other levels. However, this offers an advantage to customers by providing an opportunity to
handle their banking transactions without visiting banks. The late 1990s saw the development
of e-banking from virtual insignificance to millions of users worldwide. The current web-
based internet or e-banking is the latest in the evolution of e-banking.

The most popular and well known machines to provide electronic access to customers are
Automated teller machines (ATMs). Personal computer banking allowed users to interact
with their bank using a computer. More than 25% of the population in Norway, Sweden, and
Finland were using e-banking during 2001. In Denmark, use of e-banking grew to 45%in
2004 from 15% in 2001The larger banks tend to offer a wider array of electronic banking

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services, including loan applications and brokerage services. According to the report by
Neilsen 11, online banking was the most preferred channel used for making the transactions
followed by visiting physical banks, mobile banking in Asia-Pacific region. On contrary, in
Latin America, visiting physical banks was the most preferred channel used for making the
transactions in comparison of online banking

. There are different forms of online banking which are web-based banking where customers
can access their accounts when they use the internet. A second form of online banking is
where the bank customer, through a modem, dials-up to the bank’s server to access his bank
account. This is known to be dial-up banking. A type of dial-up banking, called Extranet, is a
private network between a bank and its corporate customers. Currently there are three kinds
of internet banking which are employed in the market place; and these are Informational,
Communicative and Transactional.

An Informational website is the first level of Internet Banking. Marketing information about
the bank’s products and services are found on a standalone server. There are typically no path
between the bank’s internal network and the server. A Communicative/simple transactional
website allows a limited amount of interaction between the customer and the bank’s system.
The interaction is restricted to e-mail, account inquiry, loan application or static file updates
(name and address). Fund transfers are not allowed. An Advanced website allows bank
customers to make queries about their accounts, electronic transfer funds to and from their
accounts, pay bills, update their account information and conduct other banking transactions
online.

Therefore a bank who is planning to offer internet banking services, is expected to create an
informational website first, then introduce a communicative website and finally an advanced
transactional website where customers can perform the basic transactions. Both the provider
and the consumer benefit from internet banking. Online banking is considered to be the most
important way to decrease cost and enhance or maintain services for consumers. From the
banks’ perspective, it is the cheapest banking products delivery channel. Together with
saving time and money, this service minimizes the possibility of bank tellers committing
mistakes. Less staff is required since the customers serve themselves in cyberspace, argued
that time and location were no longer limiting factors in banking as all over the world,
customers can now easily access their accounts 24/7.

Internet makes the transactions efficiently and expertly at an unmatched speed. Internet
banking offers the possibility to manage several bank accounts on one site and these sites are
compatible with software such as Microsoft money. With increasing competitive pressures
from existing firms and new blood on the market, competition is an important logic to be
considered. Using internet banking as an alternate channel has allowed banks to target
various demographic segments more efficiently, thus retaining existing customers and
attracting new ones. While supplying internet banking services, banks establish and extend
their customer relationship .

11
Decoding Global Investment Attitudes(pp. 1-10, Rep.). (2012). Nielsen.

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The concept of online banking is an uprising in the field of banking and finance as the
account holder does not have to visit the bank and queue to perform the basic transactions
like balance inquiry, recent transactions record, transfer fund to employees accounts in the
form of salary, bill payments and phone account top up. On top of this, the interest rates are
higher for online banking than with traditional banking (3.4% to 4%). Many persons like
internet banking as there is no credit check. If someone has a bad banking history of financial
problems, at a traditional bank, their application to open a bank account would be turned
down. This is not the case with internet banking. Some banks offer the facility of online
loaning where an instant loan is provided by only filling a form. Internet banking web-sites
are highly performing systems, easy to understand and navigate, with simple instructions
designed to answer all queries about banking. Customers also have a wide range of
opportunities to invest such as stock quotations and news updates

It is essential to extend internet banking to customers in order to maximize the advantages for
both the service providers and the customers. The navigability if the site is a very vital part of
internet banking as it can become one of the biggest competitive advantage of a financial
body. The banking sector performance increases everyday due to the rise in technology
usage. Online banking is time saving.

E-banking is now less vulnerable to safety and security related issues. Secure Socket Layer
(SSL), Password Based Encryption (PBE) and electronic signatures has increased the level of
security. If any inconsistency occurs in an account, it can be traced easily, making internet
banking more trustworthy. Trust has been identified to be an important factor for the financial
online services. Furthermore an empirical study has shown that consumers make online
decisions based only on trust. In developing countries, trust plays a crucial role for customers
to accept and use online banking. Some banks offer real time customer assistance to
customers who have trouble finding their way through the web site or the proceedings of the
internet banking registration through instant messaging, email or even the telephone.

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1.4 E-Banking in India
Today, the Internet has infiltrated every aspect of life, as exemplified by online
entertainment, online shopping, and Internet banking and these new technologies have
affected and affected people’s lives in a number of ways. The fast growth of e-banking may
make life easier in some ways; however, it must be considered that there is another side to the
issue--it also changes lives and habits in unpredictable ways, The most recent technological
advancement is the evolution of e-banking. Various alternative modes of providing banking
products are evolved and gained popularity in recent past, such as, tele-banking, Automated
Teller Machines, e-banking, credit & debit cards. The most recent one is e-banking that has
major impact on the financial market. Banks got the sense that internet facility will open up
new horizons for banks and will help them to adapt globalization effectively.

Indian banking industry has witnessed a tremendous development due to sweeping changes
that have taken place in the information technology (IT). IT has been identified as a crucial
element in framing bank’s strategy to improve productivity and customer service. Electronic
banking has emerged from such an innovative development. The computerization of bank
operations in India began in the late 1990s in a big way. Several initiatives were taken by the
government of India as well as RBI to facilitate the development of E-Banking in India due to
a significant increase in the technology.

Computerization of branches and installation of ATMs are the two main areas where the use
of technology can be seen clearly. In India, it was ICICI bank which initiated E-banking as
early as 1997 under the brand name Infinity. Citi Bank and HDFC Bank followed with
internet banking services in 1999. Public sector banks were forced to address the
computerization problems more seriously as most modern technologies were offered by
private and foreign banks. Though the pace of computerization was low, the Central
Vigilance Commission initiated various steps to make 100percent computerization to check
frauds, delays, etc. in Indian banking system The use of technology in banking has brought
significant influence in Indian banking operation. SBI has started the process of recording its
ledger posting into mainframe computer at few of its branches in 1970. Use of technology in
1970 was the rationale step towards banking development in India. Also, ledger posting in
computers, installation of ATM and offering point of sales facilities continued during the
1980s. Further, the 1990s saw the introduction of Tele -Banking and E –Banking.
Considering the importance and need of technology use in banking operations, RBI has
formed a committee on computerization and mechanization in 1983 under the chairmanship
of Dr. C. Rangrajan.

The major objective of this committee was to work out a plan for the computerization and
mechanization of Indian banking sector. The committee has recommended that regional &
head offices should start computerization and installation of Advanced Ledger Posting
Machines. Indian Bank was the first bank to install the ATM in 1989 among the nationalized
banks. Use of EFT, electronic clearing services and extension of MICR was recommended by
Saraf Committee appointed by RBI in 1994.

The period of 1996 to1998 is marked as the phase of early adoption of e-banking. Among the
public sector banks in India, SBI has pioneered in offering internet banking facilities to its

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customers. Indian Banking Association has promoted network of ATMs in 1997 under the
name of SWADHAN, which allowed the customers to withdraw the money from any ATM
and facilitated to link with the international hubs, such as, Master Card & VISA12.

The substantial technological up gradation in 1999, resulted in easy and reasonable

accessibility to the internet, penetration of personal computers and tech-savvy environment
among the Indian banking system. Though, the process of offering e-banking services in
public sector banks was very slow, it gradually picked up. Central Bank of India was the first
public bank to offer the online debit program and issuing the credit card. While technological
up-gradation and branch expansion were rapidly increasing, most of the public sector banks
were still trying to automate the branches in urban areas. It was the major task for the Indian
public sector banks to connect 64000 branches spread across the country which forced them
to follow 80-20 thumb rule.

A major issue that the public sector banks have faced during IT implementation was staff
retention. While foreign and private sector banks were recruiting trained and experienced IT
professionals, public sector banks were not able to do likewise. Also, public sector banks
could not allocate capital resources for computerization of their branches. Private and foreign
banks have generated sufficient business opportunities due to the initiation of electronic
banking activities much before the public sector banks.

online banking can be divided in two types, first, web-based banking through internet and
second, dial-up banking consumer uses a modem to dial up to a bank’s server to access bank
account. There is a special type of dial-up banking operated by private banks between a
banking institution and its corporate clients, known as Extranet.

There are mainly three functional kinds of e-banking that are currently employed in the
market place and these are:

Informational Websites -Such services are known as first level of e-banking. Through such
services bank provides marketing information regarding banking products and services on a
standalone server. It has very low degree of risk as there is no connection between server and
bank.

Communicative Websites –In this system there is very less scope of communication between
banking system and e-banking users. This communication is only to the extent of e-mail,
account balance enquiry, loan application or static file updates. This system is not having
fund transfer facility.

Advanced Transactional Websites -This form of e-banking enables e-banking users to

transfer their fund electronically, make payment of utility bills and conduct other banking
transaction online.

Use of Information & Communication Technology (ICT) is the latest mode of managing data
electronically. The advancement of ICT specifically in the utilization rate of internet facility
resulted in enhancement of production capacity and increase infund flow all over the globe.
12
Sinha, P. (2010). Annual Report of Central Vigilance Commission(Vol. 46, Rep.). Retrieved from
http://www.cvc.nic.in/ar2009.pdf

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Subsequently, it created a cut throat competitive environment internationally and that lead to
challenge of satisfying the customers who are now more aware and educated than earlier.
Due to the globalization, the distance between customers and service providers is become
irrelevant. As the use of computer increasing to improve the operating system in the various
sectors of the society, it also provided a new medium to commit crimes for some people.
With use of hacking to solve the internet problems in 1960’s, computer crimes started and
then in 1970s its pace was increased in way of crimes such as privacy violations, phone –
tapping, trespassing and distribution of illicit materials. The list of crimes had increased in
1980s by experiencing crimes as, software piracy, copyright violation and introduction of
viruses. The scenario became worse and the extent of loss occurred due to these computer
crimes is enormous. The international market experienced the same with computers being
used for surveillance and transnational organized crime and terrorism.

Organizations and banks while starting the computerization phase were not aware about the
fact that it would result in fasting the speed of computer crimes. Now, computer becomes a
vital part of our life either personal or professional and its use is irrefutable. The working
style of banking institutions has completely changed with the use of computer and internet
facility. The large number of banking transactions compelled the banks to take the help of
computer in processing the transactions. Due to this, the use of computers and internet facility
become ineluctable.

additionally, technological advancements reduced the per transaction cost of banks as now
there is no need of bank personnel to facilitate customers’ bank transaction, it could be self
served through e-banking. The various modes of e-banking, such as, ATMs, Tele-banking,
Mobile-banking, debit and credit cards etc, e-banking has popularised with very fast pace and
as people has started using ATMs, the customer visits to bank branches have reduced and it
reduced the requirement of bank branches even more when internet banking have been
introduced to the customers in late 1990s. The numbers of internet users are increasing
tremendously. According to Internet World Stats 2013, there were 2.4 billion internet users
around the world in 2012. Therefore, internet facility has evolved as a global marketplace
with global opportunities for financial services, as a challenge and as delivery mechanism
also. It provides faster service delivery modes to the customers.

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Table 1.2: Major Developments in Electronic Banking

YEAR DEVELOPMENT

1981 Home banking using video text system started

1984 The Bank of Scotland offered Notthingham building society

customers the first internet banking services in theUK and was
called as”Homelink‟.

Connecting via a television and a telephone to send transfers and

pay bills.

2000 IT Act in India

2001 Online banking software was builtinto Microsoft Money personal

finance software.

First account aggregation software was created givingtheconsumer

the ability to view all of their financial accounts at one place.

2005-07 Eight banks in the US have at least one million online users.
Direct banks begin to offer their services primarily online.

2009-11 FIs have carried out risk based assessment to evaluate customer
awareness program to implement security measures to authenticate
remote account access.

2012-14 Online banking goes the main stream, event late adopterchoose to
bank online and majority of people started preferring e-banking
rather going to branches

2015-16 The number of internet users stands at 3.010 across the globe.
Fraud attempts originating from the mobile channel increased by
173%.Cyber-attacks and cyber-crimes increased from 13301 in
2011 to 300000 in 2015.The total average annualized cost of $13.5
million for cyber-crime in financial services organizations in 2016

2017 .Various mobile applications were launched in different countries.

.Number Mobile banking users rose to 45 million.

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2018 Regulations such as Access to Accounts as part of the Payments
Service Directive (PSD II) in Europe and issuance of new payment
banking licenses in India

.Focuson five different approaches to drive innovation, i.e.,

partnering/collaborating with technology firms, establishing
incubators / accelerators, acquiring fintech firms, investing in
fintech firms, and establishing innovation labs.

Due to ownership structure, management, and governance the overall performance of public
sector banks continued to lag behind despite recapitalization. The major concern for the
public sector banks was adoption of operational flexibility, which is essential for responding
to changing conditions, whereas private and foreign banks were able to implement it easily.
Also, due to constraints imposed by the government public sector banks were not able to
compete effectively with the private banks and foreign banks.

The numbers of internet users have gone up substantially from 81 million in 2009 to 342
million in 2015. Internet users in India are growing at a CAGR of 20% and it is expected to
reach the figure of 700 million by 2019. The popular Electronic Fund Transfer (EFT) system,
introduced in the late 1990s to enable account-to-account transfers, was replaced by one-to-
one NEFT system in November 2005.

The NEFT accounts for the lion’s share (91%) of transactions in terms of value, which is
close to Rs. 58 trillion from 886 million transactions at the end of 2015.National Payments
Corporation of India (NPCI) launched the Immediate Payment Service (IMPS) in November
2010, which allowed instant 24/7 inter-bank fund transfer through the Internet, mobile, and
ATM at a very low cost of Rs. 1.50 per successful transaction . The scale of internet banking
in India has increased manifolds in last few years. During the financial year 2015, online
transactions were 1.43 trillion which were more than paper transactions. The evolution of E-
banking has dramatically transformed the traditional way of operations in the bank and also
the user’s way to reach the bank for various banking activities.

Most of the countries follow similar functions and objectives of banking structure. But, the
differences are mainly observed in ownership patterns, size and models of operations. In
developing countries, local banks play an important role in improving the financial
opportunities to small and medium enterprises which encourages entrepreneurship. Rising
middle class populations and escalating household incomes in emerging markets have
provided substantial opportunity for global banks. Rapid technological advances brought
dramatic shifts in the banking industry.

Due to monetary easing measures introduced by central banks in advanced economies, the
financial condition in the global banking industry has improved significantly. The global
banking industry faces short-term uncertainty due to the debt crises that challenge several
major economies, but total industry assets are expected to climb to an estimated US $163,058
billion in 2017 with a CAGR of 8% over the next five years. Studies related to global bank

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performance reveals that the share of emerging economies is expected to contribute
significantly to global banking industry.

Though the fundamentals of banking sectors are robust in emerging economies, the lower
economic growth rate may pose challenges. Preparation of Implementation of Basel III has
brought significant progress on the regulatory front. Systemically important financial
institutions (SIFIs) and derivative reforms also contributed towards the enhancement of the
banking regulatory framework. European banks posed relatively weak performance and the
asset quality continues to deteriorate with poor profitability rate. It is clear that post financial
crisis period has brought mixed result regarding banking performance across the globe. The
performance of European banks was deteriorated significantly during post financial crisis
period, whereas banks are able to maintain and withstand the impact of financial crisis. The
global banking system faced multiple risk including pressure on profitability, increase in
regulatory compliance cost, and revenue growth difficulties during the post financial crisis
period. The financial crisis in 2007-08 brought the major differences that exist between
developing and developed countries.

Asia Pacific and Latin America regions have registered 31.4% and 40.1% of growth
respectively during 2007-08. On the other hand, profits of the European and North American
banks were declined by 143.2% and 174.9% respectively during the same period. Overall, it
is evident that financial crisis has drastically decreased the growth of banking sector globally.
Nationalization of commercial banks in India has brought significant transformations in the
banking industry. Indian Banking system was able to withhold their sound position during the
financial crisis due to its robust regulatory framework.

Though the public sector banks dominate the Indian banking sector in terms of assets,
number of branches, employment, deposits, investments etc., their performance is found to be
low in comparison to their counter parts. The potential opportunities for growth of banking
sector in India are huge in the majority of the population is yet to be connected with the
formal banking sector. The presence of private and foreign banks in the rural area is almost
negligible due to lack of business opportunities. On the other hand, presence of public sector
banks in the rural area in order to deepen the engagement of formal banking for low income
households is essential to play a major role to promote the development of the economy.
Technological up-gradations in the public sector banks are lagging behind their counter parts.
But recent developments in the modernization of Indian commercial banks is expected to
bring customer centric approach which will enable large number of population to be
connected with banking facilities. The contribution of e-banking has dramatically
transformed the traditional banking system into modern banking.

In India the number of internet users is increasing with very fast pace that eventually increase
the opportunity to increase the number of e-banking users as well. But the success of e-
banking largely depends on the technological adaptation rate of Indian retail and corporate
banking customers. Therefore, the driving forces that influence the adaptation of e-banking
system in India will definitely be a critical issue to banks as well as to regulators of the
banking industry.

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Although the main factor that effect success of e-banking as a delivery medium of banking
services and products is the adaptation rate of the both kind of banking customers by retail
and corporate customers as well to e-banking services. Therefore, influencing factors to e-
banking adoption in India are the prime concern for e-banking offering banks as well as for
policy makers

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