EVOLUTION IN THE INDIAN BANKING SYSTEM
With nearly 47 Million
internet users and a GDP rate of 6-7 per cent, India represents a digital
economy. India has proved to be the biggest market potential for global
players. This digital revolution is expected to generate new market growth
opportunities, jobs and become the biggest business opportunity for businesses
in the next 20 to 30 years.
There was an ardent need
for this digital transformation in the Indian Banking System during the late
1980s. Digitalisation was mandatory in order to meet customer expectations,
book keeping and MIS reporting. To
fulfil the need of the hour, a committee was formed by the Reserve Bank of
India to introduce digitalisation in the banks headed by Dr. C. Rangarajan, during
the year 1988.
The banks have needed to
adopt disruptive technologies to improve customer service and ensure
unparalleled efficiency and service at all times. Banks have been adopting
face-to-face interactions with the customers to provide meaningful financial
services to the individuals and the businesses. However, this one to one
interface has changed since the emergence of new technology to meet the
evolving demands of the customers. Thus, branch banking changed to bank
banking. Core Banking Solution (CBS) enabled banks to increase the comfort
feature thereby delivering a promising step towards enhancing customer convenience.
Different Core banking platforms such as Finacle designed by Infosys, BaNCS by
TCS, gained popularity.
Core banking systems and
digitisation of important services are necessary requirements for banks to provide
innovative services. Digitisation has helped developments not only in the
operational systems of the bank or customer services, but also the new
capabilities and services that are provided to customers these days.
The onset of the World
Wide Web, truly revolutionised the banking sector and financial institutions to
think out-of-the-box in meeting their customers’ needs. This led many banks to
invest extensively in internet services and provide services over and above
those offered at branches. A major driver for this change was the increasing
competition among the private and commercial banks that started to digitalise
their processes so as to improve their efficiency and customer service, thereby
meeting the current pace of digitalisation.
have benefitted in several ways by adopting technological advancements.
E-banking has resulted in reducing costs drastically and has generated revenue
through various channels. The customer base has also increased because of the
convenience in ‘Anywhere Banking’. Digitization has reduced human error. It is
possible to access any data anytime from any nook and corner of the world. As per The Avaya Banking Survey 2017, 51% of
Indians use online banking channels and 26% of Indian customers prefer
to access services via their bank’s website, and the same number would prefer
to use a mobile app rather than talk to a human agent.
RBI is the guiding force for the banks in
forming regulations and giving recommendations. Commercial Banks in India have
adopted technology by way of Bank Mechanization and Automation with the
introduction to MICR based cheque processing, Electronic Funds transfer,
Inter-connectivity among bank Branches. The implementation of ATM (Automated
Teller Machine) Channel has resulted in the convenience of Anytime banking.
Strong initiatives have been taken by the Reserve Bank of India in
strengthening the Payment and Settlement systems in banks.
According to recent surveys, today’s
customers prefer to maintain multi-platform interactions with their banks. The
number of times one visits the branch has reduced substantially and most of the
transactions are done online, bills are paid online, cheques are deposited via
mobile banking, etc. One of the major innovations that had transformed the
Indian Banking System was the evolution of the smart phones era. This has
helped transforming the traditional banking system by the introduction of apps
that are used for transactions and other facilities.
Indian Government is
actively promoting digital transactions. The launch of United Payments
Interface (UPI) and Bharat Interface for Money (BHIM) by National Payments
Corporation of India (NPCI) are significant steps for innovation in the Payment
Systems domain. UPI is a mobile interface where people can make instant fund
transfers between accounts in different banks.
Today banks aim to provide fast, accurate and quality banking experience to
their customers. Today, the topmost priority for all the banks in India is
to the RBI Report in 2016-17, there are 2,22,475 Automated Teller Machines
(ATMs) and 25,29,141 Point of Sale devices (POS). Implementation of
electronic payment system such as NEFT (National Electronic Fund Transfer), ECS
(Electronic Clearing Service), RTGS (Real Time Gross Settlement), Cheque
Truncation System, Mobile banking system, Debit cards, Credit Cards, Prepaid
cards have all gained wide acceptance in Indian banks. These are all landmarks
in the digital revolution in the banking sector. Online banking has changed the
face of banking and brought about a remarkable transformation in the banking
operations. Source: Banking on
Technology, Perspectives on the Indian banking Industry
Electronic Funds Transfer (NEFT) is the most commonly used electronic payment
method for transferring money from any bank branch to another bank in India. At
present there are 23 settlements.
Time Gross Settlement (RTGS) is primarily used for high-value transactions
which are based on ‘real time’. The minimum amount to be remitted through RTGS
is Two Lakhs. There is no upper limit.
Payment Service (IMPS) is an instant electronic funds transfer facility offered
by National Payments Corporation of India (NPCI) which is available anytime and
usage of Prepaid payment instruments (PPIs) for purchase of goods &
services and funds transfers has increased substantially. The value of
transactions through PPI Cards, which include mobile prepaid instruments, gift
cards, foreign travel cards & corporate cards & mobile wallets have
jumped tremendously from Rs.105 billion and Rs. 82 billion respectively in
2014-15 to Rs. 277 billion and Rs. 532 billion respectively in 2016-17. This is
a remarkable development in the process digitisation in the Indian Banking
Source: RBI Data and Dun and Bradsheet Research
These increase in the number of
online transactions and mobile apps’ usages clearly show the response of the
customers to the rapid digitisation process. According to surveys, Indians
prefer a digital approach to banking, and will not hesitate to protest poor
service. As far as the numbers are concerned, 37% of Indian respondents
will change banks if they had a bad experience. With a larger population in the
social media, the customers readily share their experience and ensure that
everyone is aware of what is happening with the digitisation process.
Today’s young and affluent customers
are not only looking for smart banking services, but also for ethical
investments that will go a long way in ensuring returns. This also ensures the
holistic development of the community at large. Like every other service and
sector today, the rapid advances of technology are set to take humongous leaps
in the banking sectors as well leading into various prospective domains in the
imminent future. The Indian Banking system is the early adopters of disruptive
technology. This will help us go a long way to ensure that banks seamlessly
manage this change and stay relevant and efficient in this dynamic phase of
era of digitalisation, banks are increasingly becoming the market places and
each event is becoming a prospective opportunity. With a plethora of channels
for bringing together customers and the banks, the need of the hour is to
provide an integrated system of managing the customer life cycle. According
to a CII report, the Indian Banking System is currently worth INR 81 trillion,
and is expected to become the fifth largest in the world by 2020.
BFSI sector contributes about 40% of the revenue for major IT companies. As
digital technologies evolve around the concept of data sharing over public
networks on a number of devices, ensuring privacy and security related with
banks are the major concerns at all levels.
initiatives adopted by Indian banks are within the social, mobility, analytics
and cloud (SMAC) framework.
Social: Indian banks are offering
real time money transfers apart from improving customer interactions and
personal branding. Banks such as Kotak Mahindra (KayPay on Facebook) and ICICI
(Icicibankpay on Twitter and Pockets by ICICI Bank on Facebook) have enabled a
number of banking services such as fund transfers, account balance and
transaction checking, and even recharging prepaid mobile phones.
Mobility: Banks in India are
considering the mobile first approach for launching new application, as more
than half of the total transactions that happened in 2017 were on mobile
phones. With the emergence of E-Commerce, theirs is awareness among the public
regarding the mobile applications.
Analytics: With advancement in
technology and reduction in cost of its application, man power, computing and
analysis, banks are trying to integrate high end analytics tools to the
existing big data warehouse. This would help banks to generate revenue and also
lower the risk of being exposed to fraudulent activities.
Cloud: Banks in India are using
public cloud to move applications such as lead management, email services, and
human capital management which tend to fluctuate in volume. Though public
cloud platforms provide the advantages concerns of security, regulations and
interoperability are preventing banks from adopting public cloud platforms for
mission critical applications.
and Sullivan Report
challenge of the hour is that the adoption of digital
technologies will impact the core processes of a bank at a much deeper level. Security
and privacy issues are the major barriers for digital technology adoption in
banks. Banks fear insecure application program interface, confidential data
leakage, and malicious attacks. The lack of proper mechanism that decides on
issues of ownership, accountability, and risks is also acting as a major
barrier. Banks are also exposed to internal risks especially frauds by
employees / employees in collusion with customers. The fear of losing money in
the online transaction which is highly prevalent in the financial illiterate
and the rural poor is a barrier to usage of e-banking. Lack of adequate
knowledge among the employees as well as the customers is also a major setback
which is preventing things from moving forward. These are few challenges that
the Indian Banking System needs to improve and thus would help take things
we move forward, business analytics and Artificial Intelligence (AI) has a
potential to bring a major change. Robotics, enabled by AI, is expected to be
the future game changer in the banks. Many private banks are planning to deploy
Robots for customer service, investment advisory and credit-approval process to
improve the services and be cost effective in the long run. Digital Banking
will be the most preferred form of banking in the forth-coming years.
DIGITAL FINANCIAL SERVICES AND RISK MANAGEMENT
financial services (DFS) are the expansion of the delivery of basic financial
services to the poor through innovative technologies like mobile-phone-enabled
solutions and digital payment platforms. Digital channels can help drive down
costs for customers and financial institutions drastically. Financial
regulators have realized the tremendous potential of the DFS, by playing a
crucial role in the financial inclusion and by creating enabling environments
for digital financial services.
Reserve Bank of India (RBI) published its first guideline on mobile banking in
2008, as soon as UIDAI was established the Aadhaar numbers were integrated with
bank account numbers and the mobile numbers were also integrated sooner. It was
post-2010 that there was a rapid growth of the e-commerce sector in India. This
led to the massive development of the digital financial services and
intermediaries. Eventually the mobile banking and online transactions rose
rapidly thereby helping the digitalisation of the Indian Banking system.
The advent of new technology usually
leads to innovation in industry. Irrespective of the sector, technological
innovations are always adopted to make tasks easier and more efficient. The introduction of credit cards and ATMs has
changed the process of Banking and Financial aspects of the Nation. For the
past few years there have been major innovations in the financial sector,
thereby leading to a tremendous shift in the way people interact with the
Indian financial system. Pursuant to the same, the Reserve Bank of India has
responded to these advancements to make sure that they do not go unchecked.
Digital payments have already made it
easier to manage money. The next evolution is driving financial inclusion and
improving financial health with digital technology. The digital payments are
making financial services more affordable, accessible and they have the
opportunity to drive financial inclusion and financial health for the
population worldwide. The digitisation of money, the rapid
expansion of internet access, and the adoption of mobile phones, have created
the perfect conditions to make financial transactions easier, secure and
affordable to save, spend, give and borrow.
RBI clearly recognised the potential for a tremendous increase in mobile
banking and the opportunity of increasing financial inclusion in the country,
and made recommendations for “addressing the consumer acquisition challenges
and also the technical aspects”. Recommendations for alternate channels of
mobile registration such as ATMs, uniformity in the mobile registration process
across banks, and standardisation and simplification of the MPIN generation
process were made by the RBI. The two major challenges identified are the
customer enrolment related issues and technical issues, even after the
potential of mobile banking to improve the financial services.
RBI identified three major ways of mobile banking utilised by most banks as
SMS, USSD, and application based banking. The problems the RBI identified with
the SMS method were that the service is not encrypted, and that it may become
inconvenient for customers to remember the syntax required for the commands.
The RBI conceded that application based mobile banking is the best way to offer
that developing these applications requires a large amount of research and
introduction of technology such as cloud computing, mobile telephony, and an
increasing popularity of the virtual world would lead to significant changes in
the way payments would be made in the future, according to RBI. This would also
enhance the possibility of the movement away from cash transactions to
electronic transactions, leading a ‘less-cash economy’. The RBI held that its
regulatory stance would be to promote innovation to achieve the inclusion,
accessibility, and affordability, while remaining technology neutral.
The introduction of online wallets has provided consumers with a simpler
and more efficient method to complete online transactions. A circular was
issued by the RBI in December 2014, outlining the guidelines that these wallets
must follow. In the circular, RBI defined three types of payment instruments or
Closed wallets can be issued by a company to a
consumer for buying goods exclusively from that company, such as Flipkart or
Amazon. They do not need any sort of permission or regulation from the RBI as
they do not permit cash withdrawal or redemption, and hence are not classified
as payment systems.
Semi-closed wallets can be
used to purchase goods and services at clearly identified merchant locations
which have a specific contract with the issuer to accept the payment
instrument. NBFCs can issue semi-closed wallets which need to be authorised by
the RBI. The most commonly known online wallets (such as Paytm and Mobikwik) fall
under this category.
Open wallets can be used for the purchase of
goods and services (including financial services) at any card accepting
merchant terminal and can also be used for cash withdrawal at ATMs. However,
these can only be issued by banks with approval from the RBI.
Management practices is relatively newer in the Indian Financial Sector. But
with the introduction of risk management the efficiency of the services has
increased substantially. With the increased regulatory systems and the
divergent technologies, the risk management practices have changed dramatically
and will further keep changing. Digital payments and digital financial services
will introduce new complexities with the new entrants in the sector.
common and harmful risk includes System and technology risk, agents lacking
liquidity, transaction data security, fraudulence, theft and robbery and unsafe
fund transactions. Most of the risks in the Indian Financial services are
operational and have serious implications. There are further few risks that the
financial services should address in order to become more dynamic and capable
of responding. These are as follows –
risks should be identified and cautious measures are to be taken to address
them. Strategic risks include – geopolitical, Fintech and other non-traditional
emergent technologies to increase efficiency and effectiveness of risk
risk management capabilities to address newer nonfinancial risks and challenges
of regulatory fragmentation.
capital and liquidity strategically.
are risk management tools developed to identify and generate solutions to
address the uncertainty and prioritising the activities thereby tracking risks.
are two distinct types of risk tools: Two are identified by their approach, Capital asset pricing model
(CAP-M) and Probabilistic risk assessment
(PRA), is the mainstay of project risk management. These are
classified by the quality and fidelity of information required for their
calculations. Market-Level tools use market forces to make risk decisions
between securities. System-Level tools use project constraints to make risk
decisions between projects. Component-Level tools use the functions of probability and impact
of individual risks to make decisions between resource allocations.
is important to maintain the risk management practices to enhance the
efficiency of the digital financial services and also provide and build trust
among the customers. This would help take the digital transformation in the
financial services a long way.