banking BANKING SECTOR – SURVIVAL OF THE by hedongchenchen



                              Contributed by CS. Balakrishnan Bilu

The banking environment has suddenly become quite challenging after the subprime crisis
that surfaced last year and which has resulted in an unprecedented global liquidity crunch.

The flattening of the world has dramatically impacted both the dynamics and the pace of
global banking business. Mergers, acquisitions, consolidation, expansion, diversification of
lines of business, shifting customer orientation and the changing regulatory environment are
building up the pressure for banks to explore new possibilities by abandoning the familiar
and embracing the unconventional. Competition is compelling banks to be agile and
innovate everyday. In this milieu, what really enables banks to build a lasting competitive
advantage is the ability to continuously innovate, achieve differentiation and respond
quickly to dynamic business challenges.

The banking sector has witnessed wide ranging changes under the influence of the financial
Sector reforms initiated during 2008. The approach to such reforms in India has been one of
gradual and non-disruptive progress through a consultative process. The emphasis has been
on deregulation and opening up the banking sector to market forces. The Reserve Bank has
been consistently working towards the establishment of an enabling regulatory framework
with prompt and effective supervision as well as the development of technological and
institutional infrastructure. Persistent efforts have been made towards adoption of
international benchmarks as appropriate to Indian conditions. While certain changes in the
legal infrastructure are yet to be effected, the developments so far have brought the Indian
financial system closer to global standards.

       Banks' activities can be divided into retail banking, dealing directly with individuals;
business banking, providing services to mid-size business; corporate banking dealing with
large business entities; private banking, providing wealth management services to High Net
Worth Individuals; and investment banking, relates to helping customers raise funds in the
Capital Markets and advising on mergers and acquisitions. Banks are now moving towards
Universal Banking, which is a combination of commercial banking, investment banking and
various other activities including insurance.


       Technology has brought about strategic transformation in the working of banks. With
years, banks are also adding services to their customers. The Indian banking industry is
passing through a phase of customers market. The customers have more choices in choosing
their banks. With stiff competition and advancement of technology, the service provided by
banks has become more easy and convenient.
      The Indian Financial Network (Infinet)

               The Indian Financial Network, a VSAT-based communication back-bone for
the national payment system, was equipped with a full transponder on the INSAT-3B
satellite to carry out its operations. This was spearheaded by the Institute for Development
and Research in Banking Technology (IDRBT), a Hyderabad-based research institute
promoted by the Reserve Bank of India, is currently undergoing major changes. INFINET
can be used for both intra and inter bank applications. Banks can develop and port intra
bank applications on their own. Inter bank applications are being developed together by the
Reserve Bank of India, IDRBT and member banks. The INFINET is a Closed User Group
(CUG) Network and uses a blend of communication technologies such as VSATs and
Terrestrial Leased Lines. The network consists of over 700 VSATs located in 127 cities of the
country and utilizes one full transponder on INSAT 3B.
Applications such as Real Time Gross Settlement, Central Funds Management System,
Security Settlement System, Electronic Clearing System and Electronic Funds Transfer, being
developed by the RBI will be ported on the INFINET and in a true sense, the INFINET will
become the backbone for the National Payment Systems. These applications will use the
SFMS platform. Some of the applications, which the members are using on the network are
Any Branch Banking (Multi Branch Banking), Fast Collection of Cheques, Cash Management
Products, ATM Network, Interbank reconciliation, Corporate E-mails etc.

The INFINET is the most secure platform that technology can provide. Here are its salient
     INFINET being a CUG, it provides a high level of security against intruders.
        Outsiders cannot enter or penetrate the network. In the case of VSAT Network, the IP
        Addresses for IDUs at the remote VSAT locations are allotted and maintained by the
        Hub and cannot be changed by the endusers. This takes care of the network integrity
        and security.
     In the space segment, the data transmission, even in broadcast mode, is encrypted
        using proprietary standards and the packets cannot be opened at any VSAT location
        except the one specified as the destination VSAT.
     In the case of Leased Line Network (LLN) IPSEC 56 will be used to provide state-of-
        the-art encryption and security.
     Apart from the above layers of network security, there will be a host of in-built
        security mechanisms in each application that is deployed on the INFINET - like
        password, access control, encryption, digital signatures and certification and in some
        applications there will be smart card and/or bio-metric authentication as well.
     Application level Security at par with international standards is provided through
        Symmetric Key and Public Key Cryptography and IDRBT will act as the Certification
        Authority for the Banking and Financial Sector.

      Internet Banking (E-Banking)

               Internet banking (or E-banking) means any user with a personal computer and
a browser can get connected to his bank -s website to perform any of the virtual banking
functions. In internet banking system the bank has a centralized database that is web-
enabled. All the services that the bank has permitted on the internet are displayed in menu.
Any service can be selected and further interaction is dictated by the nature of service. The
traditional branch model of bank is now giving place to an alternative delivery channels
with ATM network. Once the branch offices of bank are interconnected through terrestrial or
satellite links, there would be no physical identity for any branch.
It would a borderless entity permitting anytime, anywhere and anyhow banking.
The network which connects the various locations and gives connectivity to the central office
within the organization is called intranet. These networks are limited to organizations for
which they are set up. SWIFT is a live example of intranet application.

      Internet banking in India

The Reserve Bank of India constituted a working group on Internet Banking. The group
divided the internet banking products in India into 3 types based on the levels of access
granted. They are:

    Information Only System: General purpose information like interest rates, branch
     location, bank products and their features, loan and deposit calculations are provided
     in the banks website. There exist facilities for downloading various types of
     application forms. The communication is normally done through e-mail. There is no
     interaction between the customer and bank's application system. No identification of
     the customer is done. In this system, there is no possibility of any unauthorized
     person getting into production systems of the bank through internet.

    Electronic Information Transfer System: The system provides customer- specific
     information in the form of account balances, transaction details, and statement of
     accounts. The information is still largely of the 'read only' format. Identification and
     authentication of the customer is through password. The information is fetched from
     the bank's application system either in batch mode or off-line. The application
     systems cannot directly access through the internet.

    Fully Electronic Transactional System: This system allows bi-directional capabilities.
     Transactions can be submitted by the customer for online update. This system
     requires high degree of security and control. In this environment, web server and
     application systems are linked over secure infrastructure. It comprises technology
     covering computerization, networking and security, inter-bank payment gateway and
     legal infrastructure.

    Automated Teller Machine (ATM): ATM is designed to perform the most important
     function of bank. It is operated by plastic card with its special features. The plastic
     card is replacing cheque, personal attendance of the customer, banking hours
     restrictions and paper based verification. There are debit cards. ATMs used as spring
     board for Electronic Fund Transfer. ATM itself can provide information about
     customers account and also receive instructions from customers - ATM cardholders.
     An ATM is an Electronic Fund Transfer terminal capable of handling cash deposits,
     transfer between accounts, balance enquiries, cash withdrawals and pay bills. It may
     be on-line or 0ff-line. The on-line ATM enables the customer to avail banking
     facilities from anywhere. In off-line the facilities are confined to that particular ATM
     assigned. Any customer possessing ATM card issued by the Shared Payment Network
     System can go to any ATM linked to Shared Payment Networks and perform his

    Credit Cards/Debit Cards: The Credit Card holder is empowered to spend wherever
     and whenever he wants with his Credit Card within the limits fixed by his bank.
     Credit Card is a post paid card. Debit Card, on the other hand, is a prepaid card with
     some stored value. Every time a person uses this card, the Internet Banking house gets
     money transferred to its account from the bank of the buyer. The buyers account is
      debited with the exact amount of purchases. An individual has to open an account
      with the issuing bank which gives debit card with a Personal Identification Number
      (PIN). When he makes a purchase, he enters his PIN on shops PIN pad. When the card
      is slurped through the electronic terminal, it dials the acquiring bank system - either
      Master Card or VISA that validates the PIN and finds out from the issuing bank
      whether to accept or decline the transactions. The customer can never overspend
      because the system rejects any transaction which exceeds the balance in his account.
      The bank never faces a default because the amount spent is debited immediately from
      the customers account.

    Smart Card: Banks are adding chips to their current magnetic stripe cards to enhance
     security and offer new service, called Smart Cards. Smart Cards allow thousands of
     times of information storable on magnetic stripe cards. In addition, these cards are
     highly secure, more reliable and perform multiple functions. They hold a large
     amount of personal information, from medical and health history to personal banking
     and personal preferences.

      Core Banking Solutions

Core Banking Solutions is new jargon frequently used in banking circles. The advancement
in technology especially internet and information technology has led to new way of doing
business in banking. The technologies have cut down time, working simultaneously on
different issues and increased 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. Now many advanced features like
regulatory requirements and other specialised services like share (stock) trading are being

      Real Time Gross Settlement (RTGS)

              RTGS is an electronic settlement system of Reserve Bank of India without
involvement of papers. To facilitate an Efficient, Secure, Economical, Reliable and
Expeditious System of Fund transfer and clearing in the Banking sector throughout India.
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. Once
processed, payments are final and irrevocable.

Electronic Clearing Service
Electronic Clearing Service is another technology enhancement happened in the banking
industry. The customer willing to use this facility are required to fill in the mandate form
from the corporate/any utility service institution for ECS mode of credit and debit. The
customer needs to prepare the payment date and submit it to the “sponsor Bank” and after
that every thing happened customer can there by make payments as well as
receive all incomes electonically.

        Mobile banking

Mobile banking (also known as M-Banking, mbanking, SMS Banking etc.) is a term used for
performing balance checks, account transactions, payments etc. via a mobile device such as a
mobile phone. Mobile banking today (2007) is most often performed via SMS or the Mobile
Internet but can also use special programs called clients downloaded to the mobile device.
Mobile Banking Services:

       Account Information

       Payments, Deposits, Withdrawals, and Transfers

       Investments (Portfolio management services, Real-time stock quotes,
                    personalized alerts and notifications on security prices)

        BASEL II is a new capital adequacy frame work applicable to scheduled commercial
banks in India, as mandated by the RBI.. The Basel capital accord (BASEL II) guideline
promulgated by the BIS to establish Capital adequacy requirements and supervisory
standards for banks and structured by three pillars.
In a nut-shell, BASEL II –

              Provide effective assessment method
              Incorporates Sensitivity to banks.
              Makes better business standards
              Reduce losses to the banks

The 3-Pillar Approach of BASEL II

                                          BASEL II

                            Pillar I       pillar II      pillar III

                            Minimum       Supervisory     Market
                            Capital       Review          Discipline &
                            Requirement   Process         Disclosure

                           Strengthening & safeguarding Financial Systems
                            ENHANCING COMPETITIVE EQUALITY

The BASELII is designed to facilitate a more comprehensive, sophisticated and risk sensitive
approach for banks to calculate regulatory capital. The basic objective of BASEL II is to
create an international standard.


       An international bank-rating system where bank supervisory authorities rate
institutions according to six factors.
The six factors are represented by the acronym "CAMELS." The six factors examined are as

C - Capital adequacy             reflects the overall financial condition of a bank & also the
                                 ability of the management to meet the need for additional

A - Asset quality                to ascertain the component of non performing assets as a
                                 percentage of the total asset

M - Management quality           to measure the efficiency of the management

E – Earnings                     to assess the quality of income generated by core activity

L – Liquidity                    to measure the ability of a bank to meet the demand from
                                 demand deposits in a particular year

 On the Basis of CAMEL rating Top Ten Banks in Performance During 2007-2008

 Public sector Banks            Private sector Banks            Foreign Banks
 Bank of India                  Karur vysya bank                Shinhan bank
 Corporation Bank               Yes bank                        Abu Dhabi commercial bank
 Union Bank of India            City Union Bank                 Mashreqbank P S C
 Andhra bank                    Tamil Nadu Mercantile Bank      Antwerp Diamond bank N V
 State bank of patiala          South Indian bank               Bank of Tokyo-Mitsubishi U F J
 Bank of Baroda                 Federal Bank                    Calyon Bank
 Indian Overseas Bank           Jammu & Kashmir Bank            Krung Thai Bank Public Co.
 State Bank of Hyderabad        Dhanalakshmi Bank               State Bank of Mauritius
 Punjab & Sind Bank             Karnataka Bank                  Bank of America National Trust
 Indian Bank                    Kotak Mahindra Bank             Mizutto Corporate Bank

SWOT ANALYSIS                    Banking Sector
       Strength                                            Weakness
       Aggression towards development                      Poor Technology infrastructure
       the existing standards by banks.

       Strong regulatory impact by central                 Ineffective risk measures
       Bank to all the banks.

       Presence of intellectual capital to face            Presence of more number of smaller
       the change in implementation with                   banks that would likely to be
       good quality.                                       Impacted adversely

       Opportunities                                       Threats

       Increasing Risk management Expertise.               Inability to meet the additional
                                                           Capital Requirements

       Need significant Connection among,                  loss of Capital to the entire banking
       business Credit & risk management                   system due to merger and acquisitions
       and Information Technology.

       Advancement of technologies.                        Huge investments in Technologies.
       Strong Asset Base would help in bigger


       Resource mobilisation                 Compliance Officer                  Liation in the audit
       Strategy                                                                  Process

Formulation of corporate                                                         Advice to the Board of
Management policies                          Company                             Directors
Conducting corporate meetings                                                    Risk management

Active contributory to corporate                                                 Formulation of
Governance Practices                                                             recovery policy
                                             Merger/Acquisition process

SEBI has introduced the facility of making application through “APPLICATION
SUPPORTED BY BLOCKED AMOUNT” process, in book built public issue. ASBA is an
application containing an authorization to block the application money in the bank account,
for subscribing to an issue. If an investor is applying through ASBA, his application money
shall be debited from the bank account only if his/her application is selected for allotment
after the basis of allotment is finalized, or the issue is withdrawn/failed. In case of rights
issue his application money shall be debited from the bank account after the receipt of
instruction from the registrars. Merchant bankers, Registrars and Self Certified syndicate
banks(SCSBs) are advised to provide the ASBA facility in rights issues with suitable
modifications to ASBA process specified by SEBI for public issue through book building
route, as deemed fit. SCSB is a bank which is recognized as a bank capable of providing
ASBA services to investors.

   The list of SCSBs are as below.

      Axis Bank
      Bank of Baroda
      Corporation Bank
      HDFC Bank
      ICICI Bank Ltd
      IDBI Bank Limited
      Kotak Mahindra Bank
      State Bank of Bikaner & Jaipur
      State Bank of India
      Union Bank of India
      Yes Bank Limited

The objective of introducing ASBA is to ensure that the investor's funds leave his bank
account only upon allocation of shares in public issues. The ASBA process also ensures that
only the requisite amount of funds are debited to the investor's bank account on allotment of
shares. In this mechanism, the need for refunds is completely obviated.


“Success is the sweetest thing in this world”….the future of banking industry depends on
efforts of all concerned parties such as service providers, service facilitators, regulatory
system and customers. The banking Business has always been different from other business
because it comes under service industry and financial industry category. Every one making a
financial transaction is anxious about the security of his money. Hence the bank, regulatory
authorities and other organisations must try their best to make banking sector as secure as

Reference: Chartered secretary, The Analyst, The Hindu Business Line,

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