INTRODUCTION OF BANKING

A bank is a financial institution that provides banking and other financial services to their
customers. A bank is generally understood as an institution which provides the
fundamental banking services such as accepting deposits and providing loans.

There is also non- banking institution that provides certain banking services without
meeting the legal definition of a bank. Banks are a subset of the financial services
industry.

A banking system also referred a system provided by the bank which offers cash
management services for customers, reporting the transactions of their accounts and
portfolios, throughout the day.
NEEDS OF THE BANKS

Before the establishment of the day, financial activities are handled by the money lenders
and individuals. At the time of the interest rates were very high. Again there was no
security of public saving. So as to overcome such problem the organized banking sector
was establish, which was fully regulated by the government. The organized banking sector
works within the financial system to provide loans, accept deposits and provide other
services to their customers.
The following functions of the bank explain the need of the bank and its importance:

To provide the security to the saving of customers.

To control the supply of money and credit.

To encourage public confidence in the working of the financial system.

 ncrease saving speedily and efficiently.

To avoid focus of financial powers in the hands of a few individuals and institutions.

To set equal norms and conditions (i.e. rate of interest, period of lending etc) to all types
of customers.

FUNCTIONS OF BANK

Global banking is going through some profound changes following the global financial crisis
(GFC) and the subsequent euro-area crisis. The crises have led to large balance sheet
impairments, notably for many banks in advanced countries. They have also led to a barrage of
new regulations, tighter supervision and oversight, and some banks having to pay large
penalties for past wrongdoings. And, to some degree, the crises have sharpened market
discipline and have made investors and creditors more wary of banks activities, including their
international operations. Together, these developments have forced banks to raise new capital;
deleverage their balance sheets, including international; and pare back cost structures by
shedding activities and personnel and adjusting compensation. Other, more secular
developments include new entries in financial services provision spurred by advances in
delivering financial services using digital means, which are putting additional pressures on
existing financial institutions. In addition, there has been a trend increase in the importance of

emerging markets and developing countries in the world economy in general and in finance
specifically, including through greater cross-border bank flows and direct foreign bank presence.
HISTORICAL BACKGROUND:
Bank of Hindustani was set up in 1890; it was the earliest Indian bank. Later, three presidency
banks under presidency banks act 1876 i.e. Bank of Calcutta, bank of Bombay and bank of
madras were set up, which laid foundation for modern banking in India. In 1921, all presidency
banks were amalgamated to form the bank of India. Imperial bank carried out limited number of
central banking business except dealing in foreign exchange. Reserve bank of India act was
passed in 1934& reserve bank of India (RBI) was constituted as an apex body without major
government ownership. Banking regulations act was passed in 1949. This regulation brought
RBI under government control. Under this act, RBI got wide ranging powers for supervision &
control of banks. The act also vested licensing powers & the authority to conduct inspections in
RBI. In 1955, RBI acquired control of the imperial bank of India , which was renamed as state
bank of India . in 1959,SBI took over control of eight private banks floated in the erst while
princely states, making them as its 100% subsidiaries. It was 1960, when RBI was empowered
to force compulsory merger of weak banks with the strong ones. It significantly reduced the total
number of banks from 566 in 1951 to 85 in 1969. In July 1969, government nationalised 14
banks having deposits of rs.50 cores & above. In 1980, government acquired 6 more banks with
deposits of more than rs.200 crores. Nationalised of banks was to make them play the role of
catalytic agents for economic growth. The Narasimha committee report suggested wide ranging
reforms for the banking sector in 1992 to introduce internationally accepted banking practices.
The amendment of banking regulation act in1993 saw the entry of new private sector banks.
Banking industry is the back bone for growth of any economy. The journey of Indian banking
industry has faced many waves of economic crisis. Recently, we have seen the economic crisis
of US in 2008-09 and now the European crisis. The general scenario of the world economy is
very critical. It is the banking rules and regulation framework of India which has prevented it
from the world economic crisis. In order to understand the challenges and opportunities of
Indian banking industry, first of all, we need to understand the general scenario and structure of
Indian Banking Industry.

GENERAL BANKING SCENARIO IN INDIA

The general banking scenario in India has become very dynamic now-a- days. Before preliberalisation era, the picture of Indian Banking was completely different as the government of

India initiated measures to play an active role in the economic life of the nation, and the
Industrial Policy Resolution adopted by the government in 1948 envisaged a mixed economy.
This resulted into greater involvement of the state in different segments of the economy
including banking and finance. The Reserve bank of India was nationalised on January 1, 1949
under the terms of the reserve Bank of India (Transfer to Public Ownership) act, 1948. In 1949,
the Banking Regulation Act was enacted which empowered the Reserve
Bank of India (RBI) to regulate, control, and inspect the banks in India. The Banking
Regulation Act also provided that no new bank or branch of an existing bank could be opened
without a license from the RBI, and no two banks could have common directors. By the 1960s,
the Indian banking industry had become an important tool to facilitate the speed of development
of the Indian economy. The government of India issued an ordinance and rationalised the 14
largest commercial banks with effect from the midnight of July 19, 1969. A second dose of
nationalisation of 6 more commercial banks followed in 1980. The stated reason for the
nationalisation was to give the government more control of credit delivery. With the second dose
of nationalisation, the government of India controlled around 91% of the banking business of
India. Later on, in the year 1993, the government merged New Bank of India with Punjab
National Bank. It was the only merger between nationalised banks and resulted in reduction of
the number of nationalised banks from 20 to 19. After this, until the 1990s, the nationalised
banks grew at a pace of around 4%, closure to the average growth rate of the Indian economy.
In the early 1990s, the then Narasimha rao government embarked on a policy of liberalisation,
licensing a small number of private banks. The new policy shook the Banking sector in India
completely. Bankers, till this time, were used to 4-6-4 method (borrow at 4%; lend at 6%; go
home at 4) of functioning. The new wave ushered in a modern outlook and tech- savvy methods
of working for traditional banks. All this led to the retail boom in India. People not just demanded
more from their banks but also received more.

STRUCTURE OF INDIANBANKING INDUSTRY:

Banking industry in India functions under the sunshade of reserve bank of India- the
regulatory, central bank. Banking industry mainly consists of:

1. Commercial Banks

2. Co-operative Banks

The commercial banking structure in India consists of: scheduled commercial banks
unscheduled bank. Scheduled commercial banks constitute those banks which have been
included in the second schedule of Reserve Bank of India (RBI) Act, 1934. RBI in turn includes
only those banks in this schedule which satisfy the criteria laid down vide section 42 (60) of the
Act. Some co- operative banks are scheduled commercial banks although not all co- operative
banks are. Being a part of the second schedule confers some benefits to the bank in terms of
access to accommodation by RBI during the times of liquidity constraints. At the same time,
however, this status also subjects the bank certain conditions and obligation towards the
reserve regulation of RBI.
For the purpose of assessment of performance of banks, the Reserve Bank of India categorise
them as public sector banks, old private sector Banks, new private sector banks and foreign
banks.
CHALLENGES FACED BY INDIAN BANKING INDUSTRY:
Developing Countries like India, still has huge number of people who do
not have access to banking services due to scattered and fragmented
locations. But if we talk about those people who are availing banking
services, their expectations are raising as the level of services are
increasing due to the emergence of Information Technology and competition . Since, foreign
banks are playing in Indian market, the number of services offered has increased and banks
have laid emphasis on meeting the customer expectations.
Now, the existing situation has created various challenges and opportunity for India Commercial
Banks. In order to encounter the general scenario of banking industry we need to understand
the challenges and opportunities lying with banking industry of India.
1. Rural Market:
Banking in India is generally fairly mature in terms of supply, product range and reach,
even though reach in rural India still remains a challenge for the private sector and foreign
banks. In terms of quality of assets and capital adequacy, Indian banks are considered to have
clean, strong and transparent balance sheets relative to other banks in comparable economies
in its region. Consequently, we have seen some examples of inorganic growth strategy adopted
by some nationalized and private sector banks to face upcoming challenges in banking industry

of India. For example recently, ICICI bank Ltd. Merged the Bank of Rajasthan Ltd. In order to
increase its reach in rural market and market share significantly. State Bank of India (SBI), the
largest public sector banking India has also adopted the same strategy to retain its position. It is
in the process of acquiring its associates. Recently, SBI has merged State Bank of Indore in
2010.
2. Management of Risks
The growing competition increases the competitiveness among banks. But, existing global
banking scenario is seriously posing threats for Indian Banking Industry. We have already
witnessed the bankruptcy of some foreign banks.
Wolgast,(2001) studied the merger and acquisition activity among financial firms. The author
focused bank supervisors in context with success of mergers, risk management financial
system stability and market liquidity. The study found concluded that large institutions are able
to maintain a superior level of risk management [1].
3. Growth of Banking
It was found in the study of Goyal and Joshi (2011a) that small and local banks face
difficulty in bearing the impact of global economy therefore, they need support and it is one of
the reasons for merger. Some private banks used mergers as a strategic tool for expanding
their horizons. There is huge potential in rural markets of India, which is not yet explored by the
major banks. They are successful in making their presence in rural India. It strengthens their
network across geographical boundary, improves customer base and market share [2].
4. Human resource Management
Gelade and Lvery (2003) examined relationships between human resource management
(HRM), work climate, and organizational performance in the branch network of a retail bank.
Significant correlations were found between work climate, human resource practices, and
business performance. The results showed that the correlations between climate and
performance cannot be explained by their common dependence on HRM practices on business
performance are partially mediated by work climate [3].

5. Global Banking

It is practically and fundamentally impossible for any nation to exclude itself from world
economy. Therefore, for sustainable development, one has to adopt integration process in the
form of liberalisation and globalisation as India spread the red carpet for foreign firms in 1991.
The impact of globalisation becomes challenges for the domestic enterprises as they are bound
to compete with global players.
If we look at the Indian Banking Industry, then we find that there are 36 foreign banks
operating in India, which becomes a major challenge for Nationalised and private sector banks.
These foreign banks are large in size, technically advanced and having presence in global
market, which gives more and better options and services to Indian traders.

6. Employees Retention
The banking industry has transformed rapidly in the last ten years, shifting from transactional
and customer service oriented to an increasingly aggressive environment, where competition
for revenue is on top priority. Long-time banking employees are becoming disenchanted with
the industry and are often resistant to perform up to new expectations. The diminishing
employee morale results in decrease revenue. Due to the intrinsically close ties between staff
and clients, losing those employees completely can mean the loss of valuable
customer relationships. The retail banking industry is concerned about employee retention from
all levels: from tellers to executives to customer service representatives because competition is
always moving in to hire them away. The competition to retain key employees is intense. Toplevel executives and HR departments spend large amounts of time, effort, and money trying to
figure out how to keep their people from leaving.
7. Customer Retention
Levesque and McDougal (1996) invested the major determinants of customer satisfaction
and future intentions in the retail bank sector. They identified the determinants which include
service quality dimensions (e.g. Getting it right the first time), service features (e.g. Competitive
interest rates), service problems, service recovery and products used. It was found, in
particular, that service problems and the banks service recovery ability have a major impact on
customer satisfaction and intentions to switch [3].

Clark (1997) studied the impact of customer relationships on customer retention rates in a
major UK retail bank. He revealed that employee and customer perceptions of service quality
are related to customer retention rates and that employee and customer perceptions of service
quality are related to each other [4].
8. Environmental Concerns
It is quite clear from the recently formed Copenhagen Climate Council (CCC) that there is
a severe need for environmental awareness among all the countries of the world. CCC
published thought leadership series on climate change which is a collection of inspirational,
concise and clearly argued pieces from some of the worlds most renowned thinkers and
business leaders on climate change. The objective of the pieces is to assist in enhancing the
public and political awareness of the actions that could have a significant impact on global
emissions growth and disseminate the message that it is time to act. The thought leadership
series was aimed at explaining and spreading awareness of the key elements in the business
and policy response to the climate problem. The rationale for the thought leadership series was
to change the focus of people.
IT in Banking
Indian banking industry, today is in the midst of an IT revolution. A combination of regulatory and
competitive reasons has led to increasing importance of total banking automation in the Indian
Banking Industry. The bank which used the right technology to supply timely information will see
productivity increase and thereby gain a competi-tive
edge. To compete in an economy which is opening up, it is imperative for the Indian Banks to
observe the latest technology and modify it to suit their environment. Information technology
offers a chance for banks to build new systems that address a wide range of customer needs
including many that may not be imaginable today.
Following are the innovative services offered by the industry in the recent past:
Electronic Payment Services - E Cheques
Nowadays we are hearing about e-governance, e-mail, e-commerce, e-tail etc. In the same
manner, a new technology is being developed in US for introduction of e-cheque, which will
eventually replace the conventional paper cheque. India, as harbinger to the introduction of echeque, the Negotiable Instruments Act has already been amended to include; Truncated
cheque and E-cheque instruments.
Real Time Gross Settlement (RTGS)
Real Time Gross Settlement system, introduced in India since March 2004, is a system through
which electronics instructions can be given by banks to transfer funds from their account to the
account of another bank. The RTGS system is maintained and operated by the RBI and
provides a means of efficient and faster funds transfer among banks facilitating their financial
operations. As the name suggests, funds transfer between banks takes place on a 'Real Time'

basis. Therefore, money can reach the beneficiary instantaneously and the beneficiary's bank
has the responsibility to credit the beneficiary's account within two hours.
Electronic Funds Transfer (EFT)
Electronic Funds Transfer (EFT) is a system whereby anyone who wants to make payment to
another person/company etc. can approach his bank and make cash payment or give
instructions/authorization to transfer funds directly from his own account to the bank account of
the receiver/beneficiary. Complete details such as the receiver's name, bank account number,
account type (savings or current account), bank name, city, branch name etc. should be
furnished to the bank at the time of requesting for such transfers so that the amount reaches the
beneficiaries' account correctly and faster. RBI is the service provider of EFT.
Electronic Clearing Service (ECS)
Electronic Clearing Service is a retail payment system that can be used to make bulk
payments/receipts of a similar nature especially where each individual payment is of a repetitive
nature and of relatively smaller amount. This facility is meant for companies and government
departments to make/receive large volumes of payments rather than for funds transfers by
individuals.
Automatic Teller Machine (ATM)
Automatic Teller Machine is the most popular devise in India, which enables the customers to
withdraw their money 24 hours a day 7 days a week. It is a devise that allows customer who
has an ATM card to perform routine banking transactions without interacting with a human teller.
In addition to cash withdrawal, ATMs can be used for payment of utility bills, funds transfer
between accounts, deposit of cheques and cash into accounts, balance enquiry etc.
Point of Sale Terminal
Point of Sale Terminal is a computer terminal that is linked online to the computerized customer
information files in a bank and magnetically encoded plastic transaction card that identifies the
customer to the computer. During a transaction, the customer's account is debited and the
retailer's account is credited by the computer for the amount of purchase.
Tele Banking
Tele Banking facilitates the customer to do entire non-cash related banking on telephone. Under
this devise Automatic Voice Recorder is used for simpler queries and transactions. For
complicated queries and transactions, manned phone terminals are used.
Electronic Data Interchange (EDI)
Electronic Data Interchange is the electronic exchange of business documents like purchase
order, invoices, shipping notices, receiving advices etc. in a standard, computer processed,
universally accepted format between trading partners. EDI can also be used to transmit
financial information and payments in electronic form.
Challenges Faced by Banks, vis--vis, IT Implementation
It is becoming increasingly imperative for banks to assess and ascertain the benefits of
technology implementation. The fruits of technology will certainly taste a lot sweeter when the
returns can be measured in absolute terms but it needs precautions and the safety nets. The
increasing use of technology in banks has also brought up 'security' concerns. To avoid any
mishaps on this account, banks ought to have in place a well-documented security policy
including network security and internal security. The passing of the Information Technology Act
has come as a boon to the banking sector, and banks should now ensure to abide strictly by its
covenants. An effort should also be made to cover e-business in the country's consumer laws.

Some are investing in it to drive the business growth, while others are having no option but to
invest, to stay in business. The choice of right channel, justification of IT investment on ROI, egovernance, customer relationship management, security concerns, technological
obsolescence, mergers and acquisitions, penetration of IT in rural areas, and outsourcing of IT
operations are the major challenges and issues in the use of IT in banking operations.
Future Outlook
Everyone today is convinced that the technology is going to hold the key to future of banking.
The achievements in the banking today would not have make possible without IT revolution.
Therefore, the key point is while changing to the current environment the banks has to
understand properly the trigger for change and accordingly find out the suitable departure point
for the change.

The Market

Digital Payments Industry including net banking, credit/debit card

transactions, prepaid cash cards, mobile wallet and IMPS was
estimated at $14.51 Billion in 2013. Out of 800 million online
transactions made in 2013, 53% were made using credit (21%)
and debit cards (32%), while 44% came from Internet banking. The
rest were attributed to Mobile Wallet, Pre-Paid Cash cards and
Immediate Payment systems (IMPS). The current size of mcommerce 4% of the market, is significantly low.
At present, mobile payments form a miniscule part of the overall
digital payments industry in India. However, contribution
from phones and tablets is expected to increase to 30% by
2020. Mobile Payments in India is estimated to grow from $86
million in 2011 to $1.15 billion in 2016, with a compound annual
growth rate (CAGR) of 68%.
The M-wallet market is projected to grow at a CAGR of around 30%
in the next five years from 2015-2019. Market of m-wallet segment
includes transferring of money, services related to banking
transactions, value added services such as shopping, ticketing,
recharging, and bill payments
In this segment, the highest 38% market share is captured by
money transfer businesses, followed by recharge and bill payments,
and utility areas by 30% and 12% respectively. Others enjoy 20%
market share.

Some of the major m-wallet players are Airtel Money, mRupee,

Vodafone m-Pesa, Oxigen Wallet, Paytm, Mobikwik and Idea Money
(VMSI).

The Opportunities
In this backdrop, potential opportunity lies in consumer payments
industry (specifically wallets)
1. Tapping into the untapped market According to data from
Reserve Bank of India (RBI), India is the home to largest number of
unbanked families (more than 145 million). Potentially one of the
largest bases to capitalize on.
2. A Focus on providing merchants with Multichannel Payment
Services.
3. Payment through wallets using NFC, tokenization, biometrics
Because Mobile devices will be a mainstream option for person-toperson or person-to-business payments.
4. Cryptocurrencies. E.g. Bitcoin, Litecoin etc.(Total Market Cap :
$3,880,950,327)
5. Developing solutions that are not payment solutions, but are
touch payments solutions for merchant, gift, loyalty, data analytics
etc.
6. Financial Inclusion A wallet which can cater to this will definitely
rule the Indian market.
Parameters
2013
2014
250.5
328.6
No of Transactions
million
million

Amount of Transactions
Banking Outlets in Villages
(Branches)
Banking Outlets in Villages
(Branchless Mode)
Banking Outlets in Villages (Total)

$ 3.6
billion

$ 8.2
billion

40,837

46,126

227,617

337,678

268,454

383,804

7. Analytics solutions Payments Transaction Data Analytics will be

a major source of payments-related revenue.
8. Remittances Remittances to developing countries to grow by
5%.
(Annual domestic remittance stood at $13 billion in 2010 and was
expected to reach at $20.3 billion by 2014, growing at a
compounded annual rate of 12 %.)
Mobile wallets
Let us talk about Mobile wallets. All these facts give a conclusion
that the market of mobile wallets is definitely a lucrative one, with
investors ready to pump in money.
As e-commerce continues its rapid growth in the Asiatic region,
mobile wallets have become one of the most trusted and preferred
ways to pay online. Most of these wallets incorporate multiple
payment methods, from bank transfers to credit cards, debit cards,
gift cards and more. That way, consumers with or without credit
cards, can use mobile wallets.
NFC is now available on nearly all high-end smartphones. The only
issue with NFC gaining popularity into the Indian market is the
supporting hardware on the merchants POS. In-store payments
drive mobile wallets adoption to a large extent, as more than 90%
transactions occur in-store. The question here is, will NFC or app
based/barcode payment rule?
Some mobile wallet providers are giving facilities to unbanked
consumers to deposit money into their wallet through agents, but
that is geographically very limited.
Mobile wallet providers have now become a kind of mini banking
institutions (Payments banks) and it would not be surprising if they
will get their banking licenses, and follow the path like Paytm, Airtel

etc. This will be very lucrative if we take into consideration the

Governments agenda of financial inclusion. Paytm has over 100
million wallet users, which is double that of Visa and Maestro
penetration together (in India). Over and above this, in a country
such as India & BRIC nations the remittance market is huge. These
Payment banks can also leverage in this landscape.
The financial institutions/e-commerce/lifestyle shops have realized
the potential of mobile wallets in terms of consumer experience and
loyalty. That is why each one of them is coming up with their own
wallet which can be recently seen with the launch of SBI Buddy,
BookmyShows own wallet to name a few. It would be relatively
easier for banks vs a non-bank product, because they already have
a trusting customer base and their product is less likely to suffer
from interoperability.
Essentials
A mobile wallet in todays world should encompass the following 3
features (Source Euromonitor)
Pre-purchase: Pre-purchase capabilities enable consumers to
identify products or solutions that they would like to buy and provide
incentives. These capabilities include offers and coupons that are
driven by location, loyalty based services including gift cards and
rebates.
Purchase: Existing payment technologies adequately cover the
purchasing option. These include NFC based and QR code based
solutions.
Post-purchase: Ability to manage payment details after a purchase
is key for a compelling mobile wallet solution. These capabilities
include transferring of payment to another card and expense
management. Some innovative capabilities could include the ability
to purchase a warranty for large purchases, signing up for loyalty
programs. Post-purchase is also a great time for providing cross
sell/up sell features
Challenges
With a new mobile wallet coming up every month or so, the main
thing to watch would be how they market themselves, which
exclusive alliances they can come up with, like Uber and Paytm what

effectively gave an entry to Paytm into the market and use all of the
Uber users on its platform. In addition to this, a wallet which can
better digitize the path-to-purchase and eliminate the friction tied to
the payment process over its rival, will capture the market.
With the advancement of technology, to create a unique selling
proposition in term of features would be extremely difficult for the
new players. The only thing that they can do, apart from making a
good product is market in a way that touches every consumer
aspect (From excellent UI/UX to all basic wallet features to one touch
payment millennial generation to one to one customer
engagement), exclusive alliance with 1-2 service providers and most
importantly partner with various e-commerce/traditional shops.
The value proposition of a mobile wallet is not about the payment,
but instead about the services that can be offered across a mobileenabled environment. It is interesting to see scenarios where the
mobile wallet is funded over the lower-cost EFT network in order to
save money on card network fees. Wallet providers also save money
by bundling transactions to get high volume discounts.
No one wants to be left behind in this race of making CUSTOMER
use their wallet for their next transaction and in the process
encourage them by rolling out n numbers of offers. Is this much cost
really justifiable in the name of customer acquisition/retention etc.?