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Role of Information Technology (IT) in the Banking Sector

Banking environment has become highly competitive today. To be able to survive and grow in the changing market environment banks are going for the latest technologies, which is being perceived as an enabling resource that can help in developing learner and more flexible structure that can respond quickly to the dynamics of a fast changing market scenario. It is also viewed as an instrument of cost reduction and effective communication with people and institutions associated with the banking business. The Software Packages for Banking Applications in India had their beginnings in the middle of 80s, when the Banks started computerising the branches in a limited manner. The early 90s saw the plummeting hardware prices and advent of cheap and inexpensive but high powered PCs and Services and banks went in for what was called Total Branch Automation (TBA) packages. The middle and late 90s witnessed the tornado of financial reforms, deregulation globalisation etc. coupled with rapid revolution in communication technologies and evolution of novel concept of convergence of communication technologies, like internet, mobile/cell phones etc. Technology has continuously played on important role in the working of banking institutions and the services provided by them. Safekeeping of public money, transfer of money, issuing drafts, exploring investment opportunities and lending drafts, exploring investment being provided. Information Technology enables sophisticated product development, better market infrastructure, implementation of reliable techniques for control of risks and helps the financial intermediaries to reach geographically distant and diversified markets. Internet has significantly influenced delivery channels of the banks. Internet has emerged as an important medium for delivery of banking products and services. The customers can view the accounts; get account statements, transfer funds and purchase drafts by just punching on few keys. The smart cards i.e., cards with micro processor chip have added new dimension to the scenario. An introduction of Cyber Cash the exchange of cash takes place entirely through Cyber-books. Collection of Electricity bills and telephone bills has become easy. The upgradeability and flexibility of internet technology after unprecedented opportunities for the banks to reach out to its customers. No doubt banking services have undergone drastic changes and so also the expectation of customers from the banks has increased greater. IT is increasingly moving from a back office function to a prime assistant in increasing the value of a bank over time. IT does so by maximizing banks of pro-active measures such as strengthening and standardising banks infrastructure in respect of security, communication and networking, achieving inter branch connectivity, moving towards Real Time gross settlement (RTGS) environment the forecasting of liquidity by building real time databases, use of Magnetic Ink Character Recognition and Imaging technology for cheque clearing to name a few. Indian banks are going for the retail banking in a big way The key driver to charge has largely been the increasing sophistication in technology and the growing popularity of the Internet. The shift from traditional banking to e-banking is changing customers expectations.

E-Banking: E-banking made its debut in UK and USA 1920s. It becomes prominently popular during 1960, through electronic funds transfer and credit cards. The concept of web-based baking came into existence in Eutope and USA in the beginning of 1980. In India e-banking is of recent origin. The traditional model for growth has been through branch banking. Only in the early 1990s has there been a start in the non-branch banking services. The new pribate sector banks and the foreign banks are handicapped by the lack of a strong branch network in comparison with the public sector banks. In the absence of such networks, the market place has been the emergence of a lot of innovative services by these players through direct distribution strategies of non-branch delivery. All these banks are using home banking as a key pull factor to remove customers away from the well entered public sector banks. Many banks have modernized their services with the facilities of computer and electronic equipments. The electronics revolution has made it possible to provide ease and flexibility in banking operations to the benefit of the customer. The e-banking has made the customer say good-bye to huge account registers and large paper bank accounts. The e-banks, which may call as easy bank offers the following services to its customers:
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Credit Cards/Debit Cards ATM E-Cheques DeMAT Accounts Mobile Banking Telephone Banking Internet Banking EDI (Electronic Data Interchange) ECS (Electronic Clearing System)

Benefits of E-banking: To the Customer:

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Anywhere Banking no matter wherever the customer is in the world. Balance enquiry, request for services, issuing instructions etc., from anywhere in the world is possible. Anytime Banking Managing funds in real time and most importantly, 24 hours a day, 7days a week. Convenience acts as a tremendous psychological benefit all the time. Brings down Cost of Banking to the customer over a period a period of time. Cash withdrawal from any branch / ATM On-line purchase of goods and services including online payment for the same. The increased speed of response to customer requirements; enhance customer satisfaction and, ceteris paribus, can lead to higher profits via handling a larger number of customer accounts.

Manipulation of books by unscrupulous staff, frauds relating to local clearing operations will be prevented if computerisation in banks takes place.

To the Bank:
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Innovative, scheme, addresses competition and present the bank as technology driven in the banking sector market. Reduces customer visits to the branch and thereby human intervention. Inter-branch reconciliation is immediate thereby reducing chances of fraud and misappropriation On-line banking is an effective medium of promotion of various schemes of the bank, a marketing tool indeed. Integrated customer data paves way for individualised and customised services. Lower cost of handling a transaction and of operating branch network along with reduced staff costs via the virtual resource compared to the cost of handling the transaction via the branch.

Impact of IT on the Service Quality: The most visible impact of technology is reflected in the way the banks respond strategically for making its effective use for efficient service delivery. This impact on service quality can be summed up as below:

With automation, service no longer remains a marketing edge with the large banks only. Small and relatively new banks with limited network of branches become better placed to compete with the established banks, by integrating IT in their operations. The technology has commoditising some of the financial services. Therefore the banks cannot take a lifetime relationship with the customers as granted and they have to work continuously to foster this relationship and retain customer loyalty. The technology on one hand serves as a powerful tool for customer servicing, on the other hand, it itself results in depersonalising of the banking services. This has an adverse effect on relationship banking. A decade of computerization can probably never substitute a simple or a warm handshake. In order to reduce service delivery cost, banks need to automate routine customer inquiries through self-service channels. To do this they need to invest in call centers, kiosks, ATMs and Internet Banking today require IT infrastructure integrated with their business strategy to be customer centric.

Impact of IT on Banking System: The banking system is slowly shifting from the Traditional Banking towards relationship banking. Traditionally the relationship between the bank and its customers has been on a one-toone level via the branch network. This was put into operation with clearing and decision making responsibilities concentrated at the individual branch level. The head office had responsibility for the overall clearing network, the size of the branch network and the training of staff in the branch network. The bank monitored the organisations performance and set the decision making

parameters, but the information available to both branch staff and their customers was limited to one geographical location.

Traditional Banking Sector

The modern bank cannot rely on its branch network alone. Customers are now demanding new, more convenient, delivery systems, and services such as Internet banking have a dual role to the customer. They provide traditional banking services, but additionally offer much greater access to information on their account status and on the banks many other services. To do this banks have to create account information layers, which can be accessed both by the bank staff as well as by th customers themselves. The use of interactive electronic links via the Internet could go a ling way in providing the customers with greater level of information about both their own financial situation and about the services offered by the bank. The New Relationship Oriented Bank

Impact of IT on Privacy and Confidentiality of Data: Data being stored in the computers, is now being displayed when required on through internet banking mobile banking, ATMs etc. all this has given rise to the issues of privacy and confidentially of data are:

The data processing capabilities of the computer, particularly the rapid throughput, integration, and retrieval capabilities, give rise to doubts in the minds of individuals as to whether the privacy of the individuals is being eroded. So long as the individual data items are available only to those directly concerned, everything seems to be in proper place, but the incidence of data being cross referenced to create detailed individual dossiers gives rise to privacy problems. Customers feel threatened about the inadequacy of privacy being maintained by the banks with regard to their transactions and link at computerised systems with suspicion.

Aside from any constitutional aspect, many nations deem privacy to be a subject of human right and consider it to be the responsibility of those who concerned with computer data processing for ensuring that the computer use does not revolve to the stage where different data about people can be collected, integrated and retrieved quickly. Another important responsibility is to ensure the data is used only for the purpose intended.

Article on Indian Banking Sector- Survival is the mother of innovation

Banks can provide innovation products and services to their corporate and retail customers only when creative people are in place along with latest technology. Such people might provide innovative ideas to customers and banks. By converting there acceptable ideas into reality, banks can get an edge to compete effectively in the global village. Indian banking is also changing its shape rapidly by adopting innovative technology, products and services. Innovation is the key to success for any activity. Innovation banking is therefore not an exception. Innovation banking is possible only when we have innovative people in banking. Moreover, innovative ideas of such people have to be heard at the right time by the right people. Only then the needed encouragement and support is given to convert such innovative ideas in reality. In the past, a generation gap is considered to be with a span of at least 10 years. Whereas with the improvement in the technology followed by integration of people and places across the world on account of revolutionary changes in information and communication. The entire world has become virtually a small global village. Since all organizations and people use technologies, we find that a new generation of techno savvy people emerging in a very short span of 5 years in every sphere of activity infusing dynamism and creativity leading to several innovations. Globally, usage of technology is very extensive in the financial sector of which banking sector is an integral part. Indian financial sector has made rapid strides in late 1980s and early 1990s picking up momentum with the advent of 21st century. Liberalization of the Indian economy has provided scope to the banking sector to reorient its focus by shifting from developmental role obligated mostly by socio-political considerations into professional financial agencies keen on preserving their bottom lines. The direction in which the Indian banking is moving presently indicates that the prevailing competition will lead to consolidation and convergence. Small players will either have to forge a merger to become big players or else they will be either extinguished or swallowed by larger players in the years to come. The pressure will equally be more on the existing large players to retain their lead over others. This emerging scenario warrants innovative approach by banks to keep themselves sailing in the sea of competition. No wonder we find a very interesting trend in the recent past in the Indian banking. The trend is the major shift from routine banking functions to a very aggressive financial marketing organization. We find most of the routines banking jobs are out source, thanks to automation made possible by technology. Direct selling agents are actively engaged by most of the foreign and new generation private sector banks for marketing all the banking products with specified targets. Therefore, the real core people who will be retained by these banks in the long run under their direct pay roles will only be experts at senior levels in marketing, corporate and retail banking specialists along with risk management professionals who will be required in view of the impending implementation of the Basle-II norms which attaches significant to assessment and management of risk factors in banking activity. One can visualize the following scenario in Indian banking in the next five to seven years. State bank of India and there associate banks aiming to come under one umbrella on one side followed

by mergers and acquisitions taking place between few strong nationalized banks, foreign banks and new private banks on the other side. This will leave the small players and weak banks to become extinct unless they device quick strategies to become larger and stronger. In this context, innovation plays a very key and crucial role of the survival of the small players and also for the large players to retain their leadership amidst cutthroat competition. Out of the box thinking is required and such thinking needs to be nurtured by the top management. ATMs of the larger banks are either fully out sourced by the individual banks or handed over to an autonomous agency by most of the banks collectively. Small players in ATMs are also trying to be a part of this shared network with regard to clearing operations, Reserve Bank of India has already initiated the required steps to gradually dispense with the physical presentation of chques and replace the same with electronic clearing in major cities. Similarly the audit and inspection of the computerized branches is now being done in many cases by transfer of data files to the supervisory and inspecting authorities. Qualitative inspection and supervision of the banks by Reserve Bank of India is made possible by the technology, leaving the routine audit work to the concerned internal audit departments of the individual banks. With the automation of the routine work process and rapid technological developments, a host of customer friendly banking products with flexibility are now available to one and all. Few departments of the government (e.g. customs, income tax, central excise, commercial taxes and sales tax) have already initiated the process of EDI (Electronic Data Interface) there by reducing the manual tasks in the preparation of documentation and enhancing the levels of automation. This also facilitates standardization in documentation with uniformity. This will also ensure submission of such standard data in electronic form and scanning the physical documents where required. In the long run, this enables e-commerce to gain momentum. Therefore, banks can also equally look forward to submission of commercial documents by the trade industry through EDI in the near future. Once this is done, the need for the business segment to personally visit the bank branches to submit the documents will be eliminated. When ATMs on one side have reduce the depends of individuals customers on the bank branches to conduct their routine banking operations, the EDI when gains momentum will reduce the dependence of corporate customers on the bank branches in a similar fashion. These developments taking place mainly on account of automation will reduce the differentiation in the service delivery systems, as they are mostly standardized. Therefore, banks have to be innovative to maintain their brand values. Few banks have already started marketing aggressively for retail business loans by tying up with a select-reputed builders and conducting road shows in India and abroad to lure the salaried people and professionals. This role is intermediation of the banker between the builders and salaried people and professionals can be further extended to cover other areas as well. For example banks can connect the manufacturers of goods and services with the ultimate buyers. The process is very simple. Banks are required to have a common agency with which the entire database of all the banks should be shared. This data should be analyzed and classified into various segments say- according to activity, age, place, income, education, etc., of the organizations and people who constitute this data. When this process is done on all India bases, a wealth of information will be available, which can be used as a marketing tool. Few relaxations in the existing banking laws are required for this purpose. Banks can also play an active intermediary role in connecting the organizations and people at various segments, thereby

facilitating the process of movement of goods and services from the manufacturers/producers to the ultimate users (of course through other intermediaries where they are not dispensable). Banks can finance the manufacturers/producers or the ultimate users while tying up them with one another thereby increasing their lending portfolio and in the process ensuring the end use of funds. Collection of data from rural places is one area where banks can boast of possessing rich information, especially the public sector banks that have almost more then one third of the network of branches located at rural areas. Banks can play a dynamic role in the delivery and purchase of consumer durables to the rural sector by using their rural database. Therefore, instead of acting as financing intermediaries to some of the parties in the total chain as at present, banks can bring all the parties in the chain under their ambit. Banks can thus transform themselves into aggressive marketing intermediaries from mere financial intermediaries. This innovative approach can also be used with regard to NPAs where the products manufactured by such sick or loss-making units are of good quality but the units have become sick due to financial indiscipline or mismanagement or lack of marketing skills. Buyers for such products can be scouted by the banks by using the above mentioned database and in deserving cases buyers can be given bank finance or there own merits to buy the products of sick units. A portion of the funds thus given can be again routed back into the banks for their working capital requirements. Similarly, banks can play an active marketing role in venture capital financing with the above modus operandi, thereby taking part in not only financing the venture capital but also in marketing functions. Micro finance is yet another area where banks can play an active role .The objective of micro finance is to deliver a wide range of financial services say, deposits, advances, insurance and other related products to people engaged in agriculture, small enterprises and poor people in order to increase their standard of living. Finance is extended to SHGs or NGOs, which is basically institutional/group finance instead of lending to individual beneficiaries unlike in the case of other priority sector/rural lending. Moreover, there are no subsidies or interest concession and the basic concept in micro finance is to give a timely finance to the needy people. Therefore, transaction costs are cheaper and profitability is better under micro finance when compared to the conventional rural lending. In view of these factors in the long run micro finance is likely to replace the conventional and concessional rural lending. Ample scope is available for private and foreign banks to venture into this activity due to the above-mentioned advantages. Similarly, banks in rural sector should actively market products like Kisan Credit Cards, Forward, Futures, and Option markets of commodities. While Kisan Credit Cards serve as an instrument of credit, Forward, Futures and Options markets ensure a fair price to the farmers eliminating uncertainty. However, this require an effective network that is one regulated as well as a matured financial market in rural areas for the growth and development of these products. Rural India and its economy mainly depend upon Monsoons. Famine and Floods both occur at the same time in the different parts of the country causing damage to the crops. Therefore, rural insurance has to be an effective tool in hedging these risk factors. Government, banks and insurance have to together evolve a more proactive and vibrant measures to deal with this issue, both at macro and micro level. There is a vast untapped potential in this area and lot of scope for developing new and innovative insurance linked financial products.

Merger of developmental financial institutions like ICICI and IDBI with there commercial banking wings lays emphasis on universal banking offering wide range of financial products under one umbrella. Similarly, SIDBI and NABARD are having a strategic alliance with few commercial banks to expand the reach of their products and services. Banks have come to realize that it is the survival of the fittest in the competitive environment. Therefore, when necessity is the mother of invention, survival is the mother of innovation.