Commercial Banking to Convenience Banking

By

Prof. Chowdari Prasad
Professor in Finance & Registrar
Alliance Business School
Bangalore-560 068
 

Banking Industry in India has been undergoing transformation on an ongoing basis responding to the customers' needs and regulators directions.  What was once mere traditional or commercial banking today is referred to as convenience banking. Some banks (including Foreign Banks) also refer their services as Relationship Banking, Private Banking, etc. In the beginning, the functions of a bank were only accepting deposits and lending on selective basis.  In course of time, the third activity was added – which included remittances like demand drafts/ mail or telegraphic transfers, collection and discounting of cheques and bills, safe deposit of articles, safe custody of scrips, bonds, etc., issue of travelers cheques, letters of credit or bank guarantees and so on. 

In the earlier years after Independence, simultaneously development banking and rural banking functions were added on when India launched its Five Years Plans.  However, developmental role was taken up initially by Project Finance Institutions like IFCI, ICICI and IDBI as also SIDC and SFCs who have lent high value term loans to encourage industrial units.  Rural Banking was looked after by State Bank of India and its subsidiaries followed by Public Sector Banks.  In the early seventies SBI, however realized the need for reorganizing itself with a clear direction to serve the customers through a proper market segmentation of its business into – Personal Banking, Commercial & Institutional Banking, Small Scale Industries & Small Business Banking, Agricultural Banking, International Banking, Merchant / Investment Banking, etc. 

Focus was given to each of the clusters of customers by SB Group and the system of Performance Budgeting was introduced internally.  Non-Resident Indians (NRIs) were afforded high importance in order to attract Foreign Exchange business while specialized branches were also opened to cater to all these types of customers by SB Group.  Industrial Finance Branches, Overseas Branches, SSI Branches, Agricultural Development Branches, Village Branches, etc were opened to intensify its services while according equal importance to its social responsibility.  Due to certain obvious reasons, the banking industry got itself derailed and passed through bad patches in seventies and eighties when certain experts or committees opined that there was a need for shifting to Universal Banking and Narrow Banking to bring back the industry on rails.  One eminent Economist occupying a high position in the Reserve Bank of India has even got to the extent of coining a new word – lazy banking – when the aspect of profitability or productivity was at the lowest in the industry.

Advent of Technology in eighties and introduction of reforms in the nineties have brought back the glitter to the banking system in India.  Today, healthy competition has set in between public, private and foreign banks – all of who are offering a wide variety of products and services.  Legal and Technological changes have made the banks to care the tech-savvy customer to expect Electronic Banking, Internet Banking, Retail Banking, Online Banking, Mobile Banking or Virtual Banking on par with banks world over.

The concept of banking was first introduced in medieval Florence in 1397. A powerful merchant family named Medici established a network of shops that allowed patrons to place money on account and withdraw the money in another city that had a Medici representative. Many powerful families and even the Church kept their money in Medici banks. This allowed rich people to travel without the need to carry large sums of money and risk of robbery while traveling. Banking continued to gain popularity throughout Europe by 1700. Nearly every country in Europe had some form of established banking. Modern banking has come a very long way from those humble beginnings in Florence. Banking today covers the entire spectrum of finance from simple savings to credit cards and home loans. Typically, a bank generates profits from transaction fees on financial services or the interest spread on resources it holds in trust for clients while paying them interest on the asset. Banks today are connected electronically so that banking transactions can be made globally in a split second. 

Banking in India is over two centuries old with its foundations laid during the British regime. The industry went through several ups and downs and has always been in the centre of debates in recent times since it is a very important service in the day to day life of customers and contributing significantly to the Indian economy. Broadly, Indian banking is discussed with reference primarily to three eras – (1) pre nationalization ie., upto the year 1969, (2) post nationalization and up to pre-economic reforms ie., 1993 and (3) post reforms ie., after 1993 till date with ongoing changes. 

The cooperative banking system did not deliver the expected results in the rural areas and hence 14 major commercial banks were taken over by GOI with this purpose.  Prior to this, formation of State Bank of India (converting Imperial Bank of India) in 1955 and subsequent take over of eight Maharaja banks as subsidiaries of State Bank was the beginning of expansion of banks in rural India. The Government of India as majority owner of the Public Sector Banks and RBI as regulator have a major say in the working of Indian banks in the post – Independence era.  The industry witnessed several changes in the last four decades due to the Government's political and developmental philosophy of taking banking to grass roots in the country transforming from class banking to mass banking from 1969 onwards. Lead Bank Scheme and Branch Licensing Policy further strengthened this concept.  In these years of expansion and transition, there were many handicaps the industry suffered but continued to sustain and deliver results.

Customer Service was always the focus area in banking.  But due to ever changing priorities and several other constraints like resorting to loan melas, domination of trade unions in the public sector banks, absence of automation, deficiency of laws for consumer protection or recovery of loans due from willful defaulters, waiver and write-offs of irrecoverable loans, etc affected the efficient function of commercial banking in seventies and eighties.  Customer Service Committee headed by RK Talwar, then Chairman of State Bank of India gave several recommendations in seventies.  Gradual changes were brought in by introducing Computers for back-office and reconciliation work or Clearing House settlements, Advanced Ledger Posting Machines for front offices to render better customer service, in a small way.  Personal Computers entered the banking scene during eighties but the shortage of trained manpower was always a bottleneck.  The decade of eighties had also witnessed MICR cheques, Automated Teller Machines (ATMs) and Credit Cards towards bettering the customer service.  Again M N Goiporia, Chairman of SBI headed another Committee on Customer Service in early nineties.

Introduction of Technology in Indian Banking began to take shape during eighties thanks to several committees constituted by RBI.  The following committees are worth mentioning for the purpose.

1. Working Group to consider feasibility of introducing MICR / OCR Technology for Cheque processing in the year 1982. The Convenor of the Committee was Dr Y B Damle, Advisor, Management Science Department, Reserve Bank of India.

2. Committee on Mechanisation in the Banking Industry in 1984 headed by Dr C Rangarajan, Deputy Governor, Reserve Bank of India

3. Committees on Communication Network for Banks and SWIFT implementation in 1987 headed by Shri TNA Iyer, Executive Director, Reserve Bank of India

4. Committee on Computerisation in Banks in 1988 headed by Dr C Rangarajan, Deputy Governor, Reserve Bank of India

5. Committee on Technology Issues relating to Payment System, Cheque Clearing and Securities System in the Banking Industry, in 1994 headed by Shri W S Saraf, Executive Director, Reserve Bank of India,

6. Committee on Proposing Electronic Funds Transfers and Electronic Payments in 1995 headed by Smt K S Shere, Principal Legal Advisor, Reserve Bank of India.

Subsequently, several other Committees have gone into the aspects of introduction of Technology and Networking of banking system in the country, Internet Banking, Cheque Truncation system, etc.  In the post reforms era, banks in India have experienced several structural changes, to bring in productivity in their working.  Introduction of Prudential Norms in 1993 with changes in their accounting systems, Income Recognition and Asset Classification norms, provisioning for Non Performing as well as Standard Assets, opening of new Generation Private Sector Banks, inviting more and more Foreign Banks in the post WTO era, extended working hours, Sunday-banking, deregulation of interest rates, withdrawal of directed lending, reduction of CRR and SLR requirements, imposing of new Capital Adequacy Requirements pursuant to banks adopting Basel I norms, Voluntary Retirement Schemes for employees, shifting or closing down of loss making branches, involving of outside agencies for selling insurance products, credit cards, mutual funds, housing and other retail loans,  introduction of Asset Liability Management and Risk Management systems, etc., introduction of Ombudsman Scheme in banking, have brought in dramatic changes in the operational aspects of banks in India.

Table No.1 Distribution of Banks branches in India as on 31^st March, 2006

The above table gives us the status of Indian banking as on March 31, 2006.  The data is exclusive of branches of Regional Rural Banks who are themselves undergoing transformation and consolidation bringing down their number from the original 196 to 96 as on a recent date.  Stupendous efforts are going on to introduce computers at all these rural and semi urban branches as also to network them for rendering improved customer service.  Going by the market trends, public sector banks in India have began competing with their private sector and foreign counterparts by offering varieties of services and products with the help of technology in all their operations. 

During the course of reforms in the industry, banks in India have also realized the need for dependence on large scale automation.  This called for huge investment in hardware and software, training of personnel and networking of branches and controlling offices. 

The many benefits of technology in banking could be listed out as under:

a. Increased operational efficiency, productivity and profitability
b. Offering of superior quality customer service on par with foreign banks
c. Multi-channel, real-time transaction processing
d. Ability to better Cross selling of products and services
e. Improved MIS, management and accountability
f. Efficient NPA and Risk / Credit Management
g. Minimising Transaction Costs, etc

Having realized the necessity to modernize and compete with the other players in the Industry all types of banks - Public, Old and New Private Sector Banks have strengthened their operations by introducing technology and offering customer-savvy products and services.  Banks like State Bank of India and Punjab National Bank opened exclusive all-India level Training Colleges to train their staff in technology.  Reserve Bank of India also took the initiative of founding a separate establishment called Institute for Development and Research in Banking Technology (IDRBT), Hyderabad in the year 1996.  It is an autonomous institution funded by RBI for the benefit of banks and financial institutions in India. IDRBT is engaged in Development, Research and Consultancy in Banking as a 'Think Tank'.  It established V-Sat based financial network for all banks called 'Infinet' engaged in Data Warehousing and Data Mining.  It publishes journals and research papers on IT in banking.  It offers web-based training to bank executives and conducts Post Graduate / Research Programs for Banking Professionals.

With the initiatives taken by Reserve Bank of India, the banking industry in India has marched forward in offering technology based services in a very efficient manner. NICNET, RABMN, I-NET have paved way for introduction of INFINET, BANKNET AND RBINET.  The successful experience of MICR / OCR and ATMs in the industry led to furthering to adoption to SWIFT, Demat services, EDI and Internet Banking in a gradual manner.  The journey was further extended to ECS credit and debit, Electronic Funds Transfer, SEFT and Real Time Gross Settlement schemes to set in the industry. 

On the other hand, the banks in India have also felt the need for compliances like Know Your Customer (KYC), Asset Liability Management (ALM), Core Banking System (CBS), Risk Management, Customer Relations Management (CRM), Basel-II, etc.  With the improvement in MIS mechanisms, threats from Money Laundering, and Cyber crimes have also made the banks to tighten their systems and audit procedures.  Shared Payment Network Systems (SPNS or also called SWADHAN) is another facility through which banks have come together to share the ATM services offered and save on costs while offering competitive customer services.  In recent years, banks also started offering mobile ATMs (besides more than 50% of off-site ATMs) and biometric ATMs to rural customers.  As on March 31, 2006 all commercial banks in India had 21,523 ATMs (10,263 on-site and 11,260 off-site) as against a total of 54,791 branches all over India.  Almost all the banks are announcing of more and more ATMs to their Metro and Urban customers which will certainly reduce the manual transaction costs at the branches.

The next best move by the system is to introduce Smart Cards with the advantage of multi-applications.  A Pilot Project has been funded and started by Government of India.  The Project is in progress and is partnered by IDRBT, IIT Mumbai and Banks.  Smart Card Forum of India (SCAFI) is a non-profit and multi-industry organization promoting and working for wide-spread acceptance of multi-application smart card technology. 

Banking industry in India moving very fast keeping in pace with their global counter parts.  After having complied with Basel-1 requirements and meeting the Capital standards, these banks are gearing up to accomplish high standards of working and meeting the Basel-2 by March 2008.  In the recent years, their deposits and advances are growing at a high range of 25-30 per cent per annum.  The recent levels of deposits and advances of all banks in India are of the order of Rs. 28,50,000 and Rs. 20,00,000 crores respectively with a Credit Deposit Ratio of above 70 per cent. 

Another interesting feature of the Indian banking system is that despite undergoing rapid changes in accounting, legal, structural and technological systems in the past 15 years, it was found to be robust.  There have been two three major financial scams in the stock market, Non Banking Financial Companies, etc during this period but there was minimal effect on the banking system.  There have been instances of some old and new private banks affected by these calamities resulting in closure of banks like Bank of Karad, Nedungadi Bank, United Western Bank, Bharat Overseas Bank, Global Trust Bank, etc.  Similarly, there have also been some mergers like Centurion Bank with Bank of Punjab, Times Bank with HDFC Bank, Ganesh Bank of Kurundwad with Federal Bank,  Bank of Madura and Sangli Bank with ICICI Bank, as also reverse mergers like ICICI with ICICI Bank and IDBI with IDBI Bank.  In an economy which is passing through the transition of reforms since 1991 and attaining a high growth rate of 9 per cent and above as well as containing inflation and Non Performing Assets to less than three per cent, such corrective steps are inevitable. 

One interesting feature in the banking system is its preparedness to change and adaptation by embracing technology in a big way.  In the process, the customer is the best beneficiary to receive excellent service at competitive rates.  Government of India and Reserve Bank of India have been bringing necessary changes by introducing legal changes (Section 138 in NI Act, certain changes in Companies Act, introduction of DRTs and BIFR, redefining of SME and their development, regulation of Credit Rating Agencies Act, regulation of NBFCs, privatization of Insurance, overseeing of Mutual Funds, Venture Capital Companies, FIIs, etc., enactment of Information Technology Act, SARFAESI Act, Credit Information Bureaus, etc).

Banks in India are increasingly adopting core banking solutions for retaining customers and lowering service costs. There is perhaps no area of life that technology has not touched and changed.  Banking in India, too, is in the midst of a techno-revolution, thanks to regulations and increasing competition.  Information Technology has been used in two different avenues in banking – communication and connectivity and business process re-engineering.  It is reported that there are 38.5 million internet users in India, and the number is set to grow to a 100 million by 2007-08.  An estimated 4.6 million Indian internet users are banking online today and, with the efforts of the government and the industry, the number of people who use the internet and mobile for banking is expected to cross 16 million by 2007-08.

While introduction of technology in all facets of banking as enumerated above is a welcome move, there are inherent risks that are growing as a menace day by day.  Credit Default, Operational and other risks are being handled by the banks efficiently with use of MIS.  The tendency of scamsters and cyber criminals are also developing in counter intelligence through technology.  Frauds in remittances like DDs, ATMs and Credit Cards are being tackled to some extent by training the operating staff.  New intelligence is developing in Hacking, Email Swoofing (Identify Thefts), Phishing, Vishing, Pharming, Trojan and so on.  Unless stringent steps are taken by the regulators and law makers, these might act as deterrents to the advancing banking system through internet banking. 

The banking system in India needs to gear up to meeting the Basel II standards, comply with WTO Financial Services Agreement by inviting more foreign banks and at the same time to stand up to meet the challenges to nullify the above adverse technological developments to offer best operational services to their customers through IT intervention at all their branches in the country.

References:

1. Reserve Bank of India Occasional Papers – Vol 27, No. 3, Winter-2006 – "The Economics of Information Technology: An Introduction" by Hal R. Varian, Joseph Farrell, Carl Shapiro, Cambridge University Press, Cambridge, 2004

2. Reserve Bank of India Monthly Bulletin, October 2007

3. FOCUS – The Week Magazine, October 28, 2007

4. "Reinventing Branch Banking in the New Cyber Age' – a paper by Mr K N C Nair -  in Contributions : Volume III – A collection of papers on Banking, Insurance, Finance and Technology (Knowledge-Research-Practices) – Banknet India publication, January 2007.

5. " Banking Sector Reforms : Policy, Issues and Fresh Outlook" by Dr R K Uppal and Rimpi Kaur published in Udyog Pragati, Vol. 31, No.3, July-Sept 2007

6. Trend and Progress of Banking in India , Reserve Bank of India, 2006

7. "Retail Banking" – Everything you need to know to work in a Bank by Raghu Palat, 2006 – published by India Book Distributors (Bombay) Ltd., Mumbai.

8. " Impact of Technology on Payment Systems" – A Study by Narinder Kumar Bhasin and M Balakrishnan – The Indian Banker, Vol II No.9, September 2007

9. Information Technology & Electronic Banking – The Indian Institute of Bankers, Mumbai – May 1998

10. Banking on Technology – Indian Management - AIMA publication, 2004

11. Building CRM – Customer Relationship Management and KYC experience through technology – BANCON 2004 – Indian Banker February, 2006
 

Prof. Chowdari Prasad
Professor in Finance & Registrar
Alliance Business School
Bangalore-560 068
 

Source: E-mail October 28, 2007

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