Features Alternative Delivery Channels

55
Chapter IV - Envisages the History of Alternative Banking Kumbhar V. M.

This chapter presents history and development of alternative banking channels.
This chapter begins with general information of the Indian banking industry, concept of
alternative banking and characteristics of alternative banking. There are some reviews
were have taken from the developed countries to address the history of alternative
banking. This chapter also presents origins and developments of alternative banking
channels in India. There are some statistical data also presented which shows
developmental aspects of the alternative banking services in India and developed
nations. At the end of the topic we have discussed about Bank Ombudsman Scheme,
Complaints registered against banks, Information Technology Act, 2000 and its
provisions related to banking and recommendations of Electronic Banking Group
(EBG) of BASEL committee.
4.1 Concept Alternative Banking and types of channels
Modern service provision to customers, such as banking or retailing, is now
supported by a myriad of interactive technologies, such as the internet, mobile
applications, or interactive kiosks, leading to the emergence of multichannel or multi-
interface service systems (Patrcio et al, 2009). Technological innovations in banking
provide many efficient alternative delivery channels to customers (Frei et al, 1998). The
advance of communication and computer technology have made it possible that one can
do most banking transactions from a any location even without stepping into a physical
financial structure (Burns, 2002) through alternative banking channels. Alternative
banking, as the name suggest, is the newer method of carrying on banking operations,
is the newer method of carrying on banking operations. It includes all non-traditional
means of banking (World Retail Banking Report-2008, pp-40; Shrotryiya, 2007;
Ogilvie, 2008; Rakesh Mohan, 2002; Niels et al , 1999; Chris et al , 2005; Sathye,
1999) such as ATM, internet banking, bank automation, core banking, credit cards,
debit cards, mobile banking, EFT etc. According to IBM Global Services alternative
banking is set of alternative delivery channels
1
. Alternative distribution channels are
not only important to reducing costs and improving competitiveness, but also ability to
retain the existing customer case as well as to attract new customers (Kimball and
Gregor, 1995). Daniel, (1999) mentioned that there are six different alternative delivery
chandelles of banking i.e. PC banking, internet banking, managed network
2
, TV
banking
3
, Telephone banking and Mobile phone banking. Association of Banks in

1
https://www-935.ibm.com/services/in/igs/pdf/g510-3829-optimizing-retail-banking-channels.pdf (Sept, 24, 2010)
2
Managed network - A bank makes use of an online service provided by another party.
3
TV Banking- Account information is delivered via satellite or cable to the TV screens of customers.
56
Palestine (2009) defined as it is conducting financial transactions electronically,
without physically interacting with the bank (i.e. using visa card, visa electron, internet
banking, other). However TV banking facilities are not available in India till date.
Alternative banking is alternative options for process banking transactions other
than traditional means. It is also known as e-banking, electronic banking, online
banking, virtual banking, direct banking and high tech-banking. According to Howcroft
(1993) alternative distribution channels provides convenient alternatives to branch
banking. In the traditional banking system customers need to visit branch to make
transaction and getting information about banking services, account information etc.
But in the alternative banking there is no need to visit physical branch most of banking
transactions are possible through alternative channels (Kumbhar 2009). It is also known
as quasi-banking, alternative remittance systems, and parallel banking. According to
Devlin, et al (2003) Direct banking is the generic term that has been adopted to
encompass telephone and Internet banking, as well as interactive television and most
recently m-banking (banking using a mobile platform such as a hand phone or personal
digital assistant). There is substantial evidence to suggest that e-banking is being
embraced by financial institutions in developed and emerging markets. There are two
different strategies has been adopted by banks for e-banking: First, an existing bank
with physical offices can establish a web site and offer alternative banking to its
customer as an additional delivery channel. A second alternative is to establish an
Internet-only bank or additional e-channels or virtual bank, almost without physical
offices (Miranda et al, 2006). Recently in Indian followings alternative banking
channels are available (See Table No. 4.1 )
IT-based service channel may significantly lower costs of serving customers.
The analysts forecast that 40% of adult UK consumers will be lured in by the
conveniences of online banking bringing the number to 22 million users by 2012.
Internet banking allows customers to perform many banking functions anytime and
anywhere, while ATMs provide some services not possible by internet banking, such as
withdrawing money around the clock (Banker et al 2009). The advent of Internet,
electronic commerce, communication technology and users response to this
technology has opened opportunity for many businesses including the financial
institution (Wang and Wang 2006).

57
4.1.1 Features of alternative banking
According to Kaleem Ahmad (2008) Electronic banking minimizes the cost of
transactions, saves time, minimizes inconvenience, provides up-to-date information,
increases operational efficiency, reduces HR requirements, facilitates quick responses,
improves service quality and minimizes the risk of carrying cash. As per Report of
European Central Bank (1999) technology has reduced the cost of operation and ways
of the banking truncation. After reviewing the literature related to alternative banking,
e-commerce, mobile commerce and ICT based financial services we have identified
followings characteristics of alternative banking services are:
Table No. 4.1: Alternative Banking Channels
Traditional
Service
Alternative
Means
Medium Services available
1 Brick-Mortar
services
Automated
Branches
PC and LAN Instant deposit and withdraw
money, getting statement, DD,
calculation of interest etc.
2 Branch
Banking
Core Banking

PC and Internet Instant deposit and withdraw
money, getting statement, cheque
clearance and depositing, stop
payment etc.
3 Manual Note
Counting
Note counting
Machines
Electronic device Instant notes and bundle of note
counting
4 Formal Cheque MICR cheque MICR technology Instant clearing of cheques
5 DD/MT/TT EFT Internet and Core
Banking Solution
(CBS)
Instant Fund Transfer from to any
branch under CBS
6 On counter
Cash Withdraw
ATM, Debit
Card
ATM Withdraw money, Balance
Inquiry, Account statement,
Mobile recharge, Make donation,
Card to card transfer, Utility bill
payments
7 On counter
Cash Withdraw
ATM or Debit
Card
Point of Sale
Terminals (POS)
Mobile recharge, Purchasing,
Utility bill payments and
Withdraw money etc.
8 Letter of Credit E-Money Credit Card Purchasing and Payments of utility
bill payments
9 Branch
Banking
Internet
Banking
(PC Banking)
PC and Internet Balance inquiry, account
statement, stop payment order,
EFT, purchasing, utility bill
payment etc.
10 Branch
Banking
Mobile Banking

Mobile phone,
SMS, WAP
4
, 3G
5

Balance inquiry, account
statement, stop payment order,
EFT, purchasing, utility bill
payment etc.
Source: Miranda et al, 2006 (edited by author)

4
The Wireless Application Protocol (WAP) is an open, global specification that empowers mobile users with
wireless devices to easily access and interact with information and services instantly. Most use of WAP involves
accessing the mobile web from a mobile phone or from a PDA.
5
3G is the next generation of mobile communications systems. It enhances the services such as multimedia, high
speed mobile broadband, internet access with the ability to view video footage on your mobile handset. With a 3G
phone and access to the 3G network you can make video calls, watch live TV, access the high speed internet, receive
emails and download music tracks.
58
Technology dependency Alternative banking services are highly depends on
technology and high-tech communication system (Srotriya, 2007, Verner, et. al.
1989). For the pursuing the e-banking services banks are using Information and
communication technology (Internet, mobile phone, telephone, other electronic
devises) But e-banking services are totally technology based services.
Round the clock service- Alternative banking portal are provides 24 hours banking
services. Customers can enjoy round the clock banking service through the self-
service banking modes. They have freedom from tense about official time of bank.
Multi channel banking Modern technology based banking provides many
alternatives to transact banking business through the different channels e.g. ATM,
core banking, Mobile banking, Internet banking, Phone banking, POS terminals,
Credit and Debit cards etc.
Lack of Face2Face contact- in the e-banking transaction there is lacking face to
face contact of customer and services provider (Jayawardhena & Foley, 2000;
Durkin and O'donnell, 2005). Customers can use the banking services via virtual
means of e-banking i.e. internet banking, mobile banking, ATM, credit card etc.
While Lack of face-to-face contact is biggest obstacle to modern banking because
right customer has been identified by ID and password than face to face
identification.
Risk factors: Despite of certain benefits of alternative banking channels there are
some certain risks e.g. Performance risk
6
, Strategic risk, financial risk
7
, Compliance
and legal risk
8
, Reputational Risk
9
, Operational (Operational) Risk
10
there has been
fear of inadequate security is one of the electronic banking channels (Ezeoha, 2005;
Schilder 2001; Sokolov Dmitri). There may be. So, it is clear that alterative banking
channels is lacking actually the assurance provided in traditional banking (Lee et
al., 2009). The Electronic Data storage and interchange system also consist Data
Risk. Unauthorized access to the bank clients private information causes first of
all operational risk, but indirectly also legal as well as reputational risk (BIS, 2009).

6
Performance risk is born from the malfunctions of online banking
7
Financial risk contains losses money due to wrong authentication process and online frauds. It is the constant and
terrible fear of transactions errors causing a potential monetary loss suffered by customers who perform online
transactions.
8
Compliance and legal issues arise out of the rapid growth in usage of e-banking and the differences between
electronic and paper-based processes.
9
Reputational risk the risk arising from negative perception on the part of customers, counterparties, shareholders,
investors or regulators that can adversely affect a banks ability to maintain existing, or establish new, business
relationships and continued access to sources of funding (e.g. through the interbank or securitisation markets).
10
Transaction/Operations risk arises from fraud, processing errors, system disruptions, or other unanticipated events
resulting in the institutions inability to deliver products or services.
59
Customer education on security risks and precautions can play an important role for
consumer protection and for limiting reputational risk.
Inseparability: e-banking services cant be separate from e-service channels and
even there is also inseparability in production and consumption of the e-banking
services. These services are being produced at the same time that the customer is
receiving it.
Homogeneity: Formal services have a heterogeneity concerns the potential for high
variability in the performance of services is special characteristics of the services it
make difficult to establish standard. However alternative banking services are
homogenous of one specific bank due to same types of channel and service
specifications, while their actual performance may be differ by place and speed of
internet connectivity.
Cost effectiveness - Technology based banking services provide cost effectiveness
to customers and bank both. Banks can deliver banking services through alternative
channels at transaction costs far lower than traditional ways. It has been proved that
online banking channels are cheaper delivery channel than traditional banking
(Adesina, 2010).
Geographical reach: Alternative banking allows expanded customer contact
through increased geographical reach and lower cost of delivery channels. Yibin
(2003) argued that it provides borderless banking services throughout the world
where the internet connectivity is available.
Virtual banking Alternative banking channels have reduced branch networks and
downsized the number of service staff. E-banking offer freedom from place
constraint, and reduced stress of queuing in banking hall. Which has paved the way
to self-service channels as quite many customers felt that branch banking took too
much time and effort. Virtual banking offering any ware banking facilities.
According to Singhal and Padhmanabhan (2008), User of ICT based banking
expect Convenience, Flexibility, Easy to use and user friendliness, Reliability,
Fulfillment, Real time access, Cost effectiveness, Alternative Options, Security &
Privacy, Speed & Continuity, Anytime and anywhere banking facilities. There is some
risk factors include in e-banking like data loss, fraud, lack of adequate information,
password theft etc. Kaleem Ahmad (2008). Hence customers expect security and trust
in e-banking services.

60
4.2 History of alternative banking in India
Information Technology (IT) has helped in increasing the speed and efficiency
of banking operations by facilitating the emergence of innovative products and new
delivery channels. The role of the Reserve Bank as the driver of technology initiatives
in the banking sector assumes greater importance given the challenges posed by rapid
advancements in technology. The Resave Bank of Indian has played important role in
implementation of information. In order to this intension the RBI constituted several
committees from time to time with different objectives, headed by experts in different
fields or academicians, some of them during eighties and nineties. The Reserve Bank of
India has appointed various committees to implement ICT in Indian banking (Table
4.2).
Table No. 4.2 : Committees Related to Use of IT in Indian Banking Industry
Year Name of the Committee Chairman
1979 Committee on Consumer Services in Banks R.K. Talwar
1982 Working Group to consider feasibility of introducing MICR/OCR
Technology for Cheque Processing
Dr.Y.B.Damle
1984 Committee on Mechanisation in the Banking Industry Dr. C. Rangarajan
1987 Committees on Communication Network for Banks and SWIFT
implementation
Shri T. N. A. Iyer
1988 Committee on Computerisation in Bank Dr. C. Rangarajan
1990 Committee on Customer Service in the Banks. M. N. Goiporia
1993 Ghosh Committee on Frauds and malpractices in Banks Shri A. Ghosh
1994 Committee on Technology Issues relating to Payments System, Cheque
Clearing and Securities Settlement in the Banking Industry
Shri W.S.Saraf
1995 Committee for proposing Legislation on Electronic Funds Transfer and
other Electronic Payments
Smt.K.S.Shere
1991
1998
Narshimhan Committee (I and II)
The Committee on Banking Sector Reforms
Shree. R.
Narshimhan
1996 Committee on Technology Up gradation In The Banking Sector A. Vasudevan
1998 S. H. Khan Working Group S. H. Khan
2000 Committee for Suggesting a Framework for Electronic Benefit Transfer R.B. Barman
2001 Working Group on Internet Banking S. R. Mittal
2001 Advisory Group on Payment and Settlement System M.G. Bhide
2001 Expert Committee on Legal Aspects of Bank Frauds N. L. Mitra
2002 Working Group on Electronic Money Mr.Zarir J. Cama
2002 Committee on Payment Systems Dr R H Patil
2003 Working Group on Cheque Truncation and E-cheques Dr R B Barman,
2004 Expert Group on Internet Deployment of Central Database Management
System
A. Vaidyanathan,
2005 Working Group On Regulatory Mechanism For Cards R. Gandhi
2007 The Working Group On Preparing Guidelines For Access to Payment
Systems
R.Gandhi
2008 The Working Group On Technology Upgradation Of Regional Rural
Banks
Shri G. Srinivasan
2008 Working Group on IT support for Urban Cooperative Banks R.Gandhi
2009 The Working Group To Review The Business Correspondent Model P.Vijaya Bhaskar
Sources: The Reserve Bank of India (http://www.rbi.org.in/scripts/PublicationsView.aspx?id=162)

61
History of the bank automation traced with use of computer technology in India.
The government of India has established the Electronics Corporation of India Ltd. in
1967 with the objective of research & development in the fields of Electronic
Communication, Control, instrumentation, automation and Information Technology.
The Computer Maintenance Corporation of India Ltd. was established in 1976 to look
after maintenance operations of Main Frame Computers installed in several
organizations in India.
Entry of technology in the Indian banking industry can be traced back to the
Raganarajan Committee report, way back in the second half of the 1970s. In 1979, the
RBI has appointed the Talwar Committee on Consumer Services in Banks and it
recommended that, computerisation of some functions is required to avoid delays in
customer service in Indian banks. While automation process has not tack off stage till
1993, because bank employees unions are not agree with bank automation process they
have fever about job losses. However, in 1993, the Employees' Unions of Banks signed
an agreement with Bank Managements under the auspices of Indian Banks' Association
(IBA) after job assurance given by management. This agreement was a major
breakthrough in the introduction of computerized applications and development of
communication networks in Banks. In the first phase the Indian banks started
computerizing the front-end operations through Advanced Ledger Posting Machines
(ALPMs). Some banks concentrated on the back office automation and some are front-
end operations. In the second phase banks started total branch automation with front-
end and back-end operation within same branch. In the third phase, during the nineties
the banking sector witnessed various foreign and new private sector banks are entre in
the Indian banking industry with the latest technology.
4.2.1 Bank computerization in India
As per the recommendations of the various committees and working groups the
RBI tied to enhance technology in Indian commercial banks. The first blue print for
computerization of banks in India was drown in 1983-84 as phased plan for
mechanization of banking industry (1985-89)
11
. Although, the Reserve Bank of India
(RBI) installed its first computer in 1968, and a larger one in 1979. But the United
Commercial (UCO) Bank, the Standard Chartered Bank, Lloyds' Bank, Grindlays, and
others had installed accounting and other machines before 1966
12
. But in large scale

11
Dr. Firdos T. Shroff, (2007) Modern Banking Technology, Northern Book Centre, New Delhi, ISBN- 81-7211-
222-X
12
Bank Flag, Journal of the All India Bank Employees Association, Bombay, March, 1981.
62
computerisation of Indian public sector banks has been undertaken by the Phased plan
of computerisation in 1985 which was constituted by Dr. C. Rangrajan Committee.
Now most public sector banks are computerised fully or partially. In the first phase of
computerisation spanning the five years ending 1989, banks in India had installed 4776
ALPMs at the branch level, 233 mini computers at the Regional/Controlling office
levels and trained over 2000 programmers/systems personnel and over 12000 Data
Entry Terminal Operators
13
. According to the RBI Annual Report of 2008-09, there are
100 per cent computerisation has been done in SBI group and 97.60 per cent in other
Nationalized Banks (Table / Graph No. 4.3).
Table / Graph No. 4.3: Bank Computerization in Indian Commercial Banks

Source: - www.rbi.org.in
4.2.2 Core banking or centralized banking
Core banking is a term used to describe a service provided by a group of
networked bank branches. Bank customers may access their funds from any of the
member branch offices. Core banking consists of a networking process by which the
servers of different branches of a bank are joined to a common server and henceforth an
account holder may access, deposit, and withdraw money from his/her account from
any of the branches of the bank. In 21st United States, core banking has become
common place. HSBC is the first bank to opt for Core Banking Solution way back in
1999
14
. Today around 67.7 % of public sector bank branches are all branches of private
and foreign banks are under core banking solution in India.
4.2.3 Currency counting machine
A currency-counting machine is a machine that counts money--either stacks of
banknotes or loose collections of coins. Counters may be purely mechanical or use
electronic components. The machines typically provide a total count of all money, or

13
http://kannanpersonal.com/inbank2/e-banking/rbi-role.html
14
BancMate CBS Case Study (http://www.hclinsys.in/HPSCB-_Bancmate_CBS_Case_Study.pdf)
63
count off specific batch sizes for wrapping and storage. The first automatic bill
counting machines (or banknote counting machines) were introduced in the 1920s in
the United States and were produced by the Federal Bill Counter Company of
Washington, D.C.(USA). These machines were designed to increase efficiency in
tellers in the Federal Reserve Bank and reduce human error (Sunny, 2009). In 1962,
newer technology developed for banknote counting machines were introduced by
Tokyo Calculating Machine Works of Shinagawa, Tokyo, Japan. With its exponential
increase in speed and accuracy, it quickly replaced older models and began to dominate
the market (Bravo Seo, 2009). There are two types of counters one is note counter from
bundle and another is loose note counter machine. In the banking industry coin sorter
and coin counter machines also used to faster counting and sorting of coins. Coin sorter
is a device which sorts a random collection of coins into separate bins for various
denominations. Coin sorters are typically specific to the currency of certain countries
due to different currencies often issuing similarly sized coins of different value.
4.3 ATM and POS terminals
The history of ATM is confusing due to the many claims about its invention and
very short literature and their evidences. The history of ATM can be traced back to the
1960s, when the first ATM machine was invented by John Shepherd-Barron he was
managing director of De La Rue Instruments. That machine used by Barclays Bank
(Barclays Bank in Enfield Town in North London, United Kingdom) in 27 June 1967
(Wikipedia E-encyclopaedia). Forth more, in 1965, Mr. Goodfellow designed a system
which accepted a machine readable encrypted card, to which he added a numerical
keypad, its called automatic cash dispenser machine. These Machines were marketed
by Chubb LTD and installed nationwide in the UK during the late 60s and early 70s.
According to Cornelis Robat (USA) the concept of the ATM first began in 1968, a
working prototype came about in 1969 and Docutel was issued a patent in 1973. The
first working ATM was installed in a New York based Chemical Bank. The machine
was called a "Credit Card Automatic Currency Dispenser". Some eveidances cleiam
that Westminister Bank installed first automated teller machine (ATM) at Victoria,
London Branch in 1967. While, According to Banknet organization (India) the first
Automated Teller Machine (ATM) was introduced in the year 1967 by Barclays Bank
in Enfield Town in North London. In 1969 first use of ATM magstripe cards in Docutel
installs its Docuteller machine at New York's Chemical Bank. Chemical Bank's ad
64
campaign announces: "On Sept. 2, our bank will open at 9:00 and never close again!"
ATM also popular in Germany 84% of all Germans are using ATMs.
The first bank to introduce the ATM concept in India was the Hong Kong and
Shanghai Banking Corporation (HSBC) in the year 1987. As a Indian bank, Bank of
India was first bank to introduced ATM in Bombay in 1988 followed by Vijaya Bank at
Delhi in 1989 and then after almost of commercial banks have started their ATM
facilities. AS on March 2009 there are 24,645 on-site and 19,006 off-site ATMs
installed in India (total 43,651) (see Table No 4.4). Today, some Urban Cooperative
Banks (UCBs) and District Central Cooperative Banks (DCCBs) also providing ATM
service in India. However, SBI is following the concept of 'ATMs in Quantity SBI
group has installed highest ATMs in India. The Corporation Bank has the second
largest network of ATMs amongst the Public Sector Banks in India. Todays all Public
Sector Banks are taking the installation of ATMs seriously for Indian market. They are
either setting up their own ATM centers or entering into tie-ups with other banks. Since
April 2009 access in any ATM machine is free of charge it is the great opportunity to
any ware banking in India.
Table 4.4:ATM Centres Established by Commercial Banks In India
Type of Bank
All
Scheduled
Banks
Public
Sector
Nationalized
Banks
SBI
Group
New
Private
Sector
Old
Private
Foreign

On-site
ATMs
2006 12,134 20,727 4,812 1,775 2,255 1,054 232
2007 14,796 10,289 6,634 3,655 3,154 1,104 249
2008 18,486 12,902 8,320 4,582 3,879 1,436 269
2009 24,645 17379 9,861 7,146 5,166 1,830 270

Off-site
ATMs
2006 11,019 6,021 2,353 3,668 3,857 493 648
2007 12,292 6,040 3,254 2,786 5,038 503 711
2008 16,303 8,886 5,035 3,851 5,988 664 765
2009 19,006 9898 5,177 4,193 7,480 844 784

Total
ATMS
2006 23,153 12,608 7,165 5,443 6,112 1,547 880
2007 27,088 16,329 9,888 6,441 8,192 1,607 960
2008 34,789 21,788 13,355 8,433 9,867 2,100 1,034
2009 43,651 27277 15,038 11,339 12,646 2,674 1,054
Source: RBI Annual Reports, 2005-06 to 2008-09
The number of ATMs under National Financial Switch (NFS)
15
Network now
stands at 61,702 and the number is growing at a rate of around 1000 ATMs a month.

15
The National Financial Switch (NFS) is payment settlement system managed by Euronet India Pvt. Ltd. It was
conceived and run by IDRBT since August 27, 2004, the NPCI is the settlement agency for this network; it is a
shared-ATM network, which inter-connects banks ATM switches.
65
National Payments Corporation of India which provides the central infrastructure and
routing service through the NFS can easily handle 300 million transactions a month.
Table No. 4.5 : ATM network and Name of the Bank Participated
Name of the
Switch
Est.
Year
Name of the Banks Participated in the Network Connected
ATMs
1
MITR 2003
Punjab National Bank, Oriental Bank of Commerce,
Indian Bank, Karur Vysya Bank, IndusInd Bank and
UCO Bank
3151
2 CashTree 2004
Bank of India, Union Bank of India, Syndicate
Bank, United Bank of India, Dena Bank, Indian
Bank, Bank of Rajasthan, Bank of Maharashtra,
Indian Overseas Bank, Karnataka Bank, YES Bank,
Dhanalakshmi Bank and Lakshmi Vilas Bank.
6400
3 NFS 2004
Allahabad Bank, Andhra Bank, Axis Bank, Bank of
Bahrain & Kuwait, Bank of Baroda, Bank of India,
Bank of Maharashtra, Barclays Bank, Canara Bank,
Catholic Syrian Bank, Central Bank of India, City
Union Bank, Corporation Bank, Cosmos
Cooperative Bank, Dena Bank, Development Credit
Bank, Dhanalakshmi Bank, Federal Bank, HDFC
Bank, ICICI Bank , IDBI Bank, Indian Bank,
Indian Overseas Bank, IndusInd Bank, Jammu and
Kashmir Bank
Karnataka Bank, Karur Vysya Bank, Kotak
Mahindra Bank, Lakshmi Vilas Bank, Oriental Bank
of Commerce, Punjab and Sind Bank, Punjab
National Bank, Ratnakar Bank, Shamrao Vithal Co-
operative Bank , South Indian Bank, Standard
Chartered Bank, State Bank of India, Syndicate
Bank, Tamilnad Mercantile Bank, UCO Bank,
Union Bank of India, United Bank of India, Vijaya
Bank, Yes Bank Limited
61702
4 BANCS 2004.
Axis Bank, IDBI Bank, Bank of India, Bank of
Bahrain & Kuwait, Saraswat Cooperative Bank,
SVC Bank, Cosmos Cooperative Bank, Greater
Mumbai Cooperative Bank, Abhyudaya Cooperative
Bank, Air Employees Cooperative Bank, Thane
Janata Sahakari Bank, Ernakulam District
Cooperative Bank, Dombivili Nagari Shakari Bank
and Punjab & Maharashtra Cooperative Bank. Other
banks including Jana Kalyan Sahakari Bank, Nutan
Nagarik Sahakari Bank, Bapuji Cooperative Bank,
Subramanyeswara Cooperative Bank, Nagpur
Sahakari Cooperative Bank, Visweshwar Sahakari
Bank and Zoroastrian Cooperative Bank
6500
5 SBI Group NA
State Bank of India State Bank of Bikaner &
Jaipur State Bank of Hyderabad State Bank of
Mysore State Bank of Patiala State Bank of
Travancore***

***Note- State Bank of Saurashtra was merger on 13 August 2008,
Sources: 1) National Payments Corporation of India (NPCI)
2) http://www.bankingfrontiers.com/2009/july/July%20Page%2022,23.pdf (5,Oct. 2010)
66
MITR is a Multi lateral ATM Network Sharing arrangement of 6 member
Banks in India. It came into existence on 8 October 2003. CashTree is an interbank
network in India that has been in operation since March 2004. Bank of India is the
settlement bank for this network, which started with just 6 public sector banks but later
expanded to admit private sector banks. BANCS is another TAM network run by Bank
of India since 2004. Swadhan it most fevered network of this network. Other than these
network there are some bilateral ATM network also working in Indian banking industry
i.e. SBI groups ATM network and SVC Cache 24 Insta ATM sharing Arrangement of
the Shamrao Vithal Co-operative Bank Ltd. SWADHAN also one of the ATM network
of the public sector banks in India (Uppal and Jatana, 2007 pp. 103). The Indian Banks
Association has introduced SWADHAN as shared payment network.
4.3.2 POS terminals in India
A Point of Sale (POS) terminal is an integrated PC-based device, with a
monitor (CRT), POS keyboard, POS printer, Customer Display, Magnetic Swipe
Reader and an electronic cash drawer all rolled into one
16
. More generally, the POS
terminal refers to the hardware and software used for checkouts kept at the merchant's
store. POS terminals are predominantly used for sale and purchase transactions.
According to the Information provided by National Payment Corporation of India
(NPCI) In India there are 4, 87,024. POS terminals established in merchant
establishments at the end of August 2009 was
17
. Currently, most people use their debit
cards to withdraw money from ATMs. Only 2-3% of PSU bank customers and 14-19%
customers of private and foreign banks use their debit cards to make payments.
Therefore, to encourage ccustomers for used of POS the Reserve Bank of India (RBI)
has allowed cash withdrawal from point of sale (POS) terminals across the country
since 2009
18
. According to the bankers this will also encourage the use of debit cards at
PoS-enabled merchant establishments in India.
4.4 Electronic money or plastic money
The history of money is one of its progressive dematerialization from metal
money to e-money. Recently paper money system has been replaced by e-money.
According to the Report on electronic Money published by the European Central
Bank (1998) Electronic Money is an electronic store of monetary value on a technical

16
Abhijit Roy, Commercial banking In India: A Beginners Module, National Stock exchange
17
http://www.moneylife.in/article/8/2252.html
18
The Economic Times, 23 Jul, 2009, RBI allows cash withdrawals of up to Rs 1,000 a day at stores

67
device that may be widely used for making payments to undertaking other than the
issuer without necessarily involving bank accounts in the transaction, but acting as a
prepaid bearer instrument (Desai, 2007 pp12-13) it is also known as Plastic Money,
Cybercash, eCash and Digcash (Digital cash). Plastic card also known as plastic
currency involving electronic device in their functioning is gaining popularly as a
convenient mode of payment (Uppal and Jatana, 2007 pp. 112)
As per the history of the electronic money the most popular type of the e-money
is debit card, since their launch in 1987 debit cards have established themselves as the
most popular card payment with consumers. Initially developed as a convenient and
cost-effective alternative to point-of-sale cheques, debit cards are increasingly being
used as a substitute for cash. A debit card is a plastic card which provides an alternative
payment method to cash when making purchases. Debit cards are accepted at many
locations, including grocery stores, retail stores, gasoline stations, and restaurants. Its
an alternative to carrying a cheque book or cash. There are currently two ways that
debit card transactions are processed: online debit cards and offline debit cards. Online
debit cards require electronic authorization of every transaction and the debits are
reflected in the users account immediately.
4.4.1 Credit cards
Use of credit card is many countries of the world are quite old. But it has
become popular in Indian past one decade only. The origins of the bank credit card
have been traced to J ohnc Biggins a customer credit specialist at the Flatbush National
Bank of Brooklyn, New York. In 1946, Biggins launched as credit plan called Charge
it. The programme featured a form of script that was accepted by local merchants for
small purchases. After the sale was completed the merchant deposited the scrip in the
bank account and the bank billed the customer for the total scrip issued (Auriemma,
1999 pp 4-5).
In the 1951 the first modern was introduced in America in 1950 when a
businessman Frank Menomara invited some of friends in hotel and suddenly at the
time of payment he discovered that he forgot bring the purse. Then he decided to
develop a fool proof system to avoid such conditions in future. The first of these was
the Diners Club Card, initially accepted by 14 restaurants in New York City. American
Express, then a leading issuer of travelers cheques, launched a more widely accepted
T&E card in 1958. Unlike some retail chains, Diners Club and American Express
expected the consumer to pay his charge balance in full at the end of each month.
68
Franklin National Bank in New York in 1951, began issuing their own universal
credit cards combining widespread acceptance with the opportunity to defer repayment
beyond the end of the month, then Bank of America, launched its BankAmericard in
1958 (Latzer, 2005).
A credit card system is a type of retail transaction settlement and credit system,
named after the small plastic card issued to users of the system. In the case of credit
cards, the issuer lends money to the consumer. Credit cards are the most frequently
used electronic payment instrument in the United States. These cards combine a
payment instrument with a credit arrangement. There were 20.5 billion credit card
transactions processed during 2000, valued at USD 1.5 trillion. Bank credit cards are
generally issued by a bank under a license from a national organisation, such as Visa
and MasterCard
19
, and typically involve a revolving credit agreement. There are Four
major service providers who are providing technical services to banks to provide credit
and debit card facilities worldwide i.e. Visa, MasterCard. American Express, and
Discover. According to American Bankers Associations (ABA) Report there are 576.4
million credit cards and 507 million debit cards circulated in USA as end of year 2009
(See Table No.4.6)
Table No. 4.6: Total Cards in Circulation in U.S.A (Through year-end 2009)
Visa credit 270.1 million 11 percent
Visa debit 382 million 18 percent
MasterCard credit 203 million 22 percent
MasterCard debit 125 million 1 percent
American Express credit 48.9 million 9 percent
Discover credit 54.4 million 6 percent
Source: American Bankers Associations (ABA) Survey Report, 2009
4.4.2 Debit cards
A debit card is a plastic bank card used at an ATM or a point-of-sale (POS)
terminal that enables a consumer to have funds directly debited from customers bank
account. Some financial service providers (such as check cashers and currency
exchanges) may market a so-called debit card that is not tied to a deposit account but
instead functions as a stored-value card (Anguelov et al , 2004). The debit cards most

19
To enhance geographical area for credit card holder Bank America Introduced network based card
system in 1976 as VISA card. Consequently 16 banks in Buffalo (New York) form their network called
Interbank Card Association, now is Master Card International. By the early 1980 the VISA and
MasterCard system had expanded throughout the world.
69
commonly used in the UK are Visa Debit, issued under the Visa card scheme, and
Maestro Cards, previously known as Switch cards, have been rebranded Maestro to
make them part of a worldwide scheme. There are two types of debit cards: Online and
off-line debit card. Online debit card require the card to be present with the cardholder
entering a PIN to complete the sale while offline debit card transactions may or may
not be authorized against the cardholder. However, now most of banks are providing
online debit cards. Use of card based payment system was introduced during 1960s in
India. While as a branch of Diners Club Card in August 1980 credit card facility was
provided by Central Bank of India as Master Card. Then Andhra Bank has issued a
credit card in 1981 with linkage VISA and Japan Credit Bureau International (JCBI). In
India card fashion increasing day by day due to its convenience and utility. Many banks
have providing customised credit and debit cards to increase their business in India.
Most of banks are using VISA, MasterCard technology to provide cars services.
Table No 4.7: Card Payments (POS Transactions) (Number in Lakh and Amount in ` crore)
Credit Card Debit Cards*

Year
No. of Out-
standing
Cards
Volume Amount
Number of
Out- standing
Cards**
Volume Amount
2003-04 1,001.79** 17,662.72 377.57 4,873.67
2004-05 1,294.72** 25,686.36 415.32 5,361.04
2005-06 173.27 1,560.86 33,886.47 497.63 456.86 5,897.14
2006-07 231.23 1,695.36 41,361.31 749.76 601.77 8,171.63
2007-08 275.47 2,282.03 57,984.73 1,024.37 883.06 12,521.22
2008-09 246.99 2,595.61 65,355.80 1,374.31 1,276.54 18,547.14
2009-10 182.83 2341.91 62,881.83 1,819.72 1,701.70 26,418.11
*: Debit Cards figures for 2003-04 and 2004-05 are estimated based on 2005-06 figures.
**: Cards issued by banks (excluding those withdrawn/blocked).
Source: - RBI, Statistical Tables Relating to Banks in India 2002 to 2009

However the card base as well as the usage has picked up during the last five
years drastically. In the year 2003 to 2010 credit card based transaction are increased
from ` 17,662.72 crore to ` 62,881.83crore and debit card based transactions are
increased from ` 4,873.67 crore to ` 18,547.14 crore. See the Table No 4.7 and Graph
No. 4.4. Because of increased use and transaction trough credit cards in India. The RBI
has issued new guidelines to issue credit cards in India as per notification date 1
st
July
2009 to insure credit card fraud and customer protection.

70
Graph No. 4.4: Card Payments (POS Transactions) (Number in Lakh and Amount in ` crore)

4.5 Evolution of payment systems in India
Payment systems are the means by which funds are transferred between a payer
and a beneficiary. It has importance for the functioning and integration of financial
markets. It influences the speed, financial risk, reliability and cost of domestic and
international transactions. The evolution of modern payment systems was characterized
by computerization of clearing operations. The other significant milestones in the
development of the payment systems were magnetic image character recognition
(MICR) based mechanised cheque processing technology in Mumbai (1986), Chennai,
New Delhi (in 1987) and Calcutta (1989). To reduce the pressures on the cheque
clearing and settlement process, and to improve customer service (especially for high
volume, low value clearing,) the central bank introduced an electronic clearing service
(ECS) credit scheme and the ECS debit scheme to facilitate payment of charges to
utility services. The modernization of the payment system in line with the global
standards was implemented as a part of the reforms of the financial system. It includes
followings transactions:
The Inter-bank Clearing System;
The Securities Clearing and Settlement System;
71
The MICR Clearing System;
The Government Securities and Foreign Exchange Clearing Systems;
The Real Time Gross Settlement System. (The High Value Clearing
System) -RTGS;
Retail Card Based Clearing System
An efficient and stable payment system is the backbone of any economy.
Recognizing the importance of payment systems in the financial system, the Reserve
Bank of India has taken a number of steps to strengthen the institutional framework for
the payment and settlement systems in the country. The emergence of e-commerce has
created new financial requirements that in many cases cannot be effectively fulfilled by
the traditional payment systems. The efforts of the Reserve Bank have been to ensure
full compliance to the core principles of BIS. The improvement in payment systems in
India has facilitated the integration of financial markets. For recognizing these needs
the RBI has implemented bank computerisation project in India and providing ICT
based networking facilities to the banks and financial institutions in India. Since 1991
the RBI has started BANKNET it is network for banking institutes other than Banknet
The 'INFINET' - Indian Financial Network is a satellite based wide area network using
VSAT (Very Small Aperture Terminal) technology set up in June 1999. The
Centralised Funds Management System (CFMS) facilitates centralised balance viewing
of and funds transfer between own accounts of a member bank maintained with the
Bank at different locations. In Indian banking system ATM also providing better
alternative to traditional payment system it can be used for payment of utility bills,
funds transfer between accounts, deposit of cheques and cash into accounts, balance
enquiry and several other banking transactions. Apart from these facilities RBI has
enhancing the payment system by introducing MICR technology, ECS, EFT, NEFT,
Card Based Clearing and RTGS etc. According to the changing payment and settlement
system in India the government of India has introduced The Payment and Settlement
Bill. The Payments and Settlements Bill, 2006 was introduced in the Lok Sabha on
July 25, 2006. The Bill seeks to designate the Reserve Bank as the authority to regulate
payment and settlement systems. The RBI has introduced Payment Systems in India -
Vision 2005-08. It is implemented to enhance payment system in India, the four broad
tenets of the mission relate to the Safety, Security, Soundness and Efficiency. It is called
the Triple-S + E principle in short, each of the principles support to customer
72
satisfaction and enhancement of payment system. In the Vision document 2009-2012
two more principles are added as accessibility and authorization in payment system.
In order to relieve the central bank from the ownership of the retail payment
systems it envisaged that the creation of a separate legal entity entrusted with at the
national level to be entrusted with the Indian retail clearing function. The advantage of
setting up of the national entity on these lines for running all retail payment system
activities will be that this entity will have uniformity in the structure, operations and
procedures
20
.
4.5.1 BANKNET
BANKNET is an internet based communication network backbone. It provides
speed of financial transaction. At present, seven centers viz. Mumbai, Delhi, Calcutta,
Madras, Nagpur, Bangalore and Hyderabad. It is set up in 1991 by the RBI, this
backbone is meant to facilitate transfer of inter-bank (and inter-branch) messages
within India by Public Sector banks who are members of this network. This project has
been implemented in two stages e.g. BANKNET-I and BANKNET-II, now more
centres like Pune, Ahmedabad, Kanpur, Lucknow, Chandigarh, Kochi, Jaipur, Bhopal,
Patna, Bhubaneshwar, Thiruvananthapuram, Guwahati, Panaji Jammu etc are being
brought on the network.
4.5.2 INFINET-Indian Financial Network
The 'INFINET' - Indian Financial Network is a satellite based wide area
network using VSAT (Very Small Aperture Terminal) technology set up by the RBI in
June 1999. The hub and the Network Management System of the INFINET are located
in the Institute for Development and Research in Banking Technology, (IDRBT)
Hyderabad. Among the major applications identified for porting on the INFINET in the
initial phase are e-mail, Electronic Clearing Service - Credit and Debit, Electronic
Funds Transfer and transmission of Inter-city Cheque Realization advices. Later, other
payment system related applications as well as Management Information System (MIS)
applications are proposed to be operationalized.
4.5.3 SWIFT
Society for Worldwide Inter-Bank Financial Telecommunication (SWIFT),
Brussels is a co-operative society for interbank financial networking, is established in
May 1973 with 239 participating banks from 15 countries (Uppal and Jatana, 2007 pp

20
Sahana Rajaram, Aparna Vachharajani, Payal Ghose, Suresh Sahu (2008), Payment System in India,
CCIL, pp 290-312
73
89-90). Actually it started functioning in 1977, and Albert, Prince of Belgium and now
King, sends the first message. The initial group of members has grown to 518
commercial banks in 22 countries. SWIFTs regional office is located in Mumbai
(India). India is 74
th
country joined SWIFT network in 2
nd
December 1991. The
Reserve Bank of India, 27 public sector banks and 8 foreign banks are initially taken
membership of SWIFT now 92 banks are member of SWIFT. SWIFT has transferred
Indian user to SWIFTnet (IP based solution for messaging) since July 2004, it is a new
service of the SWIFT.
Now more than 9,000 banking organisations, securities institutions and
corporate customers in 209 countries trust us every day to exchange millions of
standardised financial messages. Swift facilitate the members to transfer messages
relating to financial transaction, debit-credit exchange, and foreign exchange. SWIFT
enables its customers to automate and standardise financial transactions, thereby
lowering costs, reducing operational risk and eliminating inefficiencies from their
operations. This service is available 24 hours to participating member.
4.5.4 Electronic Funds Transfer (EFT)
Reserve Bank of India has introduced the Reserve Bank of India Electronic
Funds Transfer System in 1997 which may be referred to as 'RBI EFT System as per
recommendations of the Share Committee (Committee for proposing Legislation on
Electronic Funds Transfer and other Electronic Payments, 1995). It is operated by the
RBI and permits transfer of funds, unto ` 5 lakhs from any account at any branch of
any member bank in any city to any other account at any branch of any member bank in
any other city. This system utilizes the Service Branches of the member banks and the
nodal offices of RBI and RBINET is the conduit for the flow of funds. The Reserve
Bank of India acts as the service provider as well as regulator of EFT. The National
Electronic Fund Transfer (NEFT) was introduced in 2003 covering about 3000
branches in 500 cities; now (Sept, 2010) 77 banks are participated in EFT. Since its
inception the coverage of NEFT has increased about 69000 branches as on June 2010
(Axis Bank- 1003, Bank of Baroda 3098, Corporation Bank- 1139, HDFC Bank Ltd-
1741, IDBI Bank- 772 and State Bank of India- 13051branches connected NEFT) it is
called Special Electronic Fund Transfer SEFT also. This has facilitated same day
transfer of funds across accounts of constituents at all these branches. Overall EFT and
NEFT based clearing grow from ` 17,124.81 crore to ` 2,51,956.38 Crore in 2003-04
to 2008-09 (Table No. 4.8).
74
Table No. 4.8 : Electronic Funds Transfer EFT/NEFT
Volume (In Lakh) Amount ( ` Crore)
2003-04 8.19 17,124.81
2004-05 25.49 54,601.38
2005-06 30.67 61,288.22
2006-07 47.76 77,446.31
2007-08 133.15 1,40,326.48
2008-09 321.61 2,51,956.38
2009-10 663.38 4,09,507.47
Jun 2010 236.47 1,65,826.59
Source: - RBI Annual Reports 2002 to 2009
4.5.5 Real Time Gross Settlement System (RTGS)
RTGS stands for Real Time Gross Settlement. RTGS system is a funds transfer
mechanism where transfer of money takes place from one bank to another on a real
time and on gross basis. The RTGS system is primarily for large value transactions
system established as per recommendations of the Dr. R. H. Patil committee
Committee on Payment System (2002). The minimum amount to be remitted through
RTGS is ` 1 lakh. There is no upper ceiling for RTGS transactions. RTGS System has
been implemented from March 26, 2004 placing India at par with the best practices in
the world in terms of payment system. It is system for large value clearing operated by
RBI. This system ensures settlement of payments with no credit risk involved. It is
therefore, essentially a system for settlement of large value and time critical payments.
The system facilitates Inter-bank as well a customer payments.
Inter-bank clearing is used by banks mainly for four types of transactions i.e.
call money transactions, Rupee payment of foreign currency transactions, Bank to Bank
transfers for funding upcountry requirements and Inward remittances. Inter-bank
clearing was introduced in Chennai in April 1989, followed by Mumbai, Calcutta and
New Delhi. In India all bank branches are not RTGS enabled because only core
banking (CBS) enabled bank branches can extend this facility. During the year 2009-
10, a total of 11,172 bank branches were added in the RTGS system, thereby increasing
the number of RTGS enabled bank branches to 66,178. In year 2004-05 to 2008-09
transactions related customers remittances have raised from ` 2,49,662 crore to `
2,00,04,107 crore. In 2003-04 to 2008-09 amount of inter-bank remittances raised Rs.
1,965 crore to ` 1,22,75,773 crore, and total amount of transaction has been raised from
` 1,965 crore to ` 6,11,39,912 crore. It shows that increasing popularity of RTGS in
Indian banking system. See Table No.4.9

75
Table No. 4.9 : Large Value Clearing and Settlement Systems
(Number in Lakh and Amount in ` crore)
Year / Period 2004-05 2006-07 2008-09
Real Time
Gross
Settlement
System
Customer
Remittance
1 Number 0.68 24.82 112.34
Amount 2,49,662.00 71,67,807.91 2,00,04,107.80
Inter-Bank
Remittance*

2
Number 3.92 13.94 21.32
Amount 38,16,522.00 1,13,13,346.69 1,22,75,773.49
Inter-bank
Clearing
Settlement**
3

Number
0.04 0.19
Amount 61,38,025.39 2,88,60,031.15
Total Inter-bank 2+3 Number 3.92 13.98 21.5
Amount 38,16,522.00 1,74,51,372.08 4,11,35,804.65
* : Inter-Bank Clearing Settlement pertains to the MNSB batches. MNSB settlement in RTGS started from 12
August, 2006.
** : The MNSB Settlement relates to the settlement of NECS, ECS, EFT, NEFT, REPO, Outright, FOREX, CBLO
and Cheque Clearing at Mumbai.
Source: - 1) Statistical Tables Relating to Banks in India 2002 to 2009
2) http://rbi.org.in/scripts/bs_viewbulletin.aspx/scripts/BS_ViewBulletin_Test.aspx?Id=11458
Other than electronic clearing service the RBI has implemented Cheque
Truncation System to faster cheque clearing services. In the cheque truncation process
the physical cheque will be converted in electronic image and image of cheque would
be sent to the drawee branch along with the relevant information like the MICR fields,
date of presentation, presenting banks to its clearance. This process works through the
INFINET with proper authentication. The required time frame of cheque clearing via
cheque truncation is T+0 (same day) for Local Clearing and T + 1 (within one day) for
inter-city clearing.
4.5.6 Electronic Clearing Service (ECS)
To solve critical problem of hug clearing transaction in April 1968 the clearing
banks set up the Inter-Bank Computer Bureau, latter to become a separate company
known as Bankers Automated Clearing Service-BACS. Now, there is MICR, ECS
debit and Credit clearing services and National Electronic Clearing services are now
available to bankers and customers both as clearing mechanisms. ECS Scheme operated
by the RBI since 1996-97, A new variant of ECS styled National Electronic Clearing
Service (NECS) was introduced in September 2008.
ECS (Credit) facilitates the bulk payments whereby the account of the
institution remitting the payment is debited and the payments remitted to beneficiaries'
accounts. In India it is mostly known as pay unit system provided by banks to
employers. This facility is now available at 86 major centres in the country. ECS
(Debit) facilitates is the collection of payments by utility companies. In this system the
76
account of the customers of the utility company, in different banks are debited and the
amounts are transferred to the account of the company. ECS (Debit) is automated
method of payment which provides an option to pay monthly/quarterly/half-
yearly/yearly interest/dividend/salary/pension utility bills like telephone, electricity,
loan installments, insurance premium etc directly through customers bank account.
The RBI report shows that there is significant growth in the ECS transaction in India
since its inception. At the end of year march 2010 there are 34550 branches participated
in ECS clearing services and their amount of ECS based credit is increased from ` 10,
228 crore to ` 1,17,612.60 crore in 2002-03 to 2009-10 and ECS based Debit
transaction has been increased from ` 2,253 crore to ` 69,523.87 crore in 2002-03 to
2009-10 (Table No. 4.10).
Table No. 4.10: ECS Clearings In India (Volume in Lakhs Amount in ` Core)
2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
ECS
(Credit)
Vol. 203 400.51 442.16 690.19 783.65 883.94 981.33
Amt. 10,228.00 20,179.81 32,324.35 83,273.09 7,82,222.30 97,486.58 1,17,612.60
ECS
(Debit)
Vol. 79 153 359.58 752.02 1,271.20 1600.55 1492.81
Amt. 2,253.58 2,921.24 12,986.50 25,440.79 48,937.20 66,975.89 69,523.87
Source: - RBI Annual Reports 2002 to 2009
4.5.7 MICR cheque clearing service
MICR (Magnetic Ink Character Recognition) is the technology to reading and
identification of paper documents by electronic machines. MICR is a character
recognition technology used primarily by the banking industry to facilitate the
processing of cheques. According to available information MICR technology was first
demonstrated to the American Bankers Association in July 1956, and by 1963 it was
almost universally employed in the U.S. (Mandell, Lewis 1977) On September 12,
1961, U.S. Patent Number 3,000,000 was awarded for the invention of MICR. MICR
cheques are processed by the MICR Scanner, it the electronic devise for scanning
MICR cheques and recording to city, name of bank, name of branch and other details of
cheque. The MICR scanning machine can scan the MICR cheque and read their data
and convert in digital form and send that information to service computer of the bank to
further clearing operation. It make easy clearing and sorting of thousands of cheques.
In order to changing technology RBI has taken one more step in the cheque
clearing system in 80s it is known as inception of Magnetic Ink Character Recognition
(MICR) technology for cheque clearing. This technology was installed in Mumbai
(1986) followed by Chennai, New Delhi, (1987) and Calcutta (1989), The MICR
Clearing is now in operation in 64 centers including RBIs 16 MICR clearing centres in
77
Hyderabad, Banglore, Ahmedabad, Kanpur, Jaipur, Nagpur, Baroda, Pune, Gauhati,
Trivandrum etc. Now most of banks are issuing the MICR cheques to their customers.
MICR cheque is paper instrument but it has MICR coding. The codes are arranged on
cheque by order city, name of bank and name of the branch as given in the following
figure.
Figure 4.1: MICR Cheque

First set of number is cheque number, second set of numbers related to city,
bank and branch name it helps a bank to recognize the bank and branch that issued the
cheque, city of the bank where bank office located. The third set of six digit numbers
represents customers account number. In the case of Government Cheques issued by
RBI alone, the account number is of seven digits and set of number consisting two digit
is transaction code, in case of government cheque it have three digits. Transaction code
shows type and mode of transaction given.
Table No. 4.11 : Number of Clearing Houses
Managed by
RBI SBI Asso. of SBI Nationalised Banks Others Total
2001 14 649 316 7 - 986
2002 14 672 332 7 - 1025
2003 16 672 332 7 - 1027
2004 16 (15) 684 (9) 327 (2) 18 (13) - 1045 (39)
2005 16 (15) 684 (10) 327 (2) 18 (13) - 1045 (40)
2006 16 (16) 659 (12) 324 (3) 31 (21) - 1030 (52)
2007 16 (16) 667 (17) 333 (4) 29 (22) - 1045 (59)
2008 16 (16) 703 (18) 335 (4) 40 (22) - 1094 (60)
2009 16 (16) 728(19) 312(4) 46(25) 1(0) 1103(64)
Note : Figures in bracket indicate MICR Cheque processing Centres
Source: Department of Payment and Settlement Systems, RBI
Table no 4.11 indicates that there are 64 MICR clearing centers are operated in
India in 15 divisions in India. MICR technology transformed cheque processing
systems by enabling the introduction of automated clearing houses. Out of 64 MICR
clearing houses 16 houses managed by RBI, 19 managed by SBI, 04 managed by SBI
78
associated banks and 25 has managed by other nationalised banks in India. Other than
MICR clearing houses there are 1103 clearing houses are working in India.
Table no. 4.12 : MICR and Non-MICR Cheque Clearing
(Numbers in Lakh & Amount in ` Crore)
Year Total MICR Centres Non-MICR Centres
Number Amount Number Amount Number Amount
2001-02 9,015.0 1,25,75,254.0 5,377.0 1,09,47,391.0 3,638.0 16,27,863.0
2002-03 10,139.0 1,34,24,313.0 5,980.0 1,09,78,762.0 4,159.0 24,45,551.0
2003-04 10,228.0 1,15,95,960.0 6,241.0 91,78,751.0 3,987.0 24,17,209.0
2004-05 11,668.5 1,04,58,894.9 9,414.6 93,56,252.2 2,253.9 11,02,642.7
2005-06 12,867.6 1,13,29,133.5 10,318.4 94,74,370.8 2,549.2 18,54,762.8
2006-07 13,672.8 1,20,42,425.7 11,441.0 1,04,35,436.1 2,231.8 16,06,989.5
2007-08 14,605.6 1,33,96,065.9 12,229.6 1,15,28,690.2 2,376.0 18,67,375.7
2008-09 13,973.9 1,24,69,134.9 11,638.2 1,04,08,242.0 2,335.7 20,60,892.9
2009-10 (P) 13,802.7 1,04,09,941.5 11,497.1 85,31,516.9 2305.7 18,78,424.7
Source: - Statistical Tables Relating to Banks in India 2002 to 2009
The system is well stabilized in India with the overall reject rates of around 1%
while international reject rates are around 2%. Cheque clearing accounts for over 95%
of the retail payment and more than 70% of cheque clearing is based on MICR
technology (Nair,2007).According to the available data volume of MICR based
clearing has been growing rate of 13.83 percent and value is increased 0.33 percent in
2001-02 to 2009-10. Amount of MICR based clearing rose from ` 1, 04, 09,941 crore
to ` 1,25,75,254 crore in same period. See Table No 4.12.
4.5.8 Speed clearing
Speed clearing refers to collection of outstation cheques through the local
clearing. It facilitates collection of cheques drawn on outstation core-banking-enabled
branches of banks, if branch have a net-worked branch locally. The concept of Speed
Clearing combines the advantages of MICR clearing with that of CBS. The local
cheques are processed on T+1
21
working day basis and customers get the benefit of
withdrawal of funds on a T+1 or 2 basis. For the speed clearing service presenting
branches are currently permitted to levy charges at a rate not exceeding ` 150 per
cheque of above ` 1 lakh presented through Speed Clearing. While there are no
clearing charges are payable for cheques of value up to ` 1 lakh. At present only MICR
Cheques (no non-MICR, High Value cheques) having transaction codes 10, and 11 and
13 which are drawn on CBS-enabled bank branches are eligible for being presented in
Speed Clearing. Government cheques and Demand Drafts are not eligible for collection
under Speed Clearing.

21
'T' denotes transaction day viz.
79
4.5.9 Cheque Truncation System (CTS) in India
According to recommendations of Working Group on Cheque Truncation under
the Chairmanship of R.B. Barman (2003), The Cheque Truncation System (CTS) was
implemented in the National Capital Region in February 2008. Cheque Truncation
System (CTS) will be rolled out at Chennai.
22
However, In most of the developed
countries cheque truncation system is in place since long. Countries like Denmark,
Belgium has adopted this system since more than 2 decades. Singapore has adopted this
system from the year 2002 (Ranjan Nayak, 2006). The present system of MICR cheque
clearing system requires the cheques to be physically moved from place to place for
their presentation. It is required as per the Negotiable Instruments Act, 1881 under
which the physical instrument had to be presented to the drawee branch for payment.
Now the law was amended during the year 2002 according to IT Act, 2000 to paving
the way for the presentment of electronic images instead of the physical instrument.
Figure 4.2: Cheque Truncation Process

In this process electronic image of minimum standard prescribed by RBI (grey
scale 100 DPI 8 bit (256 level) in JFIF format with JPEG compression, and front and
back bi-tonal (black and white), 200 DPI TIFF image) of the cheque with
corresponding data contained in MICR line has used to cheque presentation. As on
Feb., 2010 the RBI has issued more specific norms for scanning and imaging cheques
for truncation as "CTS-2010 Standard". This system beneficial because it provides:
Speeds in collection of cheques
Enhances customer service (T+1),
Reduces the scope for clearing related frauds,
Minimizes cost of collection of cheques,
Reduces reconciliation problems,
Eliminates logistics problems etc.

22
http://www.banknetindia.com/banking/chqtruncation.htm
80
4.6 Internet banking
Till 1993 internet was dose not used commercial purpose but after 1993 internet
has used as tool of commerce and trade. Internet banking began in 1993 the office of
the Thrift Supervision Chartered Security First Network Bank (SFNB) in Atlanta
(Georgia) and it opened for business in October 1995. In 1998 it was acquired by the
Royal Bank Financial Group, Canada (Desai, 2007 pp 2-3). Internet banking not
limited to the USA many banks in the developed and developing countries are using
this technology.
In India, ICICI Bank Ltd. was started internet banking service in 1997 as brand
name Infinity followed by HDFC Bank Ltd in Sept 1999 (Uppal and Jatana, 2007 pp.
132). However, of late many public sector banks and scheduled commercial banks have
taken a led in this area. Internet or web based banking is network of banks and financial
institutes as well other sealers. It provides electronic payments and settlement services
to customers. It implies the most pragmatic use of information technology as medium
of universal communication. It has brought unprecedented changes in banking industry.
There are high increase indicates in internet users in India. According to market
research organization like Internet and Mobile Association of India (IAMAI) and
Internet World.com at present 81,000,000 peoples are using internet in India.
Table No.4.13 : Internet Users in India (Numbers of Population)
Year Population Internet Users % Pen. Usage Source
2003 1,094,870,677 22,500,000 2.1 % ITU
2004 1,094,870,677 39,200,000 3.6 % C.I. Almanac
2005 1,112,225,812 50,600,000 4.5 % IAMAI
2006 1,112,225,812 40,000,000 3.6 % IWS
2007 1,129,667,528 42,000,000 3.7 % ITU
2009 1,156,897,766 81,000,000 7.0 % IAMAI
Source:-http://www.internetworldstats.com/stats.htm
The above data shows that there are 7.0 percent Indians are using internet as a
source of information and communication also. There are also 5,280,000 broadband
Internet connections as of June 2009 as per report of Telecommunication Regulatory
Authority of India (TRAI). According to report published by the Internet and Mobile
Association of India (IAMAI) and IMRB International 12 percent of internet users are
using internet as mean of banking i.e. internet banking.
4.7 Mobile banking
Mobile banking is simply application of mobile (Cell) phone dives as mean of
banking via Wireless Application Protocol (WAP) technology and short message
service (SMS) facilities. Mobile financial services is a term applied to a range of
81
financial activities conducted using mobile devices, such as cellular phones or personal
digital assistants (Cheney, 2008). According to Ogawara, Jason and Pete (2002) the
concept of mobile payment originates in Finland. Sonera, a telecommunication
company in Finland, released a mobile payment system named Sonera Mobile Pay
(SMP) in 1999. In Germany a cellular payment service named PayBox started in 2000
to online shopping. In 2001 like SMP service Pro-tect has released the Mobile Money
System (MMS) in Japan. In USA over 1.6 million users in 2007, Bank of America,
reported having 5,00,000 active users of its mobile banking service by years end.
Mobile banking users are projected to reach almost 35 million by 2010. In order to
demand of mobile divides to use in m-banking almost of cellular device developer
companies alike Ericsson, Motorola, Nokia, LG, Siemens, Samsung, Sony etc. are
developing their mobile handset according to m-banking requirements. Most recent
handsets are enabled with CDMA, GSM, WAP, 3G, SMS, MMS, JAWA, GPRS,
Bluetooth, Infrared, and windows also.
Mobile banking has not widely accepted in India but there is significant growth
found in recent years after spread of mobile network. Since 1995, there is found
tremendous growth in mobile users in India. There are 233.62 millions of peoples are
using cellular services in Indias various states and union territories. The average
annual growth rate of subscriber base is 40.17 per cent in 2007. As per changing
scenario, Indian banks offering mobile banking services to their retail and corporate
customer. Now mobile banking is the hottest area of development in the Indian banking
sector and is expected to replace the credit and debit card system in future. In past two
years, mobile banking users have increased three times if we compare the use of either
debit card or credit card. Till June 30, 2009, 32 banks had been granted permission to
operate Mobile Banking in India, of which 7 belonged to the State Bank Group, 12 to
nationalised banks and 13 to private / foreign banks
23
. The RBI has adopted Bank Led
Model in which mobile phone banking is promoted through business correspondents of
banks.
4.8 Bank Ombudsman (BO) scheme in India
Indian banking institutions are following the social and customers oriented
banking in India. However, some mistakes always found due to machine errors,
inappropriate knowledge about technology, unskilled bank employees, negligence and
delay etc. While this mistakes or problems lead to dissatisfaction of customer and

23
Report on Trends and Progress of Banking in India 2008-09, RBI.
82
customer retention process also. Hence, the RBI has started The Banking Ombudsman
Scheme, in 1995 to provide for a system of redressal of grievances against banks. The
Scheme sought to establish a system of expeditious and inexpensive resolution of
customer complaints. It has conducting the complaints and solves the problem
according the provisions in banking regulation act, 1949 and customers protection act-
1986.
4.8.1 Customers complaints registered against banks in India
There is numbers of complaints passed to 69000 and their average growth rate
of increased to 61.83 per cent in 2003 to 2009. It realised that, modernised banking
services dose not succeeded to provide better and error free banking services in India.
In India, most of customers registered their complaints regarding credit cards, charges
without any information, remittances, failure to meet commitments and deposit related
problems. Graph No. 4.5 sows that all complaints other than notes and coins related are
related to alternative banking services. Because of wrong entres, calculation,
unexpected deduction etc. 6706 complaints are registered regarding deposits account in
2008-09, 5335 complaints relating to improper fund transfer, delay and losses, 7331
complaints related to loans principal deduction , interest calculation, fines, etc are
registered. Now the government has started e-pension facilities through selected banks
in India to provide quick pension distribution. But it also created problems to pension
holders, in 2008-09 total 2916 complaints about pension account has been registered.
Graph 4.5: Service wise Complaints Registered in BO Offices

Source: Report of the Banking Ombudsman Scheme, 2008-09
According to K. Lakshmi
24
from last two years complaints regarding ATM
services also have been increased. As per the available data most of complaints

24
K. Lakshmi, Banking ombudsman registers an increase in customer complaints ,The Hindu, Tuesday, May 26,
2009
83
registered regarding credit cards (17648) followed by failure to meet commitments
(11824). There are 0.19 complaints per thousand customers relating to credit cards in
India. One of the major cause found that after the global financial meltdown, credit card
issuers banks have become aggressive in their collection process
25
. Because of
increased customer complaints against commercial banks in India, the RBI has made
the amendments in BO scheme and the ombudsman to award a compensation of up to `
1 lakh in case of complaints arising out of credit card operations of banks since
February 2009. The amendments allowed the ombudsman to award a compensation of
up to ` 1 lakh in case of complaints arising out of credit card operations of banks.
4.8.2 Bank group wise customers complaints
The number of complaints against public sector banks, which meet some 70 per
cent or more of Indias banking needs, was the highest at 33,141, up from 25,694
during 2007-08. There are 27 percent of complaints regarding nationalised banks (their
market share near about 50 percent) and 29 percent regarding SBI group are registered.
While average complaints per branch were lower than both private sector and foreign
banks. In the same period 28 percent of complaints against private banks, and 13
percent of complaints against foreign banks are registered in India. However, 01
percent of complaints against Scheduled Primary Co-op. Banks and 02 percent of
compliant against RRBs are registered till 2009. Graph No. 4.6 also indicates that rate
of complaints are decreased from 45 percent to 22 percent of complaints against
nationalised banks in India. While consideration of their shares in Indian banking
industry it is realized that public sector banks are not providing error free banking
services in India.
Graph No. 2.6: Bank Wise Complaints Registered in BO Offices

Source: Report of The Banking Ombudsman Scheme, 2008-09
Although as on 2008-09 there are high numbers of compliant (21,982)
registered against private sector banks followed by SBI group (18167) in India. One of

25
Mahua Venkatesh, Complaints up on bank recovery, Hindustan Times, August 10, 2010
84
the serious issue realised that the numbers of complaints against foreign banks reached
to 11700 in 2008-09. In 2005-06, has 783 complaints registered against ICICI Bank
followed by HDFC Bank with 374 complaints
26
. Among foreign banks, Citibank,
Standard Chartered Bank and ABN Amro Bank leads than other foreign banks operated
in India. Even the Finance Minister Mr. Pranab Mukharji also said that two private
banks ICICI Bank and HDFC Bank had repeatedly violated the guidelines of the
Reserve Bank of India (RBI)
27
. Among the individual banks, SBI tops with 18,167
complaints in the year 2008-09, followed by ICICI Bank (11,453), HDFC Bank
(6,584), HSBC (2,838) and Citibank (2,563). As compared to branches public, private
and foreign banks in India complaints against foreign banks are too high because
market share of foreign banks in India is only 5 percent but 17 percent complaints are
registered against them.

4.9 Code of banks commitment to customers (August 2009)
To provides protection to you and explains how banks are expected to deal with
you for your day-to-day operations BCSBI has issued Code of Banks Commitment to
Customers in August 2009. This is a voluntary Code, which sets minimum standards of
banking practices for banks to follow when bank are dealing with individual customers.
It provides protection to customers and explains how banks are expected to deal with
customers in day-to-day operations. Minimum Standards of Banking Practices is given
below:
1. Ensuring that you are given clear information about our products and services,
the terms and conditions and the interest rates/service charges, which apply to
them
2. Display the information about Minimum balance requirement for accounts,
Name and address of the Zonal/ Regional Manager, Name and contact details of
the Banking Ombudsman under whose jurisdiction the branch falls, interest
rates/service charges
3. Correcting mistakes promptly and cancelling any bank charges that we apply
due to our mistake
4. Provide suitable alternative avenues to alleviate problems arising out of
technological failures.
5. Keep customers personal information as private and confidential

26
Customers Complaints Higher for PSU Banks, The Times of India, Nov 15, 2006,
27
Business Standard, New Delhi, 6 August, 2010
85
6. To inform customers about changes in interest rates, charges, introduce a new
charge, minimum balance in the account and any other relevant changes by
notice at the branches, letters, e-mail, SMS, website and newspaper
7. All terms and conditions will be fair and will set out respective rights especially
with regard to nomination facility and liabilities and obligations clearly and as
far as possible in plain and simple language.
8. Tell about the clearing cycle for local instruments and the outstation instruments
including details kind for customers information
9. Reimburse amounts wrongly debited in failed ATM transactions within a
maximum period of 12 working days from the date of receipt of customers
complaint.
10. Electronic
11. Compensate losses in case of any delay or failure in executing the mandate
resulting in financial loss or additional cost due to mistake in Electronic
Clearing Service (ECS)] as per the compensation policy of the bank.
12. Accept and obey stop payment instruction from customers immediately in
respect of cheques issued and instruction related to block the ATM card, debit
card, smart card.
13. Inform to customer by SMS / e-mail followed by a confirmation in writing If
the limit on credit card is reduced or enhanced limit.
14. Provide credit card transaction details either via monthly by mail and e-mail
15. Inform to customers about security procedure adopted by us for user
authentication and the legal risk, if any, associated with the mobile banking
including available services and terms and conditions.
16. Inform strictly to customers visit our Internet banking site directly. Avoid
accessing the site through a link from another site or an e-mail and verify the
domain name displayed to avoid spoof websites. Ignore any e-mail asking for
your password or PIN
4.10 Alternative banking system and information technology act, 2000
New communication systems and digital technology have made dramatic
changes in the way we live and the means to transact our daily business. Business firms
are increasingly using computers to create, transmit and store information in electronic
form instead of traditional paper documents. This will crests some legal challenges for
the service providers and regulators also. The challenges are not confined to any single
86
one of the traditional legal categories but also various lows i.e. laws related to book
evidences, authentication, criminal laws, theft, etc. New communication system and
digital technology introduced major changes in the each part and aspect of society. A
revolution is occurring in the way
peoples are transacting business and
customers are using computer and
advanced digital means to their day-to
day transaction. Although peoples are
aware of advantages, they are reluctant
to conduct business or conclude any
transaction in the electronic from due
to lack of appropriate legal framework.
The banking is one of the most sensitive service industries and it depends mostly of
ICT recently. Therefore, there is strict need of IT related Act. According Talwant
Singh
28
most banks are not better educates their customer to use of cyber banking
services but it is very important so customers. doing this.
According increased need of IT related act in 1988 the Electronic Commerce
Act has been enacted in India but it is limited to commercial service. Hence, The
Ministry of Commerce Government of India created the first draft of the legislation
following these guidelines termed as "E Commerce Act 1998" and thereafter the
Information Technology Bill introduced in 1999 in budget session of 2000 received
mandate from both the houses of parliament. IT act provides legal recognition to
electronic transaction and other means of electronic communication. It amends the
Indian Pinal Code, The Indian Evidence Act, 1891 and RBI act, 1934. It has wider
scope provisions of every IT related issues. While there are some provisions are related
to the e-banking as follows;
According to section 3 (1) of act nay subscriber may authenticate his electronic
data affixing his digital signature though use of asymmetric cryptosystem and
hash function, which transform the electronic record into another electronic
record.
IT act permitted retention of electronic documents and records as evidence
It permits digital signature in financial and non-financial transactions, digital
signature have considered as valid signature under section 2(1) (p).

28
Addl. Distt. & Sessions Judge, Delhi
87
Statutory remedy against unauthorised access to computer system or network
including unauthorised copying of data.
Section 78 of the Act conferred power to a police officer not below the rank of
Deputy Superintendent of Police to investigate any offence committed under the
Act.
To falcate electronic fund transfer amongst the financial institutions and banks.
4.10.1 Security procedure under IT Act, 2000 to subscribers/customers
protection
Information asset must remain confidential, secure and retaining its integrity in
the business including banking industry. Even there is strong need of information
security in banking industry than other businesses. Bothe internet and intranet
29
as well
as virtual private network (VPN)
30
are open to virus attack, hacking
31
etc. The IT act
makes provisions of security procedure at users level to protect interests of authorised
users, account holders or service providers.
Private key and digital signature: Under the Rule 23, Digital signature
certificate shall be issued only after approval of application with valid proofs
(PAN Card, Voter ID Card, Passport etc.). Private Key is defined by section
2(1) (ze) which means the key of pier used to create a digital signature. A
private or secret key is an encryption/decryption key known only to the party or
parties that exchange secret messages.
Duties of subscriber/customer: A subscriber is a customer or buyer of service
who pays to become one of the members. According to Chapter VIII of the IT
act, 2000 (section 40-42) The subscriber should generate his private key after
getting initial key provided by service providers. According to section 42 it is
the subscribers duty to prevent of the private key. By accepting certificate, the
subscriber assumes a dusty to retain control of the subscribers private key, to

29
An intranet is a private computer network that uses Internet Protocol technologies to securely share any part of an
organization's information or network operating system within that organization. An intranet uses network
technologies as a tool to facilitate communication between people or workgroups to improve the data sharing
capability and overall knowledge base of an organization's employees.
30
A virtual private network (VPN) is a network that uses a public telecommunication infrastructure and their
technology such as the Internet, to provide remote offices or individual users with secure access to their
organization's network. It aims to avoid an expensive system of owned or leased lines that can be used by only one
organization. The goal of a VPN is to provide the organization with the same secure capabilities but at a much lower
cost.
31
A hacker is a person who breaks into computers and computer networks, either for profit or motivated by the
challenge. It is illegal access into another party's computer or Internet site carried out for malevolent or fraudulent
purposes or to make unauthorised amendments or just for fun. There are numbers of application developed by
hackers to hack accounts either bank account or other i.e. Security exploit, Vulnerability scanner, Password cracking,
Packet sniffer, Spoofing attack, Rootkit, Social engineering, Trojan horse, Worm, Key loggers
88
use a trustworthy system, and to take reasonable precautions to prevent its loss,
discloser, modification or unauthorised use.
Penalty for damage to computer, computer system, etc.: Section 43-47 deal
with penalty for damages to computer, computer system, etc. If any person
without permission of the owner or any other person who is incharge of a
computer, computer system or computer network; downloads, copies or extracts
any data, computer data base or information from such computer, damages or
causes to be damaged any computer, computer system or computer network,
provides any assistance to any person to facilitate access to a computer. He /
She shall be liable to pay damages by way of compensation not exceeding one
crore rupees to the person so affected.
Cybercrime
32
: Cyber Crimes are a new class of crimes to India rapidly
expanding due to extensive use of internet (Talwant Singh). The sections 65-74
providing legal provisions relating to cyber crime and offences under IT Act.
The offences under section 65 to 70 (65-Tempring with computer source
documents, 66-Publishing of information which is obscene in electronic form,
67-Hacking with computer system, 68-Power of controller give derection,69-
Directions of controller to a subscriber to extend facilities to decrypt and 70-
protected system) are non- bailable and 71 to 74 (71- Mispresentation, 72-
Breach of confidentiality and privacy, 73-Publishing false Digital Signature
Certificate (DSC) and 74-Publications fraudulent purposes) are Non-cognizable
but bailable.
Electronic Cheques (E-Cheque
33
) and Electronic Fund Transfer (EFT):
Section 81 of the IT Act provides detailed provisions about e-cheques and EFT.
The government of India has made amendments in the Negotiable Instruments
Act 1981 consultation with RBI for allow e-cheques and EFT. Section 81-A
made an attempt to facilitate the EFT by giving legal recognition to an
electronic cheque functional equivalent of formal cheques. For the purpose of
EFT and SEFT
34
The amendment in the Reserve Bank of Indian Act-1934 in

32
Cyber crime definitions as Unauthorized access, Damage to computer data or programs, Computer sabotage,
Unauthorized interception of communications and Computer espionage According United Nations Definition- It is
any illegal behavior directed by means of electronic operations that targets the security of computer systems and the
data processed by them.
33
E-cheque means a cheque which contains the exact mirror image of paper cheque, and is generated,
written and signed in a secure system ensuring the minimum safety standards with the use of digital
signature and asymmetric crypto system.
34
SEFT-Special Electronic Fund Transfer
89
section 58, in sub section (2) after clause (P) to allow interbank fund transfer
either bank to customer, bank to bank including credit transfer, debit transfer,
direct deposit and withdrawals, Point of sale Transfers, ATM transactions etc.
Consumer dispute redressal: In the case of ATM card, debit card and credit
card related frauds this act provides Redressal mechanism. While, Visa and
Master Card provide full protected service. Visa is reported to have adopted a
zero liability policy for debit cards and credit cards. Hence, there is need to
redressal mechanism to solve problems related to cards. As per the provisions
customer can approach district Forum of the consumer courts to claim
complaint up to ` 20 lakh, to State commission up to 1 crore and to National
Commission for above 1 crore.
ATM frauds: In India it is found that the criminals taps phone-line connected
with ATM via warless devise or wire line devise. They attack a wireless
microphone to the line and records the signals when customer is using the ATM
service. After he leaves the machine, the criminal plays back signals, tripping
the machine to realise cash. For these cases the IT Act 2000 made provision
under section 67 as cyber crime.
Spy software to find password and ID: In the electronic interactions and
transaction ID and passwords are very important for authentication and
identification. While spy softwares are utilized to find out passwords and other
information from computers via network or internet. In the internet banking and
mobile banking services ID and Password also very important. The criminals
can find it through spy software. Hence, the IT Act made provisions against
unauthorised access and password theft.
There are some amendments has been made in eth IT Act 2000, in the 2008
Section 2(ha) added to define Communication Device which will include mobile
phones, ATM, PDAs etc, Section 2(j) Computer Systems and Communication
Devices, Wire Wireless added.
4.10.2 Some loopholes of IT Act 2000
This act provides wider legal provisions against cyber theft, cyber crime.
Although, there are some loopholes in the IT Act as mentioned below:
1. Spamming and junk e-mails: Spam and junk e-mails are unsolicited
commercial e-mails. It might be sent as an unwanted advertisement via e-mail
or in bulk to a large number of addressees. Some time these e-mails contains
90
massages as ; you have owner of award of lottery or prizes of $ 400,00000,
5000,0000 please send your Name, Bank Name, Account Number etc. When
customer provides this information sender of the e-mail can hack bank account.
Although there is no any provision for such e-mails.
2. Credit card fraud: There is no any provision for the credit card fraud in the IT
Act 2000. In the present scenario it is very important to protect interests of
credit card holders. According to the Bank Ombudsman report 2009 there are
most of complaint are registered relating to credit card offences in India.
Cloning or duplication of credit cards is the new type of crime which will keep
the copes and banking officials on their toes. Some small electronic gadgets also
available that can copy details of credit cards at the time of swiping credit card
at the time of payments. Some time anyone send you massage through SMS as
Thank You for making purchase of a Rs. 35,000/- on your credit card
followed by certain clarification. When you call back that number they ask you
details about your credit cards for (so called) authentication and finally this
person tell you that it is our mistake dont worry we do not proceed this
transaction. But actually problem starts thereafter, because they have obtained
all details in the authentication. There are numbers of types of credit card frauds
takes place recent days. Hence, there is need of special provisions for credit
card frauds in the IT act.
3. Offence committed outside of India: As banking business concern, financial
transaction can be made outside of the India. Frequent person can hack
customers account from outside of India and transfer money unauthorised way.
In such case there is problem of Jurisdiction issue. While section 75 of the IT
act has been made provisions related to jurisdiction but it covers computer,
computer system or network located in India not outside of India. The IT Act
Amendments in 2008 made some provision for it but that provisions are not
sufficient.
4. Anonymous digital cash: Digital cash allow to customers buy online but some
of the peoples using this facility to transfer their black money to other account
digitally. In such cases IT act is very short to solve these problems.
4.11 Basels (BIS) view to alternative banking system
The Basel Committee constituted Electronic Banking Group (EBG) under the
chairmanship of Mr John Hawke to suggest risk control principals in the electronic
91
banking. The Basel Committee on Banking Supervision has mentioned that a new e-
banking channel provides wider range of banking services in the Report on Risk
Management Principles for Electronic Banking (1997). However, the rapid
development of e-banking capabilities carries risks as well as benefits. Therefore the
committee has developed Risk Management Principles for Electronic Banking given
below:
Principle 1: The Board of Directors and senior management should establish
effective management oversight over the risks associated with e-banking
activities, including the establishment of specific accountability, policies and
controls to manage these risks.
Principle 2: The Board of Directors and senior management should review and
approve the key aspects of the bank's security control process.
Principle 3: The Board of Directors and senior management should establish a
comprehensive and ongoing due diligence and oversight process for managing
the bank's outsourcing relationships and other third-party dependencies
supporting e-banking.
Principle 4: Banks should take appropriate measures to authenticate the identity
and authorisation of customers with whom it conducts business over the Internet
Principle 5: Banks should use transaction authentication methods that promote
non-repudiation and establish accountability for e-banking transactions.
Principle 6: Banks should ensure that appropriate measures are in place to
promote adequate segregation of duties within e-banking systems, databases and
applications.
Principle 7: Banks should ensure that proper authorisation controls and access
privileges are in place for e-banking systems, databases and applications.
Principle 8: Banks should ensure that appropriate measures are in place to
protect the data integrity of e-banking transactions, records and information.
Principle 9: Banks should ensure that clear audit trails exist for all e-banking
transactions.
Principle 10: Banks should take appropriate measures to preserve the
confidentiality of key e-banking information. Measures taken to preserve
confidentiality should be commensurate with the sensitivity of the information
being transmitted and/or stored in databases.
92
Principle 11: Banks should ensure that adequate information is provided on
their websites to allow potential customers to make an informed conclusion
about the bank's identity and regulatory status of the bank prior to entering into
e-banking transactions.
Principle 12: Banks should take appropriate measures to ensure adherence to
customer privacy requirements applicable to the jurisdictions to which the bank
is providing e-banking products and services.
Principle 13: Banks should have effective capacity, business continuity and
contingency planning processes to help ensure the availability of e-banking
systems and services.
Principle 14: Banks should develop appropriate incident response plans to
manage, contain and minimise problems arising from unexpected events,
including internal and external attacks that may hamper the provision of e-
banking systems and services.
Summary
Alternative banking services are not new for developed nation. However, it is
new for Indian peoples. Most of alternative banking channels are available in 1985 to
1990 and some advanced delivery channels like internet banking , mobile banking are
available from 1997. Today in India, most of alternative banking channels are ready to
survive customers. All statistical data relating to EFT, ECS (debit and Credit) clearing,
MICR clearings, use of internet and mobile services, POS terminals, numbers of ATM
and hits on ATM shows that alternative banking channels become popular in India.
While some of channels are limited to urban areas only.
Basically technology based banking channels are availed to provide better
service quality in banking. However, data published in report of BO scheme shows that
numbers of complaints passed to 69000 and their average growth rate of increased to
61.83% in 2003 to 2009. In India, cyber fraud and frauds are also increased in e-
banking service since last five years. Hence, IT Act, 2000 has been passed in 2000.
This Act provides wide range of legal based to electronic services. Now, the RBI is
following risk management principals of EBG of Basel to minimize risk in modern
banking service and issued guideline about it to all scheduled banks in India.

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Chapter IV - Envisages the History of Alternative Banking Kumbhar V. M.

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