Indian Financial System-

An Overview

Unit 1
Phases;
 Upto 1951 Pvt Sector
 1951 to 1990 Public Sector
 Early Nineties Privatisation
 Present Status Globalisation
Pre 1951
 Control by Money Lenders
 No Laws
 Totally Private Sector
 No Regulatory Bodies
 Hardly any Industrialisation
 Banks- Traditional lenders for trade and that too short
term
 Main concentration on Agriculture
 Narrow industrial securities market (gold/bullion/metal)
but largely linked to London Market
 Absence of intermediary institutions in long-term
financing of industry
 Industry had limited access to outside saving/resources
1951 to 1990
 Moneylenders ruled till 1951. No worthwhile
Banks at that time.
 Industries depended upon their own money.
 5 Year Plan commenced from 1951
 Pvt. Sectors to Public Sector –Mixed Economy
 Public ownership of financial institutions
 Strengthening of Institutional structure
 Protection of Investors
 Participation in Corporate Management
 1951 to 1990
Nationalization
RBI-1949
SBI-1956 (Take-over of Imperial Bank)
LIC-1956 (Merges of over 250 Life Insurance companies)
Banks - 1969 (14 major Banks)
1980 (6 More Banks)
Insurance-1972 (General Insurance Corp. GIC by new
India, Oriental, United and National)
1951-1990
Developments
 Directing of Capital in conformity with planning

priorities
 Encouragement of new entrepreneurs and small

set-ups
 Development of backward region
 IFCI (1948)
 SFC (1951)
 IDBI (1964) As subsidiary of RBI to provide
Project/Term Finance.
 ICICI (1966) etc.
Post 1990s
IMPORTANT DEVELOPMENTS
 Development Financial Institutions

◦ Started providing working capital

◦ Set up Credit Rating Agencies (CRISIL, ICRA, CARE)
◦ Privatisation of DFI. (IFCI Ltd, IDBI Ltd, ICICI ltd)
◦ Conversion into Banking/Merger into Banking
Companies eg ICICI, IDBI
◦ Reduction in holding of Govt. in Banks.
 Industries
◦ Rise and growth of Service sector industries
◦ Reliance and dependence on technology
◦ Email & Mobile made sea-change in
communication, data collection etc
◦ Computerization – a catch phrase and inevitable
need of an hour
◦ Scalability of operations through globally
competitive size.
◦ Professional Management
 NBFC
◦ NBFC under RBI governance to finance retail assets
and mobilize small/medium sized savings
◦ Emergence of very large NBFCs (Birla, Tata Finance,
Reliance Finance etc)
Financial Sector Reforms
 The New Economic Policy (NEP) of structural
adjustments and stabilisation programme was
given a big thrust in India in June 1991.
 The govt had appointed a high level committee on
financial system “to examine all aspects relating to
the structure, organisation, functions, and
procedures of the financial system”.
 The committee submitted its main report in
November 1991.
 Since then, the authorities have introduced a large
number of changes or reforms in the Indian
Financial sector in the light of the said report.
 Need for Financial Reforms
 Banking sector: lack of competition, low capital base, low
productivity, and high intermediation costs.
 The role of technology was minimal, and the quality of
service did not receive adequate attention.
 DFIs operated in a over-protected environment with most
of the funding coming from assured sources.
 Little competition in Insurance and mutual funds.
 Financial markets were characterised by control over
pricing of financial assets, barriers to entry, and high
transaction costs.
 Politicisation of credit delivery as well as recovery process.
 Lack of transparency in the accounting practice of the
banks.
Objectives of Financial Reforms
1991
i. To develop a market-oriented, competitive, world-
integrated, diversified, autonomous, transparent
financial system.
ii. To increase the allocative efficiency of available
savings, and to promote accelerated growth of the
real sector.
iii. To increase or bring about the effectiveness,
accountability, profitability, viability, vibrancy,
balanced growth, professional economy and
flexibility, professionalism and depoliticisation in
the financial sector.
iv. To increase the rate of return on real investment
i. To promote competition by creating level-playing
fields and facilitating free entry and exit for
institutions and market players
ii. To ensure that the rationalisation of interest rates
structure occurs, that interest rates are flexible,
market-determined or market related. In other
words, the goal has been to dismantle the
administered system of interest rates.
iii. To reduce the levels of resource pre-emptions and
to improve the effectiveness of directed credit
programmes
iv. To build a financial infrastructure relating to
supervision, audit, technology, and legal matters.
v. To modernise the instruments of monetary control
so as to make them more suitable for the conduct of
monetary policy in market economy.
i. In short the objectives of Reforms can be
described by the key words liberalisation,
deregulation, marketisation, privatisation
and globalisation.
Major Reforms since 1991
1. Reduction in Statutory Liquidity Ratio (SLR) and
Cash Reserve Ratio (CRR):
 SLR reduced from 39% to 25% in a phased

manner. In 2008, it was further reduced to 24%.

 CRR which was 15 % was reduced over phases

to 4.5 % in June 2003.

 As of April 2023, SLR is 18% and CRR is 4.5%

2. End of Administered Interest rate regime:

 Interest rates on deposits and Lending rate of

interest for different categories which were

earlier regulated have been gradually
deregulated.
3) Prudential Norms: High Capital Adequacy
Ratio
 In order to ensure that financial system

operates on sound and competitive basis,

prudential norms, especially with regard to
capital-adequacy ratio, have been gradually
introduced to meet the international standards.
 Capital adequacy norm refers to the ratio of

paid-up capital and reserves to deposits of

banks.
 As a part of financial sector reforms, capital

adequacy norm of 8 per cent based on risk-

weighted asset ratio system has been
introduced in India.
4) Competitive Financial System
 After nationalization of 14 large banks in 1969, no

bank had been allowed to be set up in the private

sector.
 It was however recognized that there was urgent

need for introducing greater competition in the

Indian money market which could lead to higher
efficiency of the financial system.
 Accordingly, private sector banks such as HDFC,

Corporation Bank, ICICI Bank, UTI Bank, IDBI Bank

and some others have been set up.
 Competition has also sought to be promoted by

permitting liberal entry of branches of foreign banks,

therefore, CITI Bank, Standard Chartered Bank, Bank
of America, American Express, HSBC Bank have
opened more branches in India, especially in the
metropolitan cities.
5) Non-Performing Assets (NPA) and Income
Recognition Norm:
 Income on assets of a bank is not recognized

if it is not received within two quarters after

the last date.
 Measures taken to reduce non-performing

assets include restructuring at the bank level,

recovery of bad debt through Lok Adalats,
Civil Courts, setting up of Recovery Tribunals
and compromise settlements.
6) Promoting Micro-Finance to Increase Financial
Inclusion
 RBI provides guidelines to banks for
mainstreaming micro-credit providers and
enhancing the outreach of micro-credit providers
inter alia stipulated that micro-credit extended by
banks to individual borrowers directly or through
any intermediary would henceforth be reckoned
as part of their priority-sector lending.
 Though there are different models for pursuing

micro-finance, the Self-Help Group (SHG)-Bank

Linkage Programme has emerged as the major
micro-finance programme in the country.
 It is being implemented by commercial banks,

regional rural banks (RRBs), and cooperative

banks.
7) Termination of Automatic Monetisation of
Budget Deficits
 Before 1997 whenever there was a deficit in

Central Government budget this was financed

by borrowing from RBI through issuing of ad
hoc treasury bills.
 RBI issued new notes against these treasury

bills and delivered them to the Central

Government.
 Dr. C Rangarajan succeeded in getting
abolished the system of automatic
monetisation of ever-rising budget deficits
through the issue of ad hoc treasury bills by
the Government.
8) Pension Reforms
 Since October 2003, a New Pension Scheme

(NPS) was introduced by the Central

Government for its employees.
 Later many States have also joined the

scheme for their employees.

 The New Pension Scheme is a contributory

retirement scheme.
 The pension authority was named as Pension

Fund Regulatory and Development (PFRDA).

 At present the new pension scheme has

about 5.3 million subscribers and the scheme

has a corpus of around Rs. 35,000 crore.
Issues in Financial Reforms and
Restructuring
 The reform process appears to have yielded
some positive results at least in the banking
sector as reflected in;
◦ The relatively cleaner balance sheets of banks
◦ Reduction in Non-performing assets (NPAs) in
relative terms.
◦ Improvement in operating profit
◦ Fairly good progress in attaining Capital adequacy
ratio and other prudential norms.
Issues in Financial Reforms and
Restructuring
 NPAs of NBFC have increased substantially in the
immediate past.
 Financial Liberalisation has heightened competition,
but this competition engendered certain serious
problems.
 Emergence of Universal Banking/One stop Banking-
As a result mega financial institutions and financial
giants emerges with tremendous economic power.
 The reforms in India have lacked normative
perspective; they are characterised by ideological
overload; and appear to have imitated the fashion or
trends abroad.
 Considerable progress in objective i, v, vi, vii, viii, ix
but not in ii, iii and iv
 Future Agenda for Reforms
 Asset-liability management and risk management,
particularly credit risk management would have to be
accorded top priority by all financial entities.
 Overcome the shortage of Brokerage Houses relative to
demand.
 Introducing heavy securities transaction (transfer) tax,
circuit breakers, and capital gains tax for improving the
functioning of stock market.
 Redeeming the nation from the external financial debt.
 Decentralisation of capital and credit markets in both rural
and urban areas
 Nurture a correct, appropriate philosophy of credit, capital
and finance.
Regulation of Banks, NBFCs & FIs
 The regulatory framework or apparatus for the
financial sector in India broadly consists of:
◦ The Ministry of Finance of the Government of India
which administers the Companies Act 1956, and the
Securities Contracts (Regulation) Act 1956,
◦ The Reserve Bank of India and the Board of Financial
Supervision (BFS) under its aegis,
◦ The Securities and Exchange Board of India (SEBI),
◦ Insurance Regulatory & Development Authority of
India (IRDAI)
◦ The governing boards of various stock exchanges
◦ The apex financial institutions such as IDBI, SIDBI and
NHB.
Salient Provisions of Banking
Regulation Act 1949
Banking Regulation Act 1949
 A legislation in India that regulates all

banking firms in India.

 Passed as Banking Companies Act in 1949
 Came into force in 16 March 1949
 Changed to Banking Regulation Act 1949

from 1 March 1966.

 The Act has a total of 56 sections
Important Provisions
 Prohibition of Trading (Sec 8)
◦ A banking company cannot directly deal in buying
or bartering of goods.
◦ But it may, however, buy, sell or barter the
transactions relating to bills of exchange received
for collection or negotiation.
Important Provisions
 Non-Banking Assets (Sec 9)
◦ A banking company cannot hold any immovable
property, howsoever acquired, except for its own
use, for any period exceeding seven years from
the date of acquisition thereof.
◦ The company is permitted, within the period of
seven years, to deal or trade in any such property
for facilitating its disposal”.
Important Provisions
 Management (Sec 10)
◦ Not less than 51% of the total number of
members of the Board of Directors of a banking
company shall consist of persons who have
special knowledge or practical experience in one
or more of the following fields;
◦ (a) Accountancy; (b) Agriculture and Rural
Economy; (c) Banking; (d) Cooperation; (e)
Economics; (f) Finance; (g) Law; (h) Small Scale
Industry.
 Important Provisions
 Minimum Capital and Reserves (Sec 11)
◦ No banking company shall commence or carry on
business in India, unless it has minimum paid-up
capital and reserve of such aggregate value as;
a) Foreign Banking Companies:
 Not less than Rs 15 Lakhs (Mumbai/Kolkata – Rs 20
Lakhs). After the expiry of each calendar year
 20% of its profit for the year
b) Indian Banking Companies:
 More than 1 state – Rs 5 Lakhs (Mumbai/Kolkata-Rs
10 Lakhs)
 If it has all its places of business in one State
(Excluding Mumbai or Kolkata) – Rs 1 Lakh –
Principal Place, Plus Rs 10k – Other place with
same district, Plus Rs 25k for each place of
business elsewhere in the state
 If it has all its places of business in one State,
one or more of which are in Mumbai or Kolkata,
Rs. 5 lakhs plus Rs. 25,000 in respect of each
place of business outside Mumbai or Kolkata
 Important Provisions
 Capital Structure (Sec 12)
◦ Its subscribed capital is not less than half of its
authorised capital, and its paid-up capital is not less
than half of its subscribed capital.
◦ Its capital consists of ordinary shares only or ordinary
or equity shares and such preference shares as may
have been issued prior to 1st April 1944.
◦ The voting right of any shareholder shall not exceed 5%
of the total voting right of all the shareholders of the
company.
 Important Provisions
 Payment of Commission, Brokerage etc (Sec 13)
◦ A banking company is not permitted to pay directly or
indirectly by way of commission, brokerage, discount
or remuneration on issues of its shares in excess of
Two and a half % (2.5%) of the paid-up value of such
shares.
◦ According to Sec. 15, no banking company shall pay
any dividend on its shares until all its capital expenses
(including preliminary expenses, organisation
expenses, share selling commission, brokerage,
amount of losses incurred and other items of
expenditure not represented by tangible assets) have
been completely written-off.
 Important Provisions
 Reserve Fund/Statutory Reserve (Sec 17)
◦ Every banking company incorporated in India shall,
before declaring a dividend, transfer a sum equal to
20% of the net profits of each year (as disclosed by its
Profit and Loss Account) to a reserve fund.
◦ The Central Government may, however, on the
recommendation of RBI, exempt it from this
requirement for a specified period.
 Important Provisions
 Cash Reserve (Sec 18)
◦ Every banking company shall maintain by way of a cash
reserve in Cash, with itself or in current account with
the Reserve Bank or the State Bank of India or any other
bank notified by the Central Government in this behalf,
a sum equal to at least 3% of its time and demand
liabilities in India.
◦ The Reserve Bank has the power to regulate the
percentage also between 3% and 15% (in case of
Scheduled Banks).
 Important Provisions
 Restriction on Loans and Advances (Sec 20)
After the Amendment of the Act, 1968, a bank
cannot:
1. Grant loans or advances on the security of its
own shares, and
2. Grant or agree to grant a loan or advance to or
on behalf of:
◦ any of its directors;
◦ any firm in which any of its directors is interested as
partner, manager or guarantor;
◦ any company of which any of its directors is a director,
manager, employee or guarantor, or in which he holds
substantial interest; or
◦ any individual in respect of whom any of its directors is a
partner or guarantor.
 Important Provisions
 Accounts and Audit (Sec 29-34)
◦ Every banking company, incorporated in India, must
prepare a Balance Sheet and a Profit and Loss Account
as on the last working day of that year.
◦ According to Sec. 30 of the Banking Regulation Act, the
Balance Sheet and Profit and Loss Account should be
prepared according to Sec. 29 and the same must be
audited by a qualified person known as auditor.
 RESERVE BANK OF INDIA
 The Reserve Bank of India was set up in the year
1935 as per the Reserve Bank of India Act, 1934.
 Objective: “To regulate the issue of Bank notes

and the keeping of reserves to secure monetary

stability in India and to operate the currency and
credit system of the country to its advantage”.
 In 1949, the Government of India nationalized

the Reserve Bank under the Reserve Bank

(Transfer of Public Ownership) Act, 1948, and all
shares were transferred to the Central
Government.
 The RBI Act 1934 provides the statutory basis
of the functioning of the Bank.
 It provides for the Constitution management

and functions of RBI.

 It also empowers the RBI to exercise control

and regulations, over the Commercial Banks,

the Non-Banking Finance Companies and the
financial institutions. The Act is divided into
61 Sections and four schedules.
Structure of RBI
MAJOR PROVISIONS OF THE RESERVE BANK OF INDIA ACT,
1934

 Scheduled Bank (Sec 2(e) ) : Scheduled Bank means

a bank whose name is included in the Schedule II
of the RBI Act, 1934.
MAJOR PROVISIONS OF THE RESERVE BANK OF INDIA ACT,
1934

 Establishment of RBI (Sec 3 ) : Section 3 of the RBI

act provides for establishment of Reserve Bank of
India for taking over the management of the
currency from Central Government and of
carrying on the business of banking in
accordance with the provisions of this Act.
 Capital of the Bank (Sec 4) : The capital of the

Bank shall be Five Crore of Rupees.

MAJOR PROVISIONS OF THE RESERVE BANK OF INDIA ACT,
1934

 Management (Sec 7 ) : Section 7 of the RBI Act

empowers the central government to issue
directions in public interest from time to time to
the bank in consultation with RBI Governor. This
section also provides power of superintendence
and direction of the affairs and business of RBI to
Central Board of Directors.
MAJOR PROVISIONS OF THE RESERVE BANK OF INDIA ACT,
1934
 Business which the bank may transact (Sec 17 ) : This
section deals with the functioning of RBI.
◦ The RBI can accept deposits from the central and state
governments without interest.
◦ It can purchase and discount bills of exchange from
commercial banks.
◦ It can purchase foreign exchange from banks and sell it to
them.
◦ It can provide loans to banks and state financial
corporations.
◦ It can provide advances to the central government and state
governments.
◦ It can buy or sell government securities.
◦ It can deal in derivative, repo and reverse repo.
MAJOR PROVISIONS OF THE RESERVE BANK OF INDIA ACT,
1934

 Banker to Central and State Government: Section 20-

21b assigns RBI the duty of being banker to the
central government and manage public debt. It
transacts all financial business of the govern­ment,
which includes the receipt and payment of cash for the
public authority and doing of its trade, settlement,
and other financial tasks. Consequently, the
government keeps its money balance on the current
account deposits with the RBI. As the banker of the
government, the RBI gives short-term credit to the
government to meet any setbacks in its receipts over
its payment.
MAJOR PROVISIONS OF THE RESERVE BANK OF INDIA ACT,
1934

 Note Issuing Authority (Section 22-29): This

section grants power to RBI to issue the currency.
The issue of currency notes is one of its basic
functions. The currency notes issued by the bank
are legal tender everywhere in India without any
limit.
 Sec 24 specifies the denominational values of the

currency value to be 2,5, 10, 20, 50, 100, 500,

1000, 5000 and 10,000 or of such other
denominational values, not exceeding Rs. 10,000
MAJOR PROVISIONS OF THE RESERVE BANK OF INDIA ACT,
1934

 Control of Foreign Exchange (Section 40): To

keep the foreign exchange rates stable, the
Reserve Bank purchases and sells foreign
monetary standards and furthermore secures the
nation’s foreign exchange reserves. RBI sells the
foreign cash in the foreign exchange market
during its stock reductions in the economy and
the other way around.
MAJOR PROVISIONS OF THE RESERVE BANK OF INDIA ACT,
1934

 Collection and Furnishing of Credit Information

(Section 45A to 45G): These sections gives the
power of RBI to collect Credit information from
Banking Companies as it may think fits. It may
direct any bank to submit the statements related
to such credit information.
MAJOR PROVISIONS OF THE RESERVE BANK OF INDIA ACT,
1934

 Publication of Bank Rates (Section 49): It is the

standard rate at which RBI is ready to buy or
rediscount certain documents including bills of
exchange or commercial papers. Bank rates
impact the loaning rates of commercial banks.
Higher bank rate will mean higher loaning rates
by the banks. To control liquidity, the national
bank can depend on raising the bank rate and
the other way around.
Retail Banking and Corporate
Banking Products
 Retail Banking: Also known as consumer
banking or personal banking, it is the division
of a bank that serves the general public. This
side of the industry allows consumers to
manage their money by giving them access to
basic banking services, credit, and financial
advice.
 Retail Banking Products
 Current and Savings Accounts
 Certificate of Deposits

 Mortgages

 Automobile financing

 Credit cards

 Personal Credit Products

 Foreign Currency and Remittance service

Retail banking clients may also be offered the following services,

generally through another division or affiliate of the bank
 Stock brokerage (discount and full-service)

 Insurance

 Wealth management

 Private banking
 Corporate Banking: Corporate banking refers
to financial products that serve corporate
customers. Also known as business banking,
this division of a bank generally serves a wide
range of clients, including small businesses,
mid-sized businesses and large
conglomerates that may have billions in sales
and offices nationwide.
Corporate Banking Products
 Loans and other credit products
 Treasury and cash management services
 Equipment lending
 Commercial real estate and Fixed asset

requirement financing
 Trade finance
 Employer services
Universal Banking
 In India, a well diversified structure of many
types of specialised banks and other financial
institutions has come into existence and it has
developed quantitatively and qualitatively over
the years.
 Certain Development Financial institutions such

as ICICI and IDBI have merged or are in the

process of merging with their commercial
banking arms.
 Similarly, commercial banks are making efforts to

tie-up with insurance companies and other

financial institutions so as to diversify their
portfolio.
 The sectors such as banking, insurance, mutual
funds etc are becoming mixed sectors and these
former banks and other financial institutions are
becoming what are now called “universal banks”
or “one-stop banks”, or “one-roof banks” or
“one-umbrella banks”.
Meaning/Nature of Universal Banks
 The Universal Banks (UB) is a financial institution
whose functions are;
◦ Deposit acceptance
◦ Providing short-term as well as long term credit to
business, industry, and other sectors,
◦ Providing personal, consumer, housing loans,
◦ Providing insurance services,
◦ Providing investment and merchant banking services,
◦ Providing cash and treasury management services,
◦ Investing in the equity capital of their borrowers and
◦ Participating in the governance of borrowing firms.
UB Trends
 During 1990, some people argue that after
liberalisation, the DFI or Term lending
institutions did not have much special role to
play.
 Further, it was no longer thought desirable that

these institutions should depend on authorities

for concessional funds.
 Many of them were suffering from the existence

of high level of NPAs.

 Need arises for harmonisation of the roles of

banks and DFIs in India.

UB Trends
 In this context, discussion in India was initiated
at the official levels through 3 documents.
a) Report Number 2 of Narasimham Committee
(NC) on Banking Sector Reforms (April 1998)
b) Report on Khan Working Group (KWG) (May
1998)
c) Discussion Paper by RBI (January 1999).
 Major Points of Discussion according
to NC
i. Following the trends abroad, a move towards UB
is visible in India also
ii. DFIs should convert themselves into banks over
the years
iii. These banks should be subject to regulatory
discipline which is applicable to commercial
banks
iv. Only Banks and NBFCs should henceforth exist
in India.
v. Those DFIs which do not convert themselves
into banks would be categorised as NBFCs
vi. The weak banks should practice narrow banking
 Major Points of Discussion according
to KWG
 The ideas of KWG were more or less similar
 It proposed that there should be a progressive

move towards UB in India.

 There should be a regulatory framework for

regulating these UBs

Major Points of Discussion according to
RBI
 The RBI adopted a cautious and slow approach.
 It advised that international experience and
domestic requirements should guide our approach
and policy towards UB in India.
 The Banks and DFIs should become UBs gradually
over the period of 5 years.
 UBs can be developed through
mergers/acquisitions or subsidiaries, as
conglomerates.
 UBs should be subject to regulation as applied to
commercial banks
 Ultimately, only banks and NBFCs would exist in
India.
Merits and Demerits of UBs
 Please Make Your Own Notes
 NonBanking Financial Companies
(NBFCs)
◦ Meaning and Definition
◦ Charateristics
◦ Importance
◦ Types
◦ Comparison between Banks and NBFCs
Core Banking Solution
 History
◦ This scheme was brought under the chairmanship
of Dr. C. Rangarajan in 1988.
◦ 1994-96, many private banks started offering
anytime and anywhere banking facilities to their
client.
◦ Syndicate Bank was the first among the public
sector banks to implement CBS in 2001.
Basic Concept
 With technology advancement particularly in
Telecom and wireless communication, it
became possible to send data from one
computer to another computer.
 Taking advantage of this, it was thought fit to

connect branch computers to a single

computer at data centre and have all
transactions of all branches recorded live at
one place.
Meaning: It is a centralized system or a
network made by a bank and its branches
where it allows the customers to access their
bank accounts to manage and perform basic
transactions from any branch of the bank
where they hold an account.
Some of the underlying core banking
solutions includes deposit, loans, payments
etc. These services are made accessible to
customers with the help of Core banking
software.
Application Areas
 Payments and Withdrawals
 Mobile Banking
 Internet Banking
 ATMs
 Recording of transactions
 Passbook Maintenance
 Interest calculations on loans and deposits
 Fund Transfers remotely and immediately

(NEFT, RTGS etc.)

Need for CBS
 To meet the intense competition and changing
market dynamics in an over banked environment
 To meet the demands of customers who are better
informed, more demanding and less loyal than ever
 To enhance efficiency and effectiveness
 Increasing customer satisfaction and convenience
 Freeing up time for branch staff to focus on sales
and marketing
 Simplifying the process for employees.
 Enhancing bank’s competitiveness in the market.
Advantages
 Centralized Accounting
◦ Direct impact on General Ledgers and Profit & Loss
Account which provides real time total picture
about financial position and situation of banks.
◦ This helps in timely effective decision making for
financial management.
Advantages
 Centralized Product Control and Monitoring.
◦ Aspects like interest rate modifications and product
modification can be done centrally from one place
for all branches
◦ Banks can quickly respond to market scenario and
customer needs giving competitive edge to the
banks.
Advantages
 Introduction of Technology Based Services:
◦ Service channels such as ATM, either on-site or
offsite can be started.
◦ Cheque Deposit Machines (CDM) can be installed
◦ Cheque book printing machine can be installed at
central location to give personalized cheque books.
Advantages
 Centralized Customer Account Management:
◦ Any customer becomes the customer of the bank
rather than of a branch
◦ With Unique ID/Account Number, the accounts of
the customers can be viewed centrally by the bank.
Advantages
 Centralized Reporting:
◦ Presence of centralized data can be live updated
constantly any time to ensure comprehensive
report/ statement generation.
◦ This helps in decision making as well as submission
to various authorities.
◦ Operational efficiency of the bank gets increased
due to quick report generation for bank as a whole.
 Advantages
 To Customers
◦ Customer can operate his/her account from any of the branch
of the bank
◦ More service channels can be made available to the customer
◦ Customer gets immediate credit if the transaction is between
the branches of the bank.
◦ Customer can enjoy the Online and real time banking facilities
through ATMs
◦ Customer gets full attention and service satisfaction at the
branches as the branches are freed from all back office
functions, clearing functions and almost all accounting
functions
◦ Customers can get SMS/E-mail alerts for transactions taking
place in his accounts. This gives him comfort and security.
◦ Customers can also benefit from Round-the-clock banking,
quicker services anywhere, anytime
Internet Banking: RTGS and NEFT
 After demonetisation in 2016, digital banking
has grown at a faster pace.
 Most of the Indian banks have launched their

internet banking and mobile banking

websites to facilitate the customers with
online availability of almost all banking
products.
 Internet banking is now a common mode of

secure and convenient banking services.

What is Internet Banking?
 Internet Banking, also known as net-banking
or online banking, is an electronic payment
system that enables the customer of a bank
or a financial institution to make financial or
non-financial transactions online via the
internet.
 This service gives online access to almost

every banking service, traditionally available

through a local branch including fund
transfers, deposits, and online bill payments
to the customers.
Features of Internet Banking
 Provides access to financial as well as non-financial
banking services
 Facility to check bank balance any time
 Make bill payments and fund transfer to other accounts
 Keep a check on mortgages, loans, savings a/c linked to
the bank account
 Safe and secure mode of banking
 Protected with unique ID and password
 Customers can apply for the issuance of a chequebook
 Buy general insurance
 Set-up or cancel automatic recurring payments and
standing orders
 Keep a check on investments linked to the bank account
 Services Available on the Internet Banking Portals

NEFT & RTGS Fund

Account Balance Check View Bank Statements
Transfer

IMPS Fund Transfer Utility Bill Payment Start a Deposit

Open/Close a Fixed Make Merchant Issuance of Cheque

Deposit Payments Book

Recharge Prepaid
Start Investments Buy General Insurance
Mobile/DTH

Check Mortgages, Set-up/Cancel Manage/Change

Loans Automatic Payments Account Details

Buy/Sell on E- Invest and Conduct

Advantages of Internet Banking
 24×7 Availability
 Convenience of initiating financial

transactions
 Proper Track of Transactions
 Quick and Secure
 Non-financial Transactions
Types of Fund Transfers using
Internet Banking
 There are three types of fund transfers which
can be made using net-banking,
◦ NEFT
◦ RTGS
◦ IMPS
NEFT
 National Electronic Fund Transfer (NEFT) is a
payment system which allows one-to-one fund
transfer.
 Using NEFT, individuals and corporates can transfer
funds electronically from any bank branch to any
individual or corporate with an account with any
other bank branch in the country
 NEFT service is available 24×7 on internet banking.
But, it is a time-restricted service at the bank branch
 Usually, NEFT transfer is successfully completed
within 30 minutes. Nonetheless, the time can even
stretch to 2-3 hours or might be completed in just
10 minutes
RTGS
 Real-Time Gross Settlement (RTGS) is a continuous
settlement of funds individually on an order by order
basis.
 This payment system ensures that the receiver’s account
gets credited with the funds almost immediately and not
after a certain duration, as is the case with other
payment modes like NEFT
 RTGS transactions are tracked by the RBI, thereby
successful transfers are irreversible. This method is
majorly used for large value transfers
 The minimum amount to be remitted through RTGS is 2
lakh. There is no cap on the maximum amount for
transfer via RTGS
 Like NEFT, RTGS is also available online 24×7
IMPS
 Immediate Payment System (IMPS) is another
payment method that transfers funds in real-time.
 IMPS is used to transfer funds instantly within banks
across India via mobile, internet and ATM, which is
not only safe but also economical both in financial
and non-financial perspectives
 IMPS is an inexpensive mode of fund transfer. Other
fund transfer mediums such as NEFT and RTGS
charge significantly higher than IMPS
 It does not require details like account number, IFSC
code, etc. Funds can be transferred via IMPS just
with the mobile number of the beneficiary