PROJECT

ON

E-BANKING IN INDIA WITH SPECIAL REFERNCE TO RURAL AREAS

PROJECT SUBMITTED TO: PROJECT SUBMITTED BY:

Dr. Y. Papa Rao Taruna Shandilya

(FACULTY- Banking Law) SEMESTER- IX (Batch-15)
ROLL NO.: 180
SEC.- B

HIDAYATULLAH NATIONAL LAW UNIVERSITY

UPARWARA, NEW RAIPUR (C.G.)
 ACKNOWLEDGEMENTS

At the outset, I would like to express my heartfelt gratitude and gratefulness to my teacher
Dr.Y.Papa Rao, for putting his trust in me and giving me a project topic such as this and for
having the faith in me to present my report in the best possible way. I would also like to thank
her for the guidance he provided during the tenure of my working in this project. Sir, thank you
for providing me with an opportunity that helped me to grow.

My gratitude also goes out to the staff and administration of Hidayatullah National Law
University for providing the infrastructural facilities in the form of our library and IT Lab that
was a source of great help for the completion of this project.

Last but not the least, a heartfelt thanks to my seniors and friends who were there to help me out
even in the oddest of hours. Without you all this project wouldn’t be what it is.

Thanking you all sincerely,

Taruna Shandilya
Roll No.: 180

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 TABLE OF CONTENTS

Sr. No. Chapter Page No.

1. Certificate of Declaration 4

2. Introduction 5-6

3. a) Objectives of study 7

b) Research Methodology

4. E-Banking 8

Evolution of E-Banking 9

5. Need of E-Banking 10

6. E-Banking in India 11

7. E- Banking in Rural India 13

8. Recommendations 18

9. Conclusion 20

10. References 21

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 CERTIFICATE OF DECLARATION

The researcher hereby declares that the project work entitled “E-BANKING IN INDIA WITH
SPECIAL REFERNCE TO RURAL AREAS“ submitted to Hidayatullah National Law
University, Raipur, is a record of an original work done by the researcher under the guidance of
Dr.Y.Papa Rao, faculty member of Banking Law, Hidayatullah National Law University, Raipur.

The research done by the researcher is his own original work and wherever excerpts from the
works of different authors have been taken, they have been duly acknowledged.

Declared By:

Taruna Shandilya
Roll No. 180
Section B

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 INTRODUCTION

Information Technology has become a necessary tool for easy access in today’s instant world.
The usage of information technology (IT), broadly referring to computers and peripheral
equipment, has seen tremendous growth in the service sector in the recent past. 1 The most
obvious example is the banking industry, where through the introduction of IT related products
in internet banking, electronic payments, security investments, information exchanges. 2 Banks
today operate in a highly globalized, liberalized, privatized and a competitive environment.3 The
use of IT has introduced an entirely new and previously unexplored paradigm for the banking
business. It is increasingly playing a significant role in improving the services in the banking
industry. Indian banking industry has witnessed a tremendous developments due to sweeping
changes that are taking place in the information technology. The term “Banking Technology”
refers to the use of sophisticated information and communication technologies together with
computer science to enable banks to offer better services to its customers in a secure, reliable and
affordable manner and sustain competitive advantage over other banks.4

Internet is a vast network of individual computers and computer networks connected to and
communicate with each other using the same communication protocol – TCP/IP (Transmission
Control Protocol / Internet Protocol). When two or more computers are connected a network is
created; connecting two or more networks create ‘inter-network’ or Internet. The Internet, as
commonly understood, is the largest example of such a system. Internet is often and aptly
described as ‘Information Superhighway’, a means to reach innumerable potential destinations.
The destination can be any one of the connected networks and host computers.5

Banking has never been more important to our society than it is today. The advance of
communication and computer technology and the availability of the Internet have made it
1
Uppal R K, E-Age Technology- New Face of Indian Banking Industry: Emerging Challenges and New Potentials,
Journal of Social and Development Sciences, Vol. 1, No. 3, April 2011, pp. 115-129.
2
Berger, A. N. (2003), The Economic Effects Of Technological Progress: Evidence From The Banking Industry,
Journal of Money, Credit, Banking, 35 (2), 141-176.
3
http://shodhganga.inflibnet.ac.in/bitstream/10603/21949/8/08_chapter_%201.pdf
4
Id.
5
http://www.rbi.org.in/SCRIPTS/PublicationReportDetails.aspx?UrlPage=&ID=243

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possible that one can do most banking transactions from a remote location even without stepping
into a physical financial structure - i.e., the emerging of e-banking. E-banking has been viewed
as a revolution progress in the banking industry. For instance, 20 years ago, 70% of all consumer
financial transactions went through a bank office with brick and mortar structures. Today, less
than 30% of the same consumer financial transactions run through a branch office or the lobby of
a main bank office.6 As a result, the banks, as an industry, are formulating strategic plans to fight
back in winning their customers.7The industry believes that by adopting new technology, the
banks will be able to improve customer service level and tie their customers closer to the bank.
Meanwhile, the banking industry has been also looking for new methods to expand its customer
base and to counteract the aggressive marketing effort of those non-traditional banking entities.8
Through the competition, many banks quickly realized that there are a momentous number of
customers like to do banking electronically. As such, many banks, based on their existing 24-
hour telephone banking systems, have developed and implemented several important e-banking
applications so that their customers now are able to pay bills, transfer money among accounts,
check account history, download statement information, and computerize their checkbooks
online all at easy and around the clock.9

OBJECTIVES OF THE STUDY

Following are the objectives of the given project report:

6
http://www.iima.org/CIIMA/14%205.4_Yang_63-72-1.pdf
7
Healy, Thomas J (1999). Why You Should Retain Your Customers. America's Community Banker. September, p22.
8
Graven, Matthew P., (2000}, Electronic Money, PC Magazine, August 8, 2000.
9
Morrall, Katherine (1995). Business turn to online banking. Bank Marketing. January, p.11.

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 To understand the concept of E-banking in India.

 To briefly explain the need and challenges related with E- banking.

 To study the role played by the E- banking in Rural areas.

RESEARCH METHODOLOGY

This research is descriptive and analytical in nature. Secondary and electronic resources have
been largely used to gather information and data about the topic.

Books, case laws and other reference as guided have been primarily helpful in giving this project
a firm structure. Websites, articles and reports have also been referred.

Footnotes have been provided wherever necessary to acknowledge the same.

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 E-BANKING

E-banking is the term that signifies and encompasses the entire sphere of technology initiatives
that have taken place in the banking industry. E-banking is a generic term making use of
electronic channels through telephone, mobile phones, internet etc. for delivery of banking
services and products. The concept and scope of e-banking is still in the transitional stage. E-
banking has broken the barriers of branch banking.

E-banking offers vast opportunities, yet even less than one in three banks have an E-banking
strategy in place. According to a study, less than 15 percent of banks with transactional websites
will realize profits directly attributable to those sites. No single E-banking strategy is right for
every banking company. But whether they adopt an offensive or a defensive posture, they must
constantly re-evaluate their strategy. Some of the distinctive features of e-banking are10:

 It removes the traditional geographical barriers as it could reach out to customers of

different countries / legal jurisdiction. This has raised the question of jurisdiction of law /
supervisory system to which such transactions should be subjected,

 It has added a new dimension to different kinds of risks traditionally associated with
banking, heightening some of them and throwing new risk control challenges,

 Security of banking transactions, validity of electronic contract, customers’ privacy, etc.,

which have all along been concerns of both bankers and supervisors have assumed
different dimensions given that Internet is a public domain, not subject to control by any
single authority or group of users,

 It poses a strategic risk of loss of business to those banks who do not respond in time, to
this new technology, being the efficient and cost effective delivery mechanism of banking
services,

10
Report on Internet Banking, RBI, RBI Publications, p. 2.

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 A new form of competition has emerged both from the existing players and new players
of the market who are not strictly banks.

EVOLUTION OF E-BANKING

Internet banking, both as a medium of delivery of banking services and as a strategic tool for
business development, has gained wide acceptance internationally and is fast catching up in India
with more and more banks entering the fray. E-banking came into being in UK and USA in
1920s. It became prominently popular during 1960s through electronic funds transfers and credit
cards. The concept of web-based banking came into existence in Europe and USA in the
beginning of 1980s. It has been estimated that around 40 percent of banking transaction would be
done through the internet.
India can be said to be on the threshold of a major banking revolution with net banking having
already been unveiled. A recent questionnaire to which 46 banks responded, has revealed that at
present, 11 banks in India are providing Internet banking services at different levels, 22 banks
propose to offer Internet banking in near future while the remaining 13 banks have no immediate
plans to offer such facility.

Broadly, the levels of banking services offered through INTERNET can be categorized in to
three types: (i) The Basic Level Service is the banks’ websites which disseminate information on
different products and services offered to customers and members of public in general. It may
receive and reply to customers’ queries through e-mail, (ii) In the next level are Simple
Transactional Websites which allow customers to submit their instructions, applications for
different services, queries on their account balances, etc, but do not permit any fund-based
transactions on their accounts, (iii) The third level of Internet banking services are offered by
Fully Transactional Websites which allow the customers to operate on their accounts for transfer
of funds, payment of different bills, subscribing to other products of the bank and to transact
purchase and sale of securities, etc. The above forms of Internet banking services are offered by
traditional banks, as an additional method of serving the customer or by new banks, who deliver
banking services primarily through Internet or other electronic delivery channels as the value

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added services. Some of these banks are known as ‘virtual’ banks or ‘Internet-only’ banks and
may not have any physical presence in a country despite offering different banking services.11

NEED FOR E-BANKING

The use of technology in banking has direct relationship with the profitability. Cetris paribus,
investment in electronic banking increase the profit margin of banks by reducing costs and
increase in non-interest income, which will increases the ROA and ROE.12 Cost-effectiveness in
delivery of services directly implies comparatively high consumer satisfaction and a consequent
change in the revenue model for the banks. Adoption of the Internet mode of banking would
result in increased consumer awareness, attracts the entry of global majors in the market and
would lead to the emergence of open standards in the banking industry. The integration of the
banking services with e-commerce and emergence of e-cash would positively affect the
efficiency scores of the banks.13 However, Internet banking is a mixed blessing in the form of
increased risk, the level of confidence reposed by the consumers and the problem of blending it
with the physical system (Hawke, 2001). Internet banking has brought about a new orientation to
risks like settlement risk, international technology transfer risk, crime or fraud risk, regulatory
avoidance risk, taxation avoidance risk, and competition risk.14

In India, some banks like HDFC and ICICI have introduced payment gateways running on
secure systems having firewalls against hacking.15

Researchers on various occasions have raised many issues, which must be addressed in context
of Internet banking in India. First, the availability of technology and infrastructure to support the
new model of banking. Second, the need for Internet banking itself – Internet Banking or an
efficient system of instantaneous banking or convenient banking. Third, an adequate mechanism

11
http://www.rbi.org.in/SCRIPTS/PublicationReportDetails.aspx?UrlPage=&ID=243
12
Sinkney, J. F. (1998), Commercial Bank Financial Management, Prentice Hall, p.824.
13
Scott William L. (1999), Markets and Institutions-A contemporary introduction to Financial Services, South-
Western College Publishing, p.308.
14
Saunders (1997), Financial institutions Management - A Modern Perspective, IRWIN, p.274.
15
Rao, Rohit (2001) “Internet Banking: Challenges for banks and Regulators” Banking in the New Millennium,
Institute of Chartered Financial Analysts of India, p. 31.

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to tackle the security risk and operational risk aspects.16 Fourth, a proper legal framework to take
care of the rights and obligation of the consumers. While most of these issues have been
somewhat addressed, an important issue still remains - what existing and potential consumers
feel about Internet banking and on the basis of this how an appropriate banking model can be
developed in Indian context. There is a need to measure and analyze the consumer perception
towards Internet banking, to find out what is wrong with traditional banks and provide a
framework for the banks to strategically adopt the Internet so as to maximize value for the
consumers.

E-banking is facing following challenges in Indian banking industry:

 The most serious threat faced by e-banking is that it is not safe and secure all the time.
There may be loss of data due to technical defaults.

 E-banks are facing business challenges. For the transactions made through internet,
the service charges are very low. Unless a large number of transactions are routed
over the Web the e-banks cannot think of profit.

 There is lack of preparedness both on part of banks and customers in the adoption of
new technological changes.

There is lack of proper infrastructure for the installation of e-delivery channels.

E-BANKING IN INDIA

In India e-banking is of fairly recent origin. The traditional model for banking has been through
branch banking. Only in the early 1990s there has been start of non-branch banking services. The
good old manual systems on which Indian Banking depended upon for centuries seem to have no
place today. The credit of launching internet banking in India goes to ICICI Bank. Citibank and
HDFC Bank followed with internet banking services in 1999. Several initiatives have been taken
by the Government of India as well as the Reserve Bank to facilitate the development of e-
banking in India. The Government of India enacted the IT Act, 2000 with effect from October

16
Sharma, B.R. (2001), Bank Frauds-Prevention & Detection, Universal law Publishing, p.167-182.

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17, 2000 which provided legal recognition to electronic transactions and other means of
electronic commerce. The Reserve Bank is monitoring and reviewing the legal and other
requirements of e-banking on a continuous basis to ensure that e-banking would develop on
sound lines and e-banking related challenges would not pose a threat to financial stability.

E-banking has the potential to revolutionise access to financial services for the poor. There is
growing consensus that e-banking offers a unique opportunity to address mainstream banks’ two
major barriers to serving the low-income market: the need for a branch infrastructure and
managing high volumes of low value transactions. The potential of e-banking to significantly
extend the reach of financial institutions into rural areas, without investing in “bricks and
mortar” branches, is widely acknowledged.

In India, for example, both the Government and the regulator are quite concerned about the
skewed outreach of the banking sector including the nationalised banks. Of the 428 million
deposit accounts in the country, only 30% are in rural areas. With a rural population of 741.6
million, the rural penetration of banks is as low as 18%. Even when access to banking is
available, the transaction costs of savings in formal institutions in India are as high as 10% for
the rural poor. However, for all the growing talk of a revolution in financial access for the poor
through e-banking, there is limited evidence of it actually happening. Indeed markets across the
globe (including India) are littered with examples of unsuccessful e-banking initiatives that failed
to achieve their potential

To cope with the pressure of growing competition, Indian commercial banks have adopted
several initiatives and e-banking is one of them. The competition has been especially tough for
the public sector banks, as the newly established private sector and foreign banks are leaders in
the adoption of e-banking. Indian banks offer to their customers following e-banking products
and services:

 Automated Teller Machines (ATMs)

 Internet Banking

 Mobile Banking

 Phone Banking
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  Telebanking

 Electronic Clearing Services

 Electronic Clearing Cards

 Smart Cards

 Door Step Banking

 Electronic Fund Transfer

The three broad facilities that e-banking offers are:

 Convenience- Complete your banking at your convenience in the comfort of your

home.

 No more queues- There are no lines at an online bank.

 24x7 service- Bank online services is provided 24 hours a day, 7 days a week and 52
weeks a year.

RURAL E-BANKING

Reforms to the Indian financial sector over the past 15 years have resulted in significant growth
and availability of financial services. These have unleashed increased competition,
diversification of financial services and wider capital markets enabled by regulatory
liberalization along with more stringent prudential regulation and better supervision. Yet
substantial proportions of the population continue to be deprived of financial services.

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The Rural Financial Access Survey (RFAS) found that 59% of rural households in Uttar Pradesh
and Andhra Pradesh do not have deposit or savings accounts with the formal financial sector and
79% do not have access to credit from a formal source. As a separate group, 87% of marginal
farmers and 70% of small farmers have no formal credit while 70% of marginal farmers and 45%
of small farmers do not have deposit or savings accounts with a formal financial institution.

Within the Indian financial sector, the role of the rural banks is important but not apparently pre-
eminent. Of all the bank branches in the country, 49% are classified as rural branches while
another 30% are regarded as semi- urban. While rural branches clearly serve people who might
otherwise be excluded from the financial system, semi-urban branches are also of
importance for the outreach of financial services to the urban poor.

Now day’s banks are constantly searching for ways to improve profitability. On the face of the
twenty first century global economy banks’ service delivery practices are significantly changing
to get hold of advantages encapsulate in the new technologies.

The development and costing/pricing of the business case is central to a successful e-banking
solution. There are of course, individual and mutual business cases for the partners involved in a

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solution. The business case will revolve around the level of functionality that the institution
wishes to develop. Developing an appropriate revenue strategy depends on the functionalities
offered, the segments targeted and the anticipated volume of transactions. The dilemma here is
that high volumes are required to leverage the potential of e-banking systems and to allow
solutions providers to offer the services at prices acceptable to the market.

For instance, ownership and awareness of the internet and computers is wildly increasing
amongst households, businesses and government departments. With this proliferation of
internet expansion and computers usage, the electronic delivery of banking service has
become ideal for banks to meet customer’s expectations Last month, SBI tied up with Airtel and
BSNL to launch mobile money transfer in India. 67.28 percent of its total 12,207 branches are
present in rural and semi urban areas and the bank has plans to launch 1200 biometric ATMs in
rural areas.

TECHNOLOGY AND RURAL BANKING

15 | P a g e
Source17

Another development relates to the gradual undermining of the importance of branches of

banks. The emergence of new technology allows access to banking and banking services
without physical direct recourse to the bank premise by the customer. The concept of
Automated Teller Machines (ATMs) is the best example. At present, ATMs are city oriented in
our country. It is inevitable that ATMs will be widely used, in semi-urban and rural areas. The
technology-led process is leading us to what has been described as virtual banking.

The benefits of such virtual banking services are manifold. Through the competition, many
banks quickly realized that there are a momentous number of customers like to do banking
electronically. As such, many banks, based on their existing 24-hour telephone banking systems,
have developed and implemented several important e-banking applications so that their
customers now are able to pay bills, transfer money among accounts, check account history,
download statement information, and computerize their cheque books online all at easy and
around the clock.18

CONCLUSIONS

Undoubtedly e-banking is a strong catalyst for the economic development and in order to
enhance the propensity to use e-banking as a primary channel, it must be tailored suiting to the
need of the customers. A paper titled An Empirical Study of Rural Customer’s Satisfaction from
E-Banking in India19 analysed level of satisfaction of rural customers from 17 variables related to
the qualitative aspects of e-banking. The study found that rural customers are quite satisfied with
the provisions of updating, accuracy of transactions and convenience. However, they were not
found to be much satisfied with the regulatory mechanism and compensation given in case of

17
Aarathy Arun, Dilip R. S., Rajesh Ravindran, Shyam Sanker P. S., Branchless Banking By Corporation Bank - A
Branding Perspective, IIMB Management Review, 2008 (available at: http://tejas.iimb.ac.in/articles/images/10-
02.gif).
18
Morrall, Katherine, A Survey on of Critical Success Factors in e-Banking, Business Turn To Online Banking, BANK
MARKETING, January (1995), p.11.
19
Nishi Sharma, An Empirical Study of Rural Customer’s Satisfaction from E-Banking in India, Journal of Internet
Banking and Commerce, December 2012, vol. 17, no.3 (Available at: http://www.arraydev.com/commerce/jibc/)

16 | P a g e
fraudulent attack by unauthorized person or error by bank. Further they expect better services
should be provided for differently able persons.
To mitigate the fear of losing the money due to phishing or any other type of fraudulent attempt
by unauthorized person better knowledge may be provided to them through advertisement
campaign. As some of the villages of study do not have adequate facility for e-banking (like
availability of ATM, smooth networking and electricity supply for internet banking) concrete
steps should be taken to overcome these problems. Further through using good interpersonal
relation with customers and proper answering to their doubts, banks can motivate them to use e-
banking as their primary banking channel.

RECOMMENDATIONS

The following steps can be taken to improve the e-banking scenario in the country:

 E-banks should create awareness among people about e-banking products and services.
 Customers should be made literate about the use of e-banking products and services.
 Special arrangements should be made by banks to ensure full security of customer funds.

 Technical defaults should be avoided by employing well trained and expert technicians in
field of computers, so that loss of data can be avoided.

 Employees of banks should be given special technical training for the use of e-banking so
that they can further encourage customers to use the same.

 Seminars and workshops should be organised on the healthy usage of e-banking

especially for those who are ATM or computer illiterate.

 E-banking services should be customised on basis of age, gender, occupation etc. so that
needs and requirements of people are met accordingly.

 Government should make huge investments for building the infrastructure.

 Lack of awareness of internet banking benefits:
 Attract consumer attention to internet services through better marketing,

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  Inform consumers about features, advantages and benefits of internet
banking, especially its convenience,
 Allay consumer concerns about technology.
 Lack of unchallenged internet access:
 Establish facilities such as dedicated internet banking kiosks in banks and
public places,
 Develop cheaper mobile alternative technologies,
 Both of the above would improve perceptions of convenience, shown to be
a prime motivating factor in internet banking use.
 Restrictive workplace access:
 Offer incentives to businesses to facilitate internet banking.
 Competition with phone banking:
 Offer training in internet banking,
 Market relative advantages of internet banking, especially the convenience
factors.
 Difficult initial set-up procedure:
 Streamline set up procedures and provide set up support.
 Difficult to use:
 Improve screen design and navigation,
 Integrate banking systems.
 Lack of trust, security and privacy :
 Provide consumer reassurance and information,
 Improve application security and privacy, and bank information security
and privacy,
 Assist consumers in developing secure internet banking practices and risk
management procedures.
 Inadequate knowledge and support:
 Develop innovative consumer support solutions,
 Train branch staff in internet banking,
 Develop new knowledge management strategies.

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 CONCLUSION

India’s 400 million un-banked represent a tremendous opportunities for financial institutions, and
telecommunications companies interested in serving the bottom of the pyramid. Serving this
market requires the management of high volumes of low value transactions – which is precisely
what robust e-banking systems are designed to do. Indeed profitable e-banking systems are
dependent on managing large volumes of transactions, since it is these transactions that drive the
majority of their revenue. With the significant and growing penetration of mobile phones, linked
to the potential the public call office system, and the low cost of mobile telephony in India, one
can only hope that m-banking will be allowed to play a significant role in the push for financial
inclusion.

With India’s leadership in technology one can only wonder why countries like Brazil with its
correspondent banking system, and the Philippines/South Africa with their m-banking solutions,
are so far ahead. Policy makers in India are clearly committed to optimising financial inclusion
whilst maintaining the integrity of the financial system, securing depositors’ savings and
suppressing money laundering – this is a balancing act that will continue to challenge regulators
worldwide. However, even with the most enabling of regulatory environments e-banking
solution providers are only going to be successful in the short term if they concentrate on areas
where cash is inconvenient and the e-banking solution can do things that cash cannot.

REFERENCES

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  BOOKS

 Sharma, B.R. (2001), Bank Frauds-Prevention & Detection, Universal law Publishing.

 WEBLIOGRAPHY

 http://shodhganga.inflibnet.ac.in/bitstream/10603/21949/8/08_chapter_%201.pdf
 http://www.rbi.org.in/SCRIPTS/PublicationReportDetails.aspx?UrlPage=&ID=243
 http://www.iima.org/CIIMA/14%205.4_Yang_63-72-1.pdf
 http://www.rbi.org.in/SCRIPTS/PublicationReportDetails.aspx?UrlPage=&ID=243
 http://tejas.iimb.ac.in/articles/images/10-02.gif).
 http://www.arraydev.com/commerce/jibc/

 ARTICLES

 Uppal R K, E-Age Technology- New Face of Indian Banking Industry: Emerging

Challenges and New Potentials, Journal of Social and Development Sciences, Vol. 1, No. 3,
April 2011
 Berger, A. N. (2003), The Economic Effects Of Technological Progress: Evidence From
The Banking Industry, Journal of Money, Credit, Banking, 35 (2)
 Healy, Thomas J (1999). Why You Should Retain Your Customers. America's Community
Banker. September, p22.
 Graven, Matthew P., (2000}, Electronic Money, PC Magazine, August 8, 2000.
 Rao, Rohit (2001) “Internet Banking: Challenges for banks and Regulators” Banking in the
New Millennium, Institute of Chartered Financial Analysts of India.
 Aarathy Arun, Dilip R. S., Rajesh Ravindran, Shyam Sanker P. S., Branchless Banking By
Corporation Bank - A Branding Perspective, IIMB Management Review, 2008.

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