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A Study on Banking Services of New Generation Banking in the Indian

Banking Sector

Article · December 2016

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 A Study on Banking Services of New Generation Banking in the Indian
Banking Sector
Author:K.SARAVANAN Research Scholar
Co Author:Dr.K.MuthuLakshmi Associate Professor of Commerce
Bishop Heber College(Autonomous)Trichy -17

Abstract
The banking sector plays a vital role in the development of one country’s economy.
The growth of banking sector depends upon the services provided by them to the customers
in various aspects. The growing trend of banking services is found significant after the new
economic reforms in India. Today, India has a fairly well developed banking system with
different classes of banks – public sector banks, foreign banks, private sector banks – both
old and new generation, regional rural banks and co-operative banks with the Reserve Bank
of India as the fountain Head of the system. Nowadays banking sector acts as a backbone of
Indian economy which reflects as a supporter during the period of boom and recession.
Today the banking industry has been experiencing a totally unexpected paradigm shift, and in
this age of advanced technology and modern resources the bankers have to first properly
define what a new generation banks is as there is no definition that exists, that defines what a
new generation bank/banking is and how they can be operated in a sustainable manner not
just witnessing profit. But, witnessing existence on a long run for a better tomorrow. This
paper enlightens the knowledge light on new generation banking and its innovative products
and channels.
Keywords: Banking Sector, Recent Trends and Developments, Technologies, Banking
products and services

INTRODUCTION
The Banking sector has been immensely benefited from the implementation of superior
technology during the recent past, almost in every nation in the world. Productivity
enhancement, innovative products, speedy transactions seamless transfer of funds, real time
information system, and efficient risk management are some of the advantage derived
through the technology. Information technology has also improved the efficiency and
robustness of business processes across banking sector. India's banking sector has made rapid
strides in reforming itself to the new competitive business environment. Indian banking
industry is the midst of an IT revolution. Technological infrastructure has become an
indispensable part of the reforms process in the banking system, with the gradual
development of sophisticated instruments and innovations in market practices. IT in Banking
Indian banking industry, today is in the midst of an IT revolution. A combination of
regulatory and competitive reasons has led to increasing importance of total banking
automation in the Indian Banking Industry.
Financial innovation in India is key to making growth inclusive by connecting hundreds
of millions to the banking system, said panelists at the World Economic Forum’s India
Economic Summit. The deregulation of financial service industry and increased competition
with in investment banking undoubtedly led to increased emphasis on the ability to design
new products, develop better process, and implement more effective solution for increasingly
complex financial problems. These financial innovations are a result of number of
Government regulations, tax policies, globalization, liberalization, privatization, integration
with the international financial market and increasing risk in the domestic financial market.
Financial innovation is the process through which finance managers or intermediary
institutions in financial markets add value to existing plain vanilla products that satisfy the
user needs. According to John Finnerty, “Financial Innovation involves the design, the
development, and the implementation of innovative financial instruments and processes, and
the formulation of creative solutions to problems in finance”. The various innovations in
banking and financial sector are ECS, RTGS, EFT, NEFT, ATM, Retail Banking, Debit &
Credit cards, free advisory services, implementation of standing instructions of customers,
payments of utility bills, fund transfers, internet banking, telephone banking, mobile banking,
selling insurance products, issue of free cheque books, travel cheques and many more value
added services.
Today, we are having a fairly well developed banking system with different classes of
banks – public sector banks, foreign banks, private sector banks, regional rural banks and co-
operative banks. The Reserve Bank of India (RBI) is at the paramount of all the banks. The
RBI’s most important goal is to maintain monetary stability (moderate and stable inflation) in
India. The RBI uses monetary policy to maintain price stability and an adequate flow of
credit. The rates used by RBI to achieve this are the bank rate, repo rate, reverse repo rate and
the cash reserve ratio. Reducing inflation has been one of the most important goals for some
time.
REVIEW OF LITERATURE
Financial innovations lower cost of capital, reduce financial risks, improve financial
intermediation, and hence welfare enhancing. The primary function of financial system is to
facilitate the allocation and deployment of economic resources in an uncertain environment
(Merton, 1992).
Financial innovation is helpful in ensuring smooth functioning and improves the overall
efficiency of the system by minimizing cost and reducing risk. More generally, financial
innovation has been a central force driving the financial system toward greater economic
efficiency (Merton and Bodie 2005).
Avasthi & Sharma (2000-01) have analyzed in their study that advances in technology are
set to change the face of banking business. Technology has transformed the delivery channels
by banks in retail banking. It has also impacted the markets of banks. The study also explored
the challenges that banking industry and its regulator face.
B. Janki (2002) analyzed that how technology is affecting the employees’ productivity. There
is no doubt, in India particularly public sector banks will need to use technology to improve
operating efficiency and customer services. The focus on technology will increase like never
before to add value to customer services, develop new products, strengthen risk management
etc. the study concludes that technology is the only tool to achieve their goals.
Jalan, B. (2003), IT revolution has brought about a fundamental transformation in banking
industry. Perhaps no other sector has been affected by advances in technology as much as
banking & finance. It has the most important factor for dealing with the intensifying
competition & the rapid proliferation of financial innovations.
Mittal, R.K. & Dhingra, S. (2007) studied the role of technology in banking sector. They
analyzed investment scenario in technology in Indian banks but this study was related to the
time period before the Information Technology Act and at that time technology in Indian
banks was very low. But both the researchers nicely presented their views.
Padhy, K.C. (2007) studied the impact of technology development in the banking system
and he also highlights the future of banking sector. The core competencies will provide
comparative advantages.
OBJECTIVES
 To examine the new generation banking sector and its products/services
 To present the technological developments in Indian banking sector
 To study the emerging trends in banking technology.
RESEARCH METHODOLOGY
This research is based on the analysis of the secondary data and the research proposes to
throw light on the banking services of new generation banking in the Indian Banking Sector.
RECENT TRENDS AND DEVELOPMENT IN BANKING SECTOR
Today, we are having a fairly well developed banking system with different classes of
banks – public sector banks, foreign banks, private sector banks, regional rural banks and co-
operative banks. The Reserve Bank of India (RBI) is at the paramount of all the banks.
The RBI’s most important goal is to maintain monetary stability (moderate and stable
inflation) in India. The RBI uses monetary policy to maintain price stability and an adequate
flow of credit. The rates used by RBI to achieve the bank rate, repo rate, reverse repo rate and
the cash reserve ratio. Reducing inflation has been one of the most important goals for some
time. Growth and diversification in banking sector has transcended limits all over the world.
In 1991, the Government opened the doors for foreign banks to start their operations in India
and provide their wide range of facilities, thereby providing a strong competition to the
domestic banks, and helping the customers in availing the best of the services. The Reserve
Bank in its bid to move towards the best international banking practices will further sharpen
the prudential norms and strengthen its supervisor mechanism. There has been considerable
innovation and diversification in the business of major commercial banks. Some of them have
engaged in the areas of consumer credit, credit cards, merchant banking, internet and phone
banking, leasing, mutual funds etc. A few banks have already set up subsidiaries for merchant
banking, leasing and mutual funds and many more are in the process of doing so. Some banks
have commenced factoring business.
New Generation Banks
Today, banks claim themselves as new generation banks on the basis of certain services
they render or the time period they have being formed or bought into existence. But, it should
not be done so because, it totally depends on how they function, in terms of implementing
strategies, creating and initiating new investment plans managing funds and non-performing
assets, looking on to the way how their work force is recruited and retained by analyzing their
true caliber and so on.
“New generation banks are not just banks who are involved in the implementing a new
strategy for the sake of survival. But, banks who are involved in the process of creating a
paradigm shift to overcome the ever-changing market requirements and customer preferences
by the way they organize the internal and external activities, and initiatives by considering
traditional human values and using modern technology. That may result in creating larger
revenues by properly investing and managing the funds to create optimum profit and
goodwill for the long run of the business can be considered and proved as sustainable”.
Similarly, ages pass on and so does time, thus organizations who are involved in creating
change and surviving the change by implementing innovative and effective strategies to serve
the future generations to come can be considered so. Thus, In this process the bank that
excels with its innovative strategy is to be considered as a new generation bank as the those
strategies used to exhibit customer service and welfare is just a marketing strategy which
brings in customers but on a long run its only the internal affairs and money management
strategy that helps a business retain its position in the market.
DEVELOPMENT IN NEW GENERATION BANKS
Electronic Payment Services - E Cheques
Nowadays we are hearing about e-governance, e-mail, e-commerce, e-tail etc. In the same
manner, a new technology is being developed in US for introduction of e-cheque, which will
eventually replace the conventional paper cheque. India, as harbinger to the introduction of e-
cheque, the Negotiable Instruments Act has already been amended to include; Truncated
cheque and E-cheque instruments.
Real Time Gross Settlement (RTGS)
Real Time Gross Settlement system, introduced in India since March 2004, is a system
through which electronics instructions can be given by banks to transfer funds from their
account to the account of another bank. The RTGS system is maintained and operated by the
RBI and provides a means of efficient and faster funds transfer among banks facilitating their
financial operations. As the name suggests, funds transfer between banks takes place on a
'Real Time' basis. Therefore, money can reach the beneficiary instantaneously and the
beneficiary's bank has the responsibility to credit the beneficiary's account within two hours.
National Electronic Funds Transfer (NEFT)
The transfer of money from the customer remitting it to the beneficiary account usually
takes place on the same day. Settlement or clearance of funds takes place in batches as
specified by the guidelines by the RBI. Any amount of money can be transferred using
NEFT, making it usually the best method for retail remittances. Customers with Internet
banking accounts can use the NEFT facility to transfer funds nationwide on their own. Funds
can also be transferred via NEFT by customers by walking into any bank branch (which is
NEFT-enabled) and leaving relevant instructions for such transfer - either from their bank
accounts or by payment of cash. Transfer of funds to Nepal using NEFT, is also allowed
subject to limits.
Electronic Funds Transfer (EFT)
Electronic Funds Transfer (EFT) is a system whereby anyone who wants to make payment
to another person/company etc. can approach his bank and make cash payment or give
instructions/authorization to transfer funds directly from his own account to the bank account
of the receiver/beneficiary. Complete details such as the receiver's name, bank account
number, account type (savings or current account), bank name, city, branch name etc. should
be furnished to the bank at the time of requesting for such transfers so that the amount
reaches the beneficiaries' account correctly and faster. RBI is the service provider of EFT.
Electronic Clearing Service (ECS)
Electronic Clearing Service is a retail payment system that can be used to make bulk
payments/receipts of a similar nature especially where each individual payment is of a
repetitive nature and of relatively smaller amount. This facility is meant for companies and
government departments to make/receive large volumes of payments rather than for funds
transfers by individuals.
Automatic Teller Machine (ATM)
Automatic Teller Machine is the most popular devise in India, which enables the customers
to withdraw their money 24 hours a day 7 days a week. It is a devise that allows customer
who has an ATM card to perform routine banking transactions without interacting with a
human teller. In addition to cash withdrawal, ATMs can be used for payment of utility bills,
funds transfer between accounts, deposit of cheques and cash into accounts, balance enquiry
etc.
Tele-banking
Tele banking is another innovation, which provided the facility of 24 hour banking to the
customer. Tele-banking is based on the voice processing facility available on bank
computers. The caller usually a customer calls the bank anytime and can enquire balance in
his account or other transaction history. In this system, the computers at bank are connected
to a telephone link with the help of a modem. Voice processing facility provided in the
software. This software identifies the voice of caller and provides him suitable reply. Some
banks also use telephonic answering machine but this is limited to some brief functions. This
is only telephone answering system and now Tele-banking. Tele banking is becoming
popular since queries at ATM’s are now becoming too long.
Internet Banking
Internet banking enables a customer to do banking transactions through the bank’s website on
the Internet. It is a system of accessing accounts and general information on bank products
and services through a computer while sitting in its office or home. This is also called virtual
banking. It is more or less bringing the bank to your computer. In traditional banking one has
to approach the branch in person, to withdraw cash or deposit a cheque or request a statement
of accounts etc. but internet banking has changed the way of banking. Now everyone can
operate all these type of transactions on his computer through website of bank. All such
transactions are encrypted; using sophisticated multi- layered security architecture, including
firewalls and filters. One can be rest assured that one’s transactions are secure and
confidential.
Mobile Banking
Mobile banking facility is an extension of internet banking. With recent developments in
handset designs and mobile software, this is a trend which has already caught focus of
majority of the banks. The bank is in association with the cellular service providers offers this
service. For this service, mobile phone should either be SMS or WAP enabled. These
facilities are available even to those customers with only credit card accounts with the bank.
Point of Sale Terminal
Point of Sale Terminal is a computer terminal that is linked online to the computerized
customer information files in a bank and magnetically encoded plastic transaction card that
identifies the customer to the computer. During a transaction, the customer's account is
debited and the retailer's account is credited by the computer for the amount of purchase. Tele
Banking Tele Banking facilitates the customer to do entire non-cash related banking on
telephone. Under this devise Automatic Voice Recorder is used for simpler queries and
transactions. For complicated queries and transactions, manned phone terminals are used.
Electronic Data Interchange (EDI)
Electronic Data Interchange is the electronic exchange of business documents like purchase
order, invoices, shipping notices, receiving advices etc. in a standard, computer processed,
universally accepted format between trading partners. EDI can also be used to transmit
financial information and payments in electronic form.
Challenges Faced by Banks, vis-à-vis, IT Implementation
It is becoming increasingly imperative for banks to assess and ascertain the benefits of
technology implementation. The fruits of technology will certainly taste a lot sweeter when
the returns can be measured in absolute terms but it needs precautions and the safety nets.
The increasing use of technology in banks has also brought up 'security' concerns. To avoid
any mishaps on this account, banks ought to have in place a well-documented security policy
including network security and internal security. The passing of the Information Technology
Act has come as a boon to the banking sector, and banks should now ensure to abide strictly
by its covenants. An effort should also be made to cover e-business in the country's consumer
laws. Some are investing in it to drive the business growth, while others are having no option
but to invest, to stay in business. The choice of right channel, justification of IT investment
on ROI, e-governance, customer relationship management, security concerns, technological
obsolescence, mergers and acquisitions, penetration of IT in rural areas, and outsourcing of
IT operations are the major challenges and issues in the use of IT in banking operations.
Future Outlook
Everyone today is convinced that the technology is going to hold the key to future of
banking. The achievements in the banking today would not have make possible without IT
revolution. Therefore, the key point is while changing to the current environment the banks
has to understand properly the trigger for change and accordingly find out the suitable
departure point for the change.
CONCLUSION
In the days to come, banks are expected to play a very useful role in the economic
development and the emerging market will provide business opportunities to harness. As
banking in India will become more and more knowledge supported, capital will emerge as the
finest assets of the banking system. Ultimately banking is people and not just figures. To
conclude it all, the banking sector in India is progressing with the increased growth in
customer base, due to the newly improved and innovative facilities offered by banks. The
economic growth of the country is an indicator for the growth of the banking sector. The onus
for this lies in the capabilities of the Reserve Bank of India as an able central regulatory
authority, whose policies have shielded Indian banks from excessive leveraging and making
high risk investments. By the government support and a careful re-evaluation of existing
business strategies can set the stage for Indian banks to become bigger and stronger, thereby
setting the stage for expansions into a global consumer base. The long term success by any
bank cannot be achieved without the development of new business ideas, innovative products
and services and intense focus on customer retention. Banks have to in still in their DNA the
enablement of a positive and consistent customer experience that can transform them into
trusted advisers. At no time in banking history has this been more important. Although this
article gives a view on what new age banking and its trends what their customers expect the
banks of tomorrow to look like and what they should focus on, the right choice for adoption
may vary from bank to bank
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