Project on Project on Internet Banking - Report of RBI Working Group
Internet Banking - The Indian Scenario

The entry of Indian banks into Net 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. 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.

At present, the total Internet users in the country are estimated at 9 lakh. However, this is expected to grow exponentially to 90 lakh by 2003. Only about 1% of Internet users did banking online in 1998. This increased to 16.7% in March 2000^* The growth potential is, therefore, immense. Further incentives provided by banks would dissuade customers from visiting physical branches, and thus get ‘hooked’ to the convenience of arm-chair banking. The facility of accessing their accounts from anywhere in the world by using a home computer with Internet connection, is particularly fascinating to Non-Resident Indians and High Networth Individuals having multiple bank accounts.

Costs of banking service through the Internet form a fraction of costs through conventional methods. Rough estimates assume teller cost at Re.1 per transaction, ATM transaction cost at 45 paise, phone banking at 35 paise, debit cards at 20 paise and Internet banking at 10 paise per transaction. The cost-conscious banks in the country have therefore actively considered use of the Internet as a channel for providing services. Fully computerized banks, with better management of their customer base are in a stronger position to cross-sell their products through this channel.

^*Source : India Research May 29 , 2000 , Kotak Securities.

Banks in India are at different stages of the web-enabled banking cycle. Initially, a bank, which is not having a web site, allows its customer to communicate with it through an e-mail address; communication is limited to a small number of branches and offices which have access to this e-mail account. As yet, many scheduled commercial banks in India are still in the first stage of Internet banking operations.

With gradual adoption of Information Technology, the bank puts up a web-site that provides general information on the banks, its location, services available e.g. loan and deposits products, application forms for downloading and e-mail option for enquiries and feedback. It is largely a marketing or advertising tool. For example, Vijaya Bank provides information on its web-site about its NRI and other services. Customers are required to fill in applications on the Net and can later receive loans or other products requested for at their local branch. A few banks provide the customer to enquire into his demat account (securities/shares) holding details, transaction details and status of instructions given by him. These web sites still do not allow online transactions for their customers.

Some of the banks permit customers to interact with them and transact electronically with them. Such services include request for opening of accounts, requisition for cheque books, stop payment of cheques, viewing and printing statements of accounts, movement of funds between accounts within the same bank, querying on status of requests, instructions for opening of Letters of Credit and Bank Guarantees etc. These services are being initiated by banks like ICICI Bank Ltd., HDFC Bank Ltd. Citibank, Global Trust Bank Ltd., UTI Bank Ltd., Bank of Madura Ltd., Federal Bank Ltd. etc. Recent entrants in Internet banking are Allahabad Bank (for its corporate customers through its ‘Allnet’ service) and Bank of Punjab Ltd. State Bank of India has announced that it will be providing such services soon. Certain banks like ICICI Bank Ltd., have gone a step further within the transactional stage of Internet banking by allowing transfer of funds by an account holder to any other account holder of the bank

Some of the more aggressive players in this area such as ICICI Bank Ltd., HDFC Bank Ltd., UTI Bank Ltd., Citibank, Global Trust Bank Ltd. and Bank of Punjab Ltd. offer the facility of receipt, review and payment of bills on-line. These banks have tied up with a number of utility companies. The ‘Infinity’ service of ICICI Bank Ltd. also allows online real time shopping mall payments to be made by customers. HDFC Bank Ltd. has made e-shopping online and real time with the launch of its payment gateway. It has tied up with a number of portals to offer business-to-consumer (B2C) e-commerce transactions. The first online real time e-commerce credit card transaction in the country was carried out on the Easy3shoppe.com shopping mall, enabled by HDFC Bank Ltd. on a VISA card.

Banks like ICICI Bank Ltd., HDFC Bank Ltd. etc. are thus looking to position themselves as one stop financial shops. These banks have tied up with computer training companies, computer manufacturers, Internet Services Providers and portals for expanding their Net banking services, and widening their customer base. ICICI Bank Ltd. has set up a web based joint venture for on-line distribution of its retail banking products and services on the Internet, in collaboration with Satyam Infoway, a private ISP through a portal named as icicisify.com. The customer base of www.satyamonline.com portal is also available to the bank. Setting up of Internet kiosks and permeation through the cable television route to widen customer base are other priority areas in the agendas of the more aggressive players. Centurion Bank Ltd. has taken up equity stake in the teauction.com portal, which aims to bring together buyers, sellers, registered brokers, suppliers and associations in the tea market and substitute their physical presence at the auctions announced.

Banks providing Internet banking services have been entering into agreements with their customers setting out the terms and conditions of the services. The terms and conditions include information on the access through user-id and secret password, minimum balance and charges, authority to the bank for carrying out transactions performed through the service, liability of the user and the bank, disclosure of personal information for statistical analysis and credit scoring also, non-transferability of the facility, notices and termination, etc

The race for market supremacy is compelling banks in India to adopt the latest technology on the Internet in a bid to capture new markets and customers. HDFC Bank Ltd. with its ‘Freedom- the e-Age Saving Account’ Service, Citibank with ‘Suvidha’ and ICICI Bank Ltd. with its ‘Mobile Commerce’ service have tied up with cellphone operators to offer Mobile Banking to their customers. Global Trust Bank Ltd. has also announced that it has tied up with cellular operators to launch mobile banking services. Under Mobile Banking services, customers can scan their accounts to seek balance and payments status or instruct banks to issue cheques, pay bills or deliver statements of accounts. It is estimated that by 2003, cellular phones will have become the premier Internet access device, outselling personal computers. Mobile banking will further minimise the need to visit a bank branch.

Compared to banks abroad, Indian banks offering online services still have a long way to go. For online banking to reach a critical mass, there has to be sufficient number of users and the sufficient infrastructure in place. The ‘Infinity’ product of ICICI Bank Ltd. gets only about 30,000 hits per month, with around 3,000 transactions taking place on the Net per month through this service. Though various security options like line encryption, branch connection encryption, firewalls, digital certificates, automatic sign-offs, random pop-ups and disaster recovery sites are in place or are being looked at, there is as yet no Certification Authority in India offering Public Key Infrastructure which is absolutely necessary for online banking. The customer can only be assured of a secured conduit for its online activities if an authority certifying digital signatures is in place. The communication bandwidth available today in India is also not enough to meet the needs of high priority services like online banking and trading. Banks offering online facilities need to have an effective disaster recovery plan along with comprehensive risk management measures. Banks offering online facilities also need to calculate their downtime losses, because even a few minutes of downtime in a week could mean substantial losses. Some banks even today do not have uninterrupted power supply unit or systems to take care of prolonged power breakdown. Proper encryption of data and effective use of passwords are also matters that leave a lot to be desired. Systems and processes have to be put in place to ensure that errors do not take place.

Users of Internet Banking Services are required to fill up the application forms online and send a copy of the same by mail or fax to the bank. A contractual agreement is entered into by the customer with the bank for using the Internet banking services. In this way, personal data in the applications forms is being held by the bank providing the service. The contract details are often one-sided, with the bank having the absolute discretion to amend or supplement any of the terms at any time. For these reasons domestic customers for whom other access points such as ATMs, telebanking, personal contact, etc. are available, are often hesitant to use the Internet banking services offered by Indian banks. Internet Banking, as an additional delivery channel, may, therefore, be attractive / appealing as a value added service to domestic customers. Non-resident Indians for whom it is expensive and time consuming to access their bank accounts maintained in India find net banking very convenient and useful.

The Internet is in the public domain whereby geographical boundaries are eliminated. Cyber crimes are therefore difficult to be identified and controlled. In order to promote Internet banking services, it is necessary that the proper legal infrastructure is in place. Government has introduced the Information Technology Bill, which has already been notified in October 2000. Section 72 of the Information Technology Act, 2000 casts an obligation of confidentiality against disclosure of any electronic record, register, correspondence and information, except for certain purposes and violation of this provision is a criminal offence. Notification for appointment of Authorities to certify digital signatures, ensuring confidentiality of data, is likely to be issued in the coming months. Comprehensive enactments like the Electronic Funds Transfer Act in U.K. and data protection rules and regulations in the developed countries are in place abroad to prevent unauthorized access to data, malafide or otherwise, and to protect the individual’s rights of privacy. The legal issues are, however, being debated in our country and it is expected that some headway will be made in this respect in the near future.

Notwithstanding the above drawbacks, certain developments taking place at present, and expected to take place in the near future, would create a conducive environment for online banking to flourish. For example, Internet usage is expected to grow with cheaper bandwidth cost. The Department of Telecommunications (DoT) is moving fast to make available additional bandwidth, with the result that Internet access will become much faster in the future. This is expected to give a fillip to Internet banking in India.

The proposed setting up of a Credit Information Bureau for collecting and sharing credit information on borrowers of lending institutions online would give a fillip to electronic banking. The deadline set by the Chief Vigilance Commissioner for computerisation of not less than 70 percent of the bank's business by end of January 2001 has also given a greater thrust to development of banking technology. The recommendations of the Vasudevan Committee on Technological Upgradation of Banks in India have also been circulated to banks for implementation. In this background, banks are moving in for technological upgradation on a large scale. Internet banking is expected to get a boost from such developments.

Reserve Bank of India has taken the initiative for facilitating real time funds transfer through the Real Time Gross Settlement (RTGS) System. Under the RTGS system, transmission, processing and settlements of the instructions will be done on a continuous basis. Gross settlement in a real time mode eliminates credit and liquidity risks. Any member of the system will be able to access it through only one specified gateway in order to ensure rigorous access control measures at the user level. The system will have various levels of security, viz., Access security, 128 bit cryptography, firewall, certification etc. Further, Generic Architecture (see fig. 2), both domestic and cross border, aimed at providing inter-connectivity across banks has been accepted for implementation by RBI. Following a reference made this year, in the Monetary and Credit Policy statement of the Governor, banks have been advised to develop domestic generic model in their computerization plans to ensure seamless integration. The abovementioned efforts would enable online banking to become more secure and efficient.

With the process of dematerialisation of shares having gained considerable ground in recent years, banks have assumed the role of depository participants. In addition to customers’ deposit accounts, they also maintain demat accounts of their clients. Online trading in equities is being allowed by SEBI. This is another area which banks are keen to get into. HDFC Bank Ltd., has tied up with about 25 equity brokerages for enabling third party transfer of funds and securities through its business-to-business (B2B) portal, ‘e-Net’. Demat account holders with the bank can receive securities directly from the brokers’ accounts. The bank has extended its web interface to the software vendors of National Stock Exchange through a tie-up with NSE.IT – the infotech arm of the exchange. The bank functions as the payment bank for enabling funds transfer from its customers’ account to brokers’ accounts. The bank is also setting up a net broking arm, HDFC Securities, for enabling trading in stocks through the web. The focus on capital market operations through the web is based on the bank’s strategy on tapping customers interested in trading in equities through the Internet. Internet banking thus promises to become a popular delivery channel not only for retail banking products but also for online securities trading.

An upcoming payment gateway is being developed by ICICI and Global Tele System, which will enable customers to transfer funds to banks which are part of the project. Transfer of funds can be made through credit/debit/ smart cards and cheques, with the central payment switch enabling the transactions. Banks are showing interest in this new concept, which will facilitate inter-bank funds transfers and other e-commerce transactions, thus highlighting the role of banks in e-commerce as intermediaries between buyers and sellers in the whole payment process.

WAP (Wireless Application Protocol) telephony is the merger of mobile telephony with the Internet. It offers two-way connectivity, unlike Mobile Banking where the customer communicates to a mailbox answering machine. Users may surf their accounts, download items and transact a wider range of options through the cellphone screen. WAP may provide the infrastructure for P2P (person to person) or P2M (person to merchant) payments. It would be ideal for transactions that do not need any cash backup, such as online investments. Use of this cutting edge technology could well determine which bank obtains the largest market share in electronic banking. IDBI Bank Ltd. has recently launched its WAP- based mobile phone banking services (offering facilities such as banking enquiry, cheque book request, statements request, details of the bank’s products etc).

At present, there are only 2.6 phone connections per 100 Indians, against the world average of 15 connections per 100. The bandwidth capacity available in the country is only 3.2 gigabits per second, which is around 60% of current demand. Demand for bandwidth is growing by 350% a year in India. With the help of the latest technology, Indian networks will be able to handle 40 gigabits of Net traffic per second (as compared to 10 gigabits per second in Malaysia). Companies like Reliance, Bharti Telecom and the Tata Group are investing billions of rupees to build fibre optic lines and telecom infrastructure for data, voice and Internet telephony. The online population has increased from just 500,000 in 1998 to 5 million in 2000. By 2015, the online population is expected to reach 70 million. IT services is a $1.5 billion industry in India growing at a rate of 55% per annum. Keeping in view all the above developments, Internet banking is likely to grow at a rapid pace and most banks will enter into this area soon. Rapid strides are already being made in banking technology in India and Internet banking is a manifestation of this. Every day sees new tie-ups, innovations and strategies being announced by banks. State Bank of India has recently announced its intention to form an IT subsidiary. A sea change in banking services is on the cards. It would, however, be essential to have in place a proper regulatory, supervisory and legal framework, particularly as regards security of transactions over the Net, for regulators and customers alike to be comfortable with this form of banking.