UNIT-IV

BANKING TECHNOLOGY
INTRODUCTION
Over the years, especially in the later part of the 20th century, the Indian Banking Sector has undergone fast
growth and with the advent of technological changes, Indian banks are adopting to the new environment. The two
successive Committees on Computerization (Rangarajan Committees) were responsible for bank computerization
in India. Over the years led by the initiatives of the Reserve Bank of India, banks in India have witnessed lot of
changes into their banking operations duly supported by IT and communication revolution.
Some important areas where the IT plays important roles are:
Funds Transfer mechanism: ECS, EFT, RTGS, NEFT
Clearing House operations: MICR, CTS
Innovative on line e- banking services: Tele banking, Mobile banking, SMS banking, Credit/ Debit Cards, ATMs,
Internet banking, Core Banking Solutions, etc.

IT and Communication Systems – Important features

The integration of computers and communication techniques has opened opportunities for banks to provide
various innovative and customer friendly products/services and also to redesign their internal control systems.
The data communication network systems play an important role in interface and interconnectivity of banks. With
the fast changing technological supported world, banks in India have come a long way. Over the years different
methods have been used to transmit data from computer to computer. The data is transmitted by means of data
communication media like terrestrial cables, microwave and satellites.

Communication Networks in Banking System

As per the recommendations of the Saraf Committee, the Reserve Bank of India has set up a country wide data
communication network for banks linking major centers of the country, known as INFINET (Indian Financial
Network) and this network uses satellite communication with very small aperture terminals (VSATs) as earth
stations.
VSAT network is a single closed user group network for the exclusive use of banks and other financial institutions.
The VSATs are owned by individual banks and the RBI. The hub is owned by the RBI and the Institute for
Development and Research in Banking Technology (IDRBT). Satellite services based on VSAT technology can
establish reliable links to all sites. The central hub monitors and controls the flow of network traffic.

Internet
The internet is a global network of networks. Computers with internet links can allow users to exchange data,
information, messages, files, etc, with other computers across the globe through internet connectivity.

Internet Access Services

Some of the important services available on internet are: E-mail: Most popular and widely used application.
Messages can be sent and received to/from any place in very quick time. It is user friendly and cost effective as
well.

This facility collates internet related resources and makes available the information. The access to this site
assists user to source out a large variety of information.
Banks uses internet and web sites (banks’ own web sites) to market their products and services. These platforms
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also allow banks to offer online banking facilities and can be used for posting their financial results and information
to customers.

Society for Worldwide Inter-bank Financial Telecommunications (SWIFT) is a co-operative non-profit making
organization established under Belgian law with its head quarters at Brussels. SWIFT is wholly owned by its
member banks. SWIFT is a paperless message transmission system.
SWIFT – important features:
– Operates on 24x7 basis throughout the year
– All messages are transmitted to any part of the world immediately
– Message formats are standardized
– Information is confidential and is protected against unauthorized disclosure
– SWIFT assumes financial responsibility for the accuracy and timely delivery
SWIFT and banks:
– SWIFT has become an integral part of banking system. SWIFT assist member banks
– SWIFT transmit authenticated financial and non-financial messages
– SWIFT with its well-standardized and structured message formats have been offering a reliable system
of message transmission
– Banks use SWIFT platform to for transmission of financial and non-financial messages covering
international finance (settlement of forex deals), international trade (advising of LCs, amendments to
LCs etc,)

AUTOMATED CLEARING SYSTEMS

Clearing House Inter-bank Payment System (CHIPS)

This is a clearing system run by New York clearing house. The financial transactions such as – foreign and
domestic trade services, international loans, syndicated loans, foreign exchange trade settlements, are carried
out through CHIPS. The CHIPS have a direct interface with the SWIFT system.

Clearing House Automated Payment System (CHAPS)

CHAPS is an automated system set up in UK which ensures immediate settlement of payments.

Clearing House Automated Transfer System (CHATS)

CHATS provide the inter-bank transfer facilities in Hong Kong. CHATS provide same day inter-bank settlement,
instant order confirmation and enquiry facilities. The integrity of message transmission is carried out through
authentication and encryption techniques.

ELECTRONIC FUND MANAGEMENT

Banking operations over the years and decades have witnessed many changes and have been adopting from
time to time new innovations. The technological revolution especially in the Information and Technology front
has changed the functioning of banks. In today’s globalized competitive business environment banks are trying
to have the competitive edge by using the latest technology to cut down turnaround time, cut costs and increase
efficiency. “e Banking” through many innovative products and services has revolutionized banking operations.

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Electronic Fund Management

IT revolution has paved way for banks to implement different systems to handle funds management in banks.
This methodology is collectively recognized as Electronic Fund Management.

Electronic Clearing System (ECS)

One of the earliest electronic forms of funds transfer is the Electronic Clearing System. ECS is a retail funds
transfer system to effect payments (utility bills, dividends, interest, etc) ECS helps corporates, government
departments, public sector undertakings, utility service providers to receive and/or pay bulk payments. ECS is
divided into ECS (credit) and ECS (debit)

ECS – important aspects/ features

On receipt of the required mandate, the funds (payments/ receipts) can be handled by a bank through ECS.
ECS (debit) is generally used by utility companies like electricity companies, telephone companies and other to
receive the bill payments directly from bank accounts of their clients. Instead of payment of utility bills by
means of cash or cheque payments, an individual or a company can make payment through ECS. In case the
company has the facility of payment through ECS, the client can give a mandate to the company to receive the
utility bill amount from his bank account directly. The utility company (service provider) based on the ECS
mandate given by the client, would advise the client’s bank to debit the bill amount to the client’s account on the
due date (or on a any date before the due date as per the client’s request) and transfer the amount to the
company’s own bank account. Similarly, ECS (Credit) can facilitate payment to various clients like dividend
warrants, maturity values of Annuities.

Real Time Gross Settlement (RTGS)

One of the important IT revolutions in Indian Banking Scenario was the implementation of the Real Time Gross
Settlement (RTGS) system by the Reserve Bank of India. With the changing scenario from manual environment
to electronic mode, banks started to use faster, safer and efficient methods to transfer funds.
In this regard, two important and popular electronic funds transfer systems are Real Time Gross System (RTGS)
and National Electronic Funds Transfer System (NEFT)
RTGS is an electronic payment system, where payment instructions are processed on a ‘continuous’ or ‘REAL
TIME’ basis and settled on a ‘GROSS’ or ‘individual’ basis without netting the debits against credits. In India,
RBI introduced this system and the system is functioning well. The payments so effected are ‘final’ and
‘irrevocable’. The settlement is done in the books of the central bank (RBI). The RTGS system allows transfer
of funds across banks on a real time (immediate) basis. Each participant bank needs to open a dedicated
settlement account for putting through its RTGS transactions. Not only does it allow transfer of funds, it also
reduces the credit risk. Both customers and banks can transfer funds monies the same day at regular intervals
within the banking hours.

RTGS: Special features:

(a) Real Time Gross Settlement helps banks to settle interbank and forex settlements
(b) It also helps banks in handling big ticket funds transfers
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 (c) Since RTGS it is routed through RBI platform, the credit risk is minimized (this is one of the main advantages
in settlement of funds)
(d) Unlike in case of cheque clearance, the drawer of the cheque cannot enjoy the float time (the date of
issuance of cheque and the date on which it is received in inward clearing and debited by his banker)
However, in the case of RTGS, the remitter’s account is debited first and then only the funds are transferred
(e) If all relevant details such as the beneficiary’s name, account number, IFSC code of the receiving branch,
name of the beneficiary bank, etc., are correctly furnished it would assist the remitting bank to effect the
transfer quickly
(f) As the name RTGS suggests, the transfer mechanism works on real time and, therefore, the beneficiary
branch/bank should receive the funds immediately. The beneficiary’s branch/bank should give credit to
the beneficiary’s account immediately or latest within 2 hours of receiving the funds transfer message.
However, in case the funds cannot be credited for any reason, such funds should be returned to the originating
branch within two hours. In such a situation, as soon as the money is returned, the remitting bank should reverse
the original debit entry in the client’s (remitter’s) account. This system is applicable between banks/branches who
are on Core Banking Solutions (CBS)

National Electronic Funds Transfer (NEFT)

NEFT is a system similar to RTGS with certain differences. RTGS handles big ticket transactions, whereas NEFT
handles smaller size transactions. Most branches are using this facility to transfer funds in an efficient manner.
Once the applicant for the transfer of funds furnishes full and correct details (correct account details means
correct name of the beneficiary, the correct account number, the branch and bank of the beneficiary, and the
correct IFS code, etc.) funds can be transferred to the beneficiary’s account by the remitting bank. Transfer of
funds through NEFT is safe, quick. It reduces the paper work and is cost effective.
NEFT is an innovative electronic media for effecting transfer of funds. Special features of NEFT are:
1. NEFT is a funds transfer system which enables a customer of a bank to transfer funds to another customer
of another bank having account with any participating bank
2. NEFT allows both intra and inter-bank funds transfer within a city and across cities
3. Since it is in the form of e transfer, without any physical movement of instruments, funds can be transferred
quickly
4. The beneficiary customer gets funds in his account on the same day or at the earliest on the next day
depending upon the time of settlement
5. Both the originating and destination bank branches should be on NEFT platform
6. The correct details of IFSC, beneficiary’s name, account numbers, etc., should be furnished to the
originating bank.
7. The originating bank branch can keep track of the status of the NEFT transaction.
8. In case for any reason the destination branch is not able to afford credit to the beneficiary’s account,
destination branch/bank have to return the funds to the originating bank within two hours of completion
of the batch through which the transaction was processed

9. It is not only easy method of transfer of funds, but also enables the remitters to have user friendly and
cost effective transfer of funds

Indian Financial System Code (IFSC)

IFSC is an alpha-numeric code that identifies a bank-branch participating in the RTGS/NEFT system. IFSC has
11 digit code and the first four alpha characters represents the bank, the 5th code is 0 (zero), which is reserved for
future use and the last six digits are numeric characters represents the branch. Correct IFSC code is essential for
identifying the beneficiary’s branch and bank as destination for funds transfers. E.g. Syndicate Bank Cuffe Parade
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Branch, Mumbai- SYNB0005087

Automated Teller Machines (ATMs)

ATMs are used as a channel for cash management of individual customers. ATMs can be accessed by ATM card,
debit or credit cards. To have access the customer (the card holder) needs to use his Personal Identification
Number (PIN) issued by his/her banker and access password. ATMs generally used for cash deposit and
withdrawals, they can also be used for payment of utility bills, funds transfer thereby ATMs serve as a channel for
electronic funds management. Requests for new cheque book and statement of accounts can also be given
through ATMs.
White Label ATMs- RBI has vide notifications dated 20th June, 2012, permitted non-banking entities to set up or
start ATMs which are called White Label ATMs (WLA). From such ATMs customers of any bank will be able to
withdraw money, takeout statement, change PIN etc. These WLAs will not display logo of any bank. However,
WLA operator has been permitted to display advertisements, and offer value added services as per regulations in
force. While WLA operator is entitled to receive a fee from the banks for use of ATM resources by their customers,
WLAs are not permitted to charge Bank customers directly for use of WLA.

Internet Banking
Internet banking one of the popular e-banking modes has changed the banking operations and offer virtual
banking services to the clients on 24 x 7 basis. It is also called as convenient banking, since the customer
(account holder) can have access to his bank account from anywhere at any time, through the bank’s web site.
The customer is allowed online access to account details and payment and funds transfer facilities. Net banking
services of a bank can be accessed through a Personal Identification Number (PIN) and access password as in
the case of ATMs. In net banking the advantage for the bank customer is that funds can be transferred from the
client’s bank account to another account with the same bank or another bank through NEFT/RTGS. Another
method of funds transfer facility is online payment of taxes. Bank customer can pay various taxes like income tax,
service tax, etc.; Net banking can be used as a channel by the customer to pay the utility bills (electricity bills,
telephone bills, etc) on line. Customers can make use of net banking to pay the insurance premiums and similar
other payments.

Core Banking Solutions (CBS)

Core Banking Solutions has helped banks to offer better customer service. It has also reduced the time and
increased the efficiency. The Core Banking Solutions mainly work on the support of effective communication and
good information technology. It is on account of merger of communication technology and information technology
which enables the banks to offer core banking needs of the clients.
Core Banking Solutions are computer based banking applications (software) which works on a platform. The
computer software handles the different functions of the bank like, recording of transactions, updating the balances
in the accounts based on the type of transactions, calculate interests and application of interest, charges etc.,
The software is installed in the branches and the computer systems are interconnected with a main computer
server though communication lines (telephones, satellite, internet, fibre optical

CBS is a back end system, and it processes daily banking transactions and updates the records accordingly.
CBS helps the clients to operate their accounts from any CBS branch. CBS branch assist customers to handle
their funds transfers in a quick turnaround time. It also assists the client to withdraw and deposit funds in other
branches apart from the parent branch, where he maintains his account.
Data Warehousing- A Data Warehouse or Enterprise Data Warehouse (DWH/EDW) is a database used for
reporting and data analysis. It is a central repository of data which is created by integrating data from one or more
separate sources. DWH store current as well as historical data and are used for creating trending reports for use
by senior management. The data stored in the warehouse are uploaded from the operation systems. The main
source of data is cleaned, transformed, catalogued and made available for use by the managers for data mining,
online analytical processing and decision support.

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 WAN and LAN

LAN, which stands for local area network, and WAN, which stands for wide area network, are two types of
networks that allow for interconnectivity between computers. As the naming conventions suggest, LANs are for
smaller, more localized networking — in a home, business, school, etc. — while WANs cover larger areas, such
as cities, and even allow computers in different nations to connect. LANs are typically faster and more secure
than WANs, but WANs enable more widespread connectivity. And while LANs tend to be owned, controlled and
managed in-house by the organization where they are deployed, WANs typically require two or more of their
constituent LANs to be connected over the public Internet or via a private connection established by a third-party
telecommunications provider.

Comparison chart LAN versus WAN comparison chart

LAN WAN

Stands For Local Area Network Wide Area Network

Covers Local areas only (e.g., homes, offices, Large geographic areas (e.g., cities, states, nations)
schools)

Definition LAN (Local Area Network) is a computer WAN (Wide Area Network) is a computer network that
network covering a small geographic area, covers a broad area (e.g., any network whose
like a home, office, school, or group of communications links cross metropolitan, regional, or
buildings. national boundaries over a long distance).

Speed High speed (1000 mbps) Less speed (150 mbps)

Data transfer LANs have a high data transfer rate. WANs have a lower data transfer rate compared to
rates LANs.

Example The network in an office building can be a The Internet is a good example of a WAN
LAN

Technology Tend to use certain connectivity WANs tend to use technologies like MPLS, ATM,
technologies, primarily Ethernet and Frame Relay and X.25 for connectivity over longer
Token Ring distances

Connection One LAN can be connected to other LANs Computers connected to a wide-area network are often
over any distance via telephone lines and connected through public networks, such as the
radio waves. telephone system. They can also be connected through
leased lines or satellites.

Components Layer 2 devices like switcches and Layers 3 devices Routers, Multi-layer Switches and
bridges. Layer 1 devices like hubs and Technology specific devices like ATM or Frame-relay
repeaters. Switches etc.

Fault Tolerance LANs tend to have fewer problems WANs tend to be less fault tolerant as they consist of
associated with them, as there are smaller large number of systems.
number of systems to deal with.

Data Experiences fewer data transmission Experiences more data transmission errors as
Transmission errors compared to LAN
Error

Ownership Typically owned, controlled, and managed WANs (like the Internet) are not owned by any one
by a single person or organization. organization but rather exist under collective or
distributed ownership and management over long
distances.

Set-up costs If there is a need to set-up a couple of For WANs since networks in remote areas have to be
extra devices on the network, it is not very connected the set-up costs are higher. However WANs
expensive to do that. using public networks can be setup very cheaply using
just software (VPN etc).

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 LAN WAN

Geographical Have a small geographical range and do Have a large geographical range generally spreading
Spread not need any leased telecommunication across boundaries and need leased telecommunication
lines lines

Maintenance Because it covers a relatively small Maintaining WAN is difficult because of its wider
costs geographical area, LAN is easier to geographical coverage and higher maintenance costs.
maintain at relatively low costs.

Bandwidth High bandwidth is available for Low bandwidth is available for transmission.
transmission.

Congestion Less congestion More congestion

Main frame networking

A mainframe (also known as "big iron") is a high-performance computer used for large-scale computing
purposes that require greater availability and security than a smaller-scale machine can offer. Historically,
mainframes have been associated with centralized rather than distributed computing, although that distinction is
blurring as smaller computers become more powerful and mainframes become more multi-purpose. Today, IBM
emphasizes that their mainframes can be used to serve distributed users and smaller servers in a computing
network. The original mainframes were housed in room-sized metal frames, which is probably where the name
derives from. In the past, a typical mainframe might have occupied 2,000 - 10,000 square feet. Newer
mainframes are about the same size as a large refrigerator.

Computerization of Clearing of Cheques

Over the years Reserve Bank of India as a facilitator has been playing a vital role in the implementation of
innovative systems, to enable banks not only to function effectively but also to offer better customer service. RBI
is in charge of the clearing house and clearing operations. It has always taken lead to introduce new systems to
speed up clearing process as well to reduce the turnaround time in clearance of funds. Computerization of
clearing operations was the first major step initiated by RBI, over the years RBI has been upgrading the system
with new changes. To overcome the increasing volume of cheques through the clearing mechanism, RBI has
fully automated the clearing house operations. This is based on the Magnetic Ink Character Recognition technology;
RBI upgraded the clearing functions with new set of MICR cheques. Under this new system, cheques should
have MICR code consisting of 9 digits. Each cheque would have the unique 9 digit MICR code along with the
cheque number.
MICR code consists of 9 digits as:
– First three digits indicates CITY {identical to the first three digit of the postal pin code of the CITY (For
example: in case of Mumbai, it would be 400)}
– Next three digits represents the Bank and each bank has been given a three digit code called bank code
– Last three digits denote the branch code
Under this MICR system the computer program would read and sort out the cheques based on the codes,
thereby, in quick turnaround time, the system is able to handle volume.

Cheque Truncation System (CTS)

Cheques are being used as a medium for exchange of funds, which play a key role in the funds management of
customers and banks. The efficient cheque clearing system helps in settlement of receipts and payments. Cheque
Truncation is a new system introduced in Indian Banking Scenario. It is a system of cheque clearance and
settlement between banks based on electronic data and/or images without the need for exchange of physical
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cheques and negotiable instruments like demand drafts, pay orders, dividend warrants, etc.
Cheque truncation - Special features:
– Bank customers would get their cheques realized faster
– Quick realization helps in better cash management (receivables/payables)
– In the long run, it would reduce the administrative costs for bank
– Importantly this would assist banks’ in reconciliation and also reduction in clearing frauds.

ELECTRONIC COMMERCE AND BANKING

The global e-commerce activities include the interaction of traders (buyers/importers and sellers/exporters) with
banks and counterparties, manufacturers, service providers etc., Banks across the globe provide payments and
settlements services thereby enable the rapid growth of global e-commerce.
“e marketing” or cyber marketing is an important segment of e commerce. Salient features of internet (e)
marketing are:

Internet marketing:
Internet based marketing is an important segment in e commerce. It plays a vital role in the supply chain
process of exchange of goods between the producer and consumer.
Interconnectivity: Internet is recognized as a network of networks. The search engines assist the user of the
internet to have access to required information. For customers, the interconnectivity offered by the internet
helps him/her to have information/access to large number of diverse markets. One important feature is that it
gives information and access about international markets as well.
Interactivity:
Internet not only allows access but also allows interface and interactivity among users. In view of this interface,
it assists both the producer/manufacturer as well as customers to have better communication and choices. It
allows the marketer to customize and focus even on individual customers in large markets. On the other hand
the customers are also benefitted because of their interface with the marketer, peers and different web sites to
make their selection.
Information:
The availability of large number of websites on the internet enables the customers to decide on price, choice of
products, designs etc., On account of innovative methods of marketing the customers can have access to
information covering wide range of areas.
Individual preference:
The interconnectivity, information and interface provided by the internet network assists the customer with wide
choices. Based on his/her preference and capacity a customer can decide on his preference to choose and
order.
Integrity:
With the changing time and requirements and on account of security issues and also to safe guard the users
from cyber crimes, internet provides tools to check the authenticity of the data and its providers. In view of
many fake offers & advertisements, the internet users should be cautious. They should not provide any
sensitive information like details of PIN, passwords and other information to any unauthorized sites, not only to
safeguard their interests, but also not to allow cyber criminals to have access to this information.

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Internet and Supply Chain Management
Internet also provides online distribution of digitalized products. This helps in quick turnaround reach to a large
number of customers, and eliminates the lead time between the place of order and delivery. This also enables
a better inventory management and quicker transaction processing. Many enterprises have started using the
new
concept called Enterprise Resource Planning (ERP) systems. e-distribution (cyber distribution) activities when
linked to these ERP systems assist the companies to achieve a greater efficiency in their entire Supply Chain
Management.
Cyber Marketing: Limitations:
Internet marketing is also exposed to quite a few problems. Some of them are in-built and others are external
problems.
1. Digitization: For cyber marketing, the products should be in digitized format. This process requires
manpower, skills and technical knowledge. The digitization is one of the issues faced by e marketing.
2. Shopping experience: Customers especially in India are more used to touch and feel experience as
against click and view mode of shopping.
3. Cyber crimes: Despite the popularity of internet and e commerce and e-marketing, on account of different
cyber crimes users are concerned about e marketing.
4. Security: While shopping on internet, customers are required to furnish sensitive personal data which are
being shared by marketing companies and create inconvenience to the customers and also pose threats
to their privacy.
While customers can have faster access to information and details about the range of products, customers are
cautioned to be careful on account of various issues and risks associated with cyber marketing.

INTERNATIONAL PAYMENT SYSTEMS

In today’s fast growing e commercial activities, banks’ role is very important for the success of global e- commerce.
e- commerce should be end to end covering various aspects like from the customer’s end, the selection of on line
products, placement of orders, and making and settling payments.
An effective global payment channel should be an integral part of global e commerce. Before setting up a global
payment channel, an organization should consider certain aspects such as
1. Payment Type: Payments can be made through different modes like credit cards, debit cards, or online
transfer. Customers should be allowed to choose any of the method to settle payments. Internal checking
and balancing act should be embedded into the system
2. Legal frame work/Regulatory compliance: The system should satisfy the legal and regulatory requirements
in the centers
3. Taxes: Taxation laws are different in different countries. The payment system should have the capability
to calculate and compute the required taxes, duties as per the local tax laws
4. Banking relationship: Global e commerce involves cross border trade activities and to ensure prompt
settlement of payments, the system should be supported by the banks to process these payments. As
per the rules and procedures applicable at different centers, the payment system should be supported by
well established banks.
5. Risk: Global e commerce is subject to risks. On-line payment risks can be classified into:

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 Credit Risk: The customer may not have sufficient funds to make payment
Fraud: Payments may be made on a misrepresented identify

Repudiation: The customer may refuse to honour payment

Security: Global e commerce is exposed to various cross border nations, hence it is subject to different laws and
regulations. Therefore, the payment system should be able to handle the country specific security
regulations/guidelines.
An efficient global payment processing system should have the following features;
A single system should enable national and internationa payments
It should be able to support multi=currency and multi=payment types
The processing facility should be active for 24 x 7
The system should be able to handle the high value transactions
Interface facilities should be available in the system to enable the system in switching to one type of payment to
another like (Real Time Gross Settlements (RTGS) Automated Clearing House (ACH)
Inter connectivity with message switching systems like SWIFT should be part of the system
It should also be able to handle current and future inflow/outflows
Importantly, it should have the feature and facility to comply with the regulatory requirements
Risks:
Some of the important risks associated with payment systems are:
Credit Risk: Failure by a party to meet the financial obligations
Liquidity Risk: A party in the system fails to pay on account of insufficient funds Operational Risk: A risk
can arise on account of human error, system failure, frauds etc. Legal Risk: Non compliance of legal or
regulatory framework can create a legal risk
Systemic Risk: It can have a chain effect into the system due to the default of one of the parties
Legal frame work:
The following Acts and Regulations handle the payment and settlement in India:
– The Payment and Settlement Systems Act 2007
– The Payment and Settlement Systems Regulation 2008
– Board for Regulation and Supervision of Payment and Settlement Systems Regulations 200

International Initiatives: Bank for International Settlements (Basel) has taken many international initiatives to
ensure global financial stability. It is also taking actions to strengthen the global financial infrastructure.
According to the Committee on Payments and Settlement Systems (CPSS), the core principles for a controlled
payments and settlement systems are:
1. The system should be based on a clear legal framework under all relevant jurisdictions
2. All participants should be able to clearly understand the system’s rules and procedures. There should
be clarity regarding system’s impact on each of the financial risks
3. Credit and liquidity risks are important risks in an e-commerce environment. Hence banks Payment
systems should cover the area of credit and liquidity risk management
4. Liquidity management depends upon timely settlement of funds. In view of this, banks’ settlement
systems should ensure that settlements take place without fail on the value dates (during the day
and/or definitely at the end of the day. In case of multilateral netting, at the minimum, the system
should be able to complete daily settlements in case the participant of a single big ticket transaction is
unable to make the settlement
5. The system should have an integrated high degree of security and operational reliability
6. The system should have a backup system to handle any contingency situations for timely completion of
daily processing

Role of Central Bank in Payment Mechanism

The central bank of a country is responsible in applying the core principles for ensuring that an efficient and cost
effective payments system is in place.
The central bank should:
– Clearly define the payment system’s objectives and should publicly disclose the role and major policies
in respect the payments system
– Ensure that the system is operating efficiently as per the core principles
– As supervisor and facilitator oversee that banks comply with the system’s core principles.
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 – Co-ordinate and co-operate with other central banks for effective implementation of the payments
system

RBI – Payments and settlements System

RBI as the central bank plays a pivotal role in ensuring that a payment and settlement system is established in
conformity with the international standards. Some of the initiatives taken by RBI in introducing different models
RBI has been very active in introducing new systems to take care of changing environment and also to safe
guard the interest of bank customers, banks, financial instiutions,traders, and others. RBI also ensures that the
payment amd settlement systems opreating in India are safe, secure, efficient, accessible and authorised. In
addition to the above, RBI played a key role in the establishment of the Clearing Corporation of India Ltd (CCIL),
a central organisation that settles transactions relating to government securities and foreign exchange
transactions.
Over the years, RBI has introduced the above mentioned payment and settlement systems to ensure that the e
commerce participants are provided with world class system
The success of e-commerce depends upon the efficiency of the support system in timely settlement of funds
(payments and receipts). In this regard, the Indian banks are enhancing their payment system to offer
international standard service to support e commerce activities.
A simple payment processing model involves the following steps:

The buyer’s bank receives money and instructions to remit the funds. Bank uses its payment and settlement
network like RTGS, NEFT and remits the funds to the payee’s (beneficiary – vendor – seller’s account)
(INFINET) INdian FInancial NETwork- INFINET is the communication backbone for the Indian banking and the
financial sectors. All banks in the public sector, private sector, co-operative etc. and the premier FIs in the
country are eligible to become members of INFINET. It is a closed user group network for the exclusive use of
the member banks and FIs and is the communication backbone for the National Payments System which caters
to inter-bank applications like RTGS, Delivery vs. Payment, Automated clearing house, Government

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Transactions etc. With the availability of better and more reliable technology, INFINET backbone has now been
to large extent migrated to multi protocol label switching (MPLS).

Information System Security (ISS)

In today’s complex and competitive changing business environment, the information technology assists banks
across the globe to offer wide range of services and products and also give competitive edge to the players with
well supported information system. However, banks are also exposed to many risks on account of growing
opportunities on account of information system. This leads to the security concerns of the information system
and calls for implementation of an effective control system as well. Since banks are important segment in the
financial sector and also acts as trustees of funds. The information system security of banks should provide
comfort levels both for the banks as well as customers and regulators.
Objectives of banks’ IS Security Policy:
Confidentiality: The confidentiality of customer information and sensitive financial data should not be revealed to
unauthorized persons. The IS security should ensure that the confidentiality is maintained
Integrity: Banks’ IS security should protect banks information system from accidental or unauthorized and
deliberate alteration or deletion of information
All the required controls should be in place to ensure availability of reliable and correct information to the
authorized users and persons. These controls include access controls by PIN, pass words, proper approved
authentication control, and effective internal controls.
E-banking allows on line banking services and as such the banks’ should ensure high level of IS security as part
of e banking.
Threats to IS Security: Banks are also offering Core Banking Solutions along with e banking or online banking. In
view of these facilities, network security is a concern for banks.
E-mail viruses, Phishing attacks and other issues: Installation of updated antivirus software would assist banks to
handle email viruses. The users should be cautioned not to open e mail from unknown sources and spam
mails. Phishing is one form of cyber attack in which the attackers make the internet users to reveal sensitive
information about the bank account details and personal information. Banks should use certain level of
protection by installing fire walls for data integrity. Fire walls do not allow direct access between the internet
and the banks’ system. This facilitates a high level of control and monitoring. Necessary controls should be
exercised in case of computer hardware and software to secure banks information system
.
Information Technology Act, 2000 & other Relevant Acts
Information Technology Act 2000 provides legal protection for transactions carried out by means of electronic
communication. In view of the recognition given to electronic records, electronic signatures, and electronic
documents, the banks are also required to follow the amendments of other Acts, such as,
(i) The Indian Penal Code 1860
(ii) The Indian Evidence Act 1872
(iii) The Indian Negotiable Instruments Act, 1881
(iv) The Banker’s Books Evidence Act, 1891 and
(v) The Reserve Bank of India Act 1934

Current Trends in Information Technology

1. Increased automation. There’s no escaping that people costs continue to be a big part of total IT costs.
The use of cloud services will continue to reduce this (with cloud service providers achieving lower costs
through both economies of scale and the use of automation) but there is still a need to reduce human
touch points, and the associated costs, within corporate data centers and operational environments –
with speedier delivery and fewer human errors secondary benefits. 2015 will see even greater
automation adoption by corporate IT organizations under pressure to reduce costs and better
demonstrate business value.
2. Continued cloud adoption. IT organizations will continue to move IT services (whether buying SaaS,
IaaS, or PaaS) to third-party cloud service providers. Security will continue to be a cause for concern,
especially as the media’s breach article frenzy continues. However, the ability to integrate (with existing
on-premise and newer cloud services) – and have always-up service availability – will rise to be two very
practical concerns for enterprise cloud adoption. From an IT management point of view, organizations
will need to continue to seek out people with the ability to manage suppliers and service delivery.
Nonetheless, IT will continue to head to the cloud in 2015.
3. The growth of hybrid cloud. Only the foolish ever thought that large enterprises would move
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 everything from the corporate data center to the cloud. Yes, new companies might be able to rely on
third-party cloud service providers but for those with a long business and data center history, and
sensitivity to storing certain types of information in the public cloud, it was never going to be the case.
The hybrid cloud, defined by global analyst firm Gartner as “a combination of private, public, and
community cloud services,” will continue to rise in popularity during 2015 as organizations look to get the
best from both private and public cloud.

4. The BYO epiphany. This is where corporate IT organizations finally wake up to see that Shadow IT,
BYOD, or BYO-anything is not being driven by consumer IT and cloud service providers but by the
corporate IT organization’s inability to meet stakeholder and user expectations across usability, cost,
service, and agility. The 10 years of Consumerization of IT talk, with a focus on consumer gadgets, has
thus been a red herring – hiding the true root cause of customer discontent with existing IT supply. Post-
epiphany, corporate IT organizations will need to change; and change quickly.

5. Greater focus on IT costs. It’s inevitable. It’s been over 10 years since business colleagues buying
consumer products and services first started to question why they receive lower spec IT equipment at a
higher cost from the corporate IT department. And now as companies require more and more
technology to function, especially those that are transforming to digital enterprises, those IT costs will
continue to rise. The increased use of third-party service providers (cloud or IT services) will reduce the
burden somewhat but it will not be enough for IT organizations to escape the scrutiny of the CFO and
CEO, and the need for greater financial stewardship during 2015.
6. The increased focus on costs will drive a focus on assets. IT asset management has long been a
poor relation to corporate IT service management activities and investment. In some ways, the lack of
business scrutiny as to why IT costs so much, has allowed corporate IT organizations to be lackadaisical
in their asset management. But those days have gone, or are quickly coming to an end, with 2015 finally
seeing corporate IT organizations looking to physical and software assets as ways of reducing and
optimizing costs.
7. IT service management models will trifurcate. The focus on delivering consumer-like service
experiences and the extension of IT service management capabilities to other corporate service
providers such as HR, facilities, and legal through enterprise service management, will cause IT service
management as a discipline to divide into, and to evolve at different speeds within, two different schools
of thinking. There will be traditional IT service management, enterprise service management, and then
both with an emphasis on better meeting customer expectations around not only the consumed service
but also the service experience. 2015 will see many corporate IT organizations at a crossroads as they
chose which of the three service management roads to take.
8. The need to manage more complex IT supplier environments. This need will continue to grow as
enterprises exit outsourcing deals that have failed to deliver against expectations of service
improvement, cost savings, and innovation. In 2015 the need for service integration capabilities, often
called service integration and management (SIAM) or multisourcing services integration (MSI), will come
to the fore. And this will happen not only for larger organizations replacing previously outsourced
scenarios with multiple suppliers but also smaller organizations needing to manage a portfolio of third-
party, often cloud service, providers.
9. Continued mobile pervasiveness. Continued improvements in anytime, anywhere, any device access
to data and services will continue to drive the need for better mobile apps and experiences, and the use
of personal devices for work purposes. Not only will this dictate the need for better service and app
design and delivery, and more intelligent approaches to BYOD, but also the need to consider the
security implications of mobility such as data segregation issues – with personal and business data and
applications isolated from each other on the same device.
10. Wearables and the quantified worker. The Apple iWatch launch in 2015 will no doubt see a greater
potential business use case focus on wearable computing. While employees might like the idea of a new
gadget giving them access to alerts and short messages related to email, social media, schedules, travel
plans, or the weather, the ability of wearables to provide location and productivity-related information
about the employee might not be so appealing. 2015 will provide an exciting technology opportunity, but
one that will need the corporate IT organization and its business partners to fully understand the human
implications of new technology.

11. Big Data. While there will continue to be big talk about Big Data, the real Big Data issue for 2015 will be
the availability of Big Data people and their Big Data skills rather than Big Data technology itself. Not
only from a tail-end analytics and insight perspective, companies will also need the people and skills for
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 building the new data architectures required to handle unstructured data and real-time input, and other
changes required as the increased focus on large data sets continues to disrupt business and IT
operations.
12. The Internet of Things (IoT), or the Internet of Everything (IoE). Most of us are probably bored to
death of hearing about how the IoT will change IT forever. It seems as though it has been a long time
coming – from IP address management through service/fault management to Big Data analytics. Then
there is the security of a whole new breed of network-connected end points. 2015 will see IT
organizations having to look beyond the traditional IT capabilities, such as availability and capacity
management, to work closer with business colleagues on how these now-connected devices do, can,
and will tie in to business operations and business models.

13. Knowledge management will reappear. It’s been around since before the end of the last century but
2015 will see it appear on the IT agenda again – not only because of the replacement of people with
automation and the associated potential for corporate knowledge loss, but also due to the rise in self-
help and self-service. Organizations need to be clear about what they need though. Knowledge
management has previously been held back by its name – knowledge isn’t valuable because it is
managed, the value comes from its use and reuse. So look at knowledge management through a new
lens, one of knowledge mining and knowledge exploitation.

14. Software-defined everything will continue its advancement. You’ve probably already heard the talk
of software-defined data centers or software-defined networks, where the control plane is abstracted
from the hardware. It seems to be in vogue across all data center domains: software-defined servers
now seem old hat; software-defined networking continues to mature; and software-defined storage is
gaining interest. But this is about more than quickly moving from the old to the new state data center,
notwithstanding the fact that the legacy data center might not want to change so quickly. It’s about
increasing your agility, minimizing vendor lock-in, and improving your ability to serve the customers and
consumers of your IT services.

15. Unicorn chasing will continue. Whether it be the use of cloud technologies or DevOps thinking and
operations, in 2015 enterprises will continue their fascination with the operations of technology giants
such as Amazon, Google, and Facebook. Business leaders will also continue to ask why their corporate
IT organizations can’t match these technology giants for unit costs, service levels, service experience,
customer support, and agility. Thus, these technology unicorns will continue to be chased, and I’m not
sure that 2015 or even 2016 or even 2017, for that matter, will be the year that they are caught.

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