Annual Report

Table 13.1 : Annual Turnover in Financial Markets

(Rupees crore)

2001-02

2000-01

1

2

3

Central Government

Securities Market (outright)

24,23,933

11,44,291

Call/Notice Money Market

1,28,29,129

1,10,62,419

Equity Market (BSE)

3,07,292

10,00,032

Equity Market (NSE)

5,13,167

13,39,510

Cheque clearances through

MICR Clearing

7,68,979

7,25,806

Value of ECS Transactions

5,921

3,587

Value of EFT Transactions

202

137

Total Cheque Clearance

(including ECS and EFT)

1,20,69,577

1,07,47,119

Ratio of Cheque

Clearance to GDP

5.2

5.1

Table 13.2 : Computerisation in Public Sector Banks
(as at end-December 2001)

Level of Computerisation

Number of Banks

1

2

1.

More than 80 per cent

7

2.

Between 75 and 80 per cent

13

3.

Between 70 and 75 per cent

7

Total

27

With technology having played a significant role in the development of newer modes of payment and settlement, many banks have introduced innovative products such as e-banking and e-payments. Simply put, e-banking is the process of conduct of banking with the use of electronic tools and facilities. The service-based areas of activity of banks have perhaps been the largest beneficiary of e-banking. Internet banking has been the predominant mode of e-banking in India with the Internet offering itself as a new delivery mechanism for the banks in reaching the customer.

Commencing with simple transactions such as enquiry facilities, today messages sent through the internet to banks perform tasks such as funds transfer and account opening. Internet banking, however, necessitates that banks have a secure web server and a centralised data base of their customers to facilitate information flow from customers to the bank and vice versa. While some banks already have systems to meet this requirement, others are at various stages of implementation.

Effecting payments through electronic means constitute e-payments. Various forms of e-payment are in existence such as e-cheque, card based payments (credit, debit and smart cards) and EFT. All these are available in the country and the large scale usage of these are dependent on the levels of technology at banks and their ready acceptance by the constituents of banks.

Yet another facilitating factor in the use of technology is Electronic Data Interchange (EDI). EDI facilitates transfer of information/data across different communities in an economy. EDI is the base for functions such as ‘Just-in-time’ processing by manufacturing companies and also has deep roots in electronic commerce and electronic trade. Recognising the benefits of EDI for the exporter/importer community, the Government has taken up, through the Reserve Bank and the Indian Banks’ Association, the implementation of EDI in the banking sector. The project envisages finalisation of message formats, providing for connectivity and migrating towards a paperless environment. While the message formats have all been finalised, one of the major benefits announced by the Reserve Bank for exporters is the abolishment of the GR forms for export transactions and the migration to a common Statutory Declaration Form (SDF) for the Customs, from where the data relevant to the banks and the Reserve Bank would be extracted. The progress achieved by banks in EDI implementation which is initially aimed at the 114 export intensive centres of the country is being constantly reviewed.

A smart card is a credit card sized plastic card which has an integrated circuit with a micro-processor chip embedded in it. These chips hold a variety of information from stored (monetary) value used for vending machines to secure information and applications for higher end operations such as medical/healthcare records. They allow storage of thousands of times the information stored on magnetic stripe cards. They are more reliable and more secure because of high security mechanisms such as advanced encryption and biometrics. The cards have built-in facility for protection against fraudulent operations. The cards can either be exhaustible or rechargeable. In either case, they have built-in memory and processor along with an operating system, which performs the financial operations.

Multiple application smart cards like the Java Card and MULTOS have a variety of uses. They hold personal information (such as driver’s licence, social security, medical information, auto insurance, voter registration, workplace ID, website passwords keys for making digital signatures and encrypting data) and provide functions such as working as a phone card, a charge card, a video rental credit tracker, a credit card, a debit card and an electronic cash repository.

Two broad categories of smart cards are: Contact and Contactless cards. A Contact smart card requires insertion into a smart card reader or a terminal called a Card Acceptance Device. These cards have a contact plate (typically gold plated) on the face, which makes an electrical connector. A Contactless card has an antenna coil and chip embedded within the card and hence requires only close proximity to a reader equipped with an antenna. Most Contactless cards also derive the internal chip power source from this electromagnetic signal. These are ideal for applications such as mass transit, which require very fast card interface. In addition, Hybrid cards (with two chips, each with contact and contactless interface) and Combination cards (single chip cards with both Contact and Contactless interface) are available.

After the smart card is issued to the consumer, the protection of the card is provided by an application manifested in the Personal Identification Number (PIN). Unblocking of the PIN to retrieve information has to be carried out with the knowledge of the correct PIN, usually a set of numbers. Consecutive presentations of invalid PIN up to a certain number of times unblock the PIN irreversibly or invalidate the whole card to prevent further attacks. Unblock PIN instructions then need to be carried out typically by the card issuer.

Smart cards have been in operation in India in the financial industry and other sectors. Smart card based payment systems developed for the banks by IDRBT in association with the Reserve Bank, Indian Institute of Technology, banks and a few vendors have established inter-operability between different technologies and standard of cards, card readers and clearing and settlement system. Technical standards for cards and card readers have been formulated by IDRBT incorporating best international practices. The Reserve Bank has also issued operational guidelines to banks and financial institutions on smart card deployment. The SFMS, also developed by IDRBT in cooperation with the Reserve Bank, uses smart cards for purposes of access and authentication to its users. Digital certificates through a Public Key Infrastructure are now embedded in the smart cards issued for the purpose.

A robust and efficient payment system is a key requirement in promoting financial stability since payment systems are a major channel through which shocks may be transmitted across domestic and international financial systems and markets. In recognition of this, the Committee on Payment and Settlement Systems of the Bank for International Settlements had in January 2001 published a paper ‘Core Principles For Systemically Important Payment Systems’.

The Core Principles, ten in number, are a common set of universal international standards and best practices. These principles are aimed at reducing risks, achieving safety, measuring the efficiency of the financial systems and encouraging the development of appropriate strategies for operation of safer and more efficient systemically important payment systems worldwide. They also incorporate the responsibilities of the central bank in applying these principles. The Core Principles draw heavily from the Lamfalussy Report on Inter-bank Netting Schemes published in 1990. A summary of the Core Principles and the responsibilities of the central banks in applying them are as follows:

1. The system should have a well-founded legal basis under all relevant jurisdictions.
2. The system’s rules and procedures should enable participants to have a clear understanding of the system’s impact on each of the financial risks they incur through participation in it.
3. The system should have clearly defined procedures for the management of credit risks and liquidity risks, which specify the respective responsibilities of the system operator and the participants and which provide appropriate incentives to manage and contain those risks.
4. The system should provide prompt final settlement on the day of value, preferably during the day and at a minimum at the end of the day.
5. A system in which multilateral netting takes place should, at the minimum, be capable of ensuring the timely completion of daily settlements in the event of an inability to settle by the participant with the largest single settlement exposure.
6. Assets used for settlement should preferably be a claim on the central bank; where other assets are used, they should carry little or no credit risk.
7. The system should ensure a high degree of security and operational reliability and should have contingency arrangements for timely completion of daily processing.
8. The system should provide a means of making payments which is practical for its users and efficient for the economy.
9. The system should have objective and publicly disclosed criteria for participation, which permit fair and open access.
10. The system’s governance arrangements should be effective, accountable and transparent.

1. The central bank should define clearly its payment system objectives and should disclose publicly its role and major policies with respect to systemically important payment systems.
2. The central bank should oversee compliance with the Core Principles.
3. The central bank should oversee compliance with the Core Principles by systems it does not operate and it should have the ability to carry out this oversight.
4. The central bank, in promoting payment system safety and efficiency through the Core Principles, should cooperate with other central banks and with any other relevant domestic or foreign authorities.

At present, in India, the clearing and settlement systems are all Deferred Net Settlement Systems; the Core Principles, hence, are applicable. Considerable progress has been made in terms of compliance to the Core Principles. These involve (a) publishing of ';Payment Systems Vision Document'; by the Reserve Bank detailing the objectives, roles and policies vis-à-vis payment system; (b) initiatives in establishing a legal basis to multilateral netting in the form of Payment System Act; (c) establishment of CCIL for guaranteed settlement of transactions in Government securities and inter-bank transactions in foreign exchange; (d) putting in place appropriate procedures in the Deferred Net Settlement Systems that would address the risks in settlement; and, (e) moving towards RTGS system.

Banking is undergoing rapid transformation. Prime factors ushering these changes are competition, productivity and efficiency of operations, reduced operating margins, better asset/liability management, anytime and anywhere banking. Exploiting the benefits of technology holds the key to enabling the financial system to manage the forces of change.

Payment systems too have benefited from the developments in technology – such as the proliferation of electronic products like card based transactions and EFT. The usage of physical cash is set to undergo substantial change in the context of electronic products substituting cash. Newer delivery channels for the customer – such as internet banking and Automated Teller Machines and even mobile banking – are some of the innovations which have had a positive impact for both banks and their customers. For the corporate customer, there are benefits in the form of improved cash management products which facilitate better funds management by the clientele of banks.

Technology in banks has also thrown up a host of challenges. Some of these relate to the need for standardisation of the hardware, operating systems, system software and application software, apart from message formats for inter-bank communication, need for effective security, a technology plan for each bank and the attendant implementation related infrastructure, effective communication facilities and effective human relations management in a highly technological environment. The need for Business Process Re-engineering would stand out as a necessity in the context of changed work procedures consequent upon large-scale implementation of technology.

One of the major challenges arising out of technology implementation relates to security. With the evolution of delivery channels relating to fund-based services such as, EFT, the security measures need to be developed adequately. Various concepts such as digital signatures, certification, storage of information in a secure and tamper-proof manner assume significance and will be part of the practices and procedures in the day-to-day functioning of banks in the future. A concern for central banks also occurs on account of risks arising out of technology.

With increased dependence on technology, the need for Information Systems Audit also assumes significance coupled with the availability of skilled personnel not only for implementing technology but also manning such technology based activities and conducting audit thereof. Overall, technology would offer a good tool for improved customer service, better house-keeping and increased systemic efficiency and productivity for the banks of the country.