Banking Mod4

8/7/2019 Banking Mod4

1/59


2/59

` Credit Push

` One debit- multiple credits

` Cover all ECS locations

` Centralised ECS at national level` Processing at Mumbai

` T +1 cycle

` Eligibility NEFT members , CBS banks

` Usage ( divident payout, IPO refunds , salary ,pension etc )

` Low value, high volume business


3/59

` Means stop the movement of physical cheques inthe banking system

` Once the cheque enters the banking system, thecollecting bank, information from the cheque is

converted into a medium for electronic processing` Cheque is stored there (truncated) for 8 years

` Further processing using electronic information

` Both sides of the cheque are scanned and stored indigital form during image processing.


4/59

` Images should be preserved for 8 years

` One centralised agency per location should act asimage warehouse who preserves the images

How Does It Work?

` Cheque Truncation is a system of cheque clearingand settlement between banks based on

electronic data / images or both without physicalexchange of instrument.


5/59

` It is being used globally

` As per negotiable instrument act, a truncatedcheque means

Which is truncated during the course of aclearing cycle by the clearing house or by thebank while paying or receiving paymentimmediately on generation of an electronic image

for transmission ,substituting the further physicalmovement of the cheque


6/59

` Benefits- reduces risks of paper based clearingcosts and delay

` T+0(local) , T+1 (Intercity) credits to customer

accounts` Easy reconciliation

` Reduces frauds

` Risks- collecting bank has to verify the

genuinness of cheque, Images must be retainedfor 8 years


7/59

` Banks have traditionally been in the forefront ofharnessing technology to improve their products,services and efficiency. They have been using

electronic and telecommunication networks fordelivering a wide range of value added productsand services. The delivery channels include directdial up connections, private networks, and the

devices include telephone , PC, modem etc. Withthe popularity of PCs, easy access to internet andworld wide web, internet is increasingly used


8/59

by banks as a channel for receiving customersinstructions and providing services to them. Thisform of banking is generally termed as Internet

banking. The range of products and servicesoffered by different banks vary widely both incontent and sophistication.

Basically, three types of services are offered

through internet.


9/59

` Basic Level Services

The banks website disseminate information ondifferent products and services offered to

customers and public. It may receive and reply tocustomers queries through email.

` Simple Transactional Web Sites

Which allows customers to submit their

instructions , application for different services ,queries on account balances etc


10/59

but do not allow any fund based transactions.` Fully transactional websites which allows

customers to operate their account for fundstransfer, payment of bills, purchase and sale of

securities etc.Traditional banks offer internet services as an

Additional delivery channel to customers.

The new generation banks offer their services

Primarily through internet.

Virtual banks offer their services only throughinternet


11/59

` It removes traditional barriers of geography-canaccess anywhere in the world

` New dimension of risk to transactions

` Security of transactions, validity of electroniccontracts, customers privacy etc

` Risk of loss of business to e-banks from traditionalbanks

`

New form of competition from new playersRegulatory and supervisory concerns in i-banking arise mainly out of the distinctive featuresoutlined above. These


12/59

Concerns are broadly classified into three1. Legal and regulatory issues

2. Security and technology issues

3. Supervisory and operational issues

Legal Issues

Relating to jurisdiction of law validity of electroniccontract including question of repudiation,regulatory environment for e-commerce etc. Onthe question of jurisdiction, the question iswhether to


13/59

Apply law of the area where access to internet hasbeen made or where the transaction has finallytaken place; who would tax the income generatedetc.

Security Issues

Most important concern. Security issues includequestions of adopting internationally acceptedminimum technology standards for access control,encryption/decryption (min key length etc) ;firewalls verification of digital signatures, public keyinfrastructure(PKI). The


14/59

security policy of the banking industry, securityawareness and educating customers are otherconcerns.

Supervisory and Operational IssuesThey include risk control measures, advancewarning system, IT Audit and re-engineering ofoperational procedures. The services rendered

conform to regulatory framework and do notcamouflage money laundering operations.


15/59

` In India , i-banking is fast catching and most bankhave moved to core banking

` C-Centralized

` O-Online` R-Real Time

` E-Electronic


16/59

` Use of internet for commerce is called e-commerce. It involves individuals and businessorganizations exchanging business informationand giving instructions over electronic media using

computers , telephones, and other telecomequipments.

` E-commerce is classified by the targetedcounterpart of a business , ie , whether the

counterpart is a final consumer or anotherbusiness in the distribution chain. Ie, B2C or B2B


17/59

` In this category comes e-shops, shopping malls, e-broking, e-auction, e-banking etc.

` Are targeted on final consumer, education,entertainment ,personal banking etc are examples.

Opportunities` Internet provides ever growing market in terms of

customers and geographies

` Global visibility to business

` High quality service` Least response time

` Cost effective ; communication cost very low


18/59

Concerns` Quality of goods and services are not sure about.

Have to earn trust of customers

` Proper logistic support to deliver physical products

at the doorstep of consumer` Privacy of customers credit cards/debit cards/bank

accounts etc.

` Security of transaction, authenticity of deals,identification of consumer are technological issues

` Accessibility to internet services


19/59

` Here the parties to the deal are at two differentpoints of the product supply chain. In this domain,a company, its suppliers, dealers and bankers to

all parties are networked to finalise and settle allaspects of deal ONLINE. Only the goods move indifferent stages of processing from supplier todealer.

` Business information is integrated to back officesystems of parties to a deal and the state ofSTRAIGHT THROUGH PROCESSING


20/59

is achieved. This reduces inventory holding andenhance profits.

` Technology and networking are important aspects

of B2B transactions` Compatibility of EDI platforms across different

B2B parties is another concern. Standardizationof software platforms can solve this issue.

` Security concerns for high volume transactions


21/59

` It is a product of e-commerce in the field ofbanking and financial services in B2C domain

Risks Of Internet Banking

` Operational Risk or Transactional Risk

-inaccurate data processing

-human errors

-compromises in data entry-non enforceability of contracts

-unauthorized access to bank systems

-technological inadequacies in banks


22/59

` Security Risk

-Internet is a pubic network. Banks have tocreate a secured environment to use this

medium.-risk arises in maintaining an account of

unauthorized access to banks critical informationstores like accounting system, portfolio

management system etc-external threats

-internal fraud by employees


23/59

` Legal Risk

-violation or non conforming with the laws orrules in force

-ambiguity in legal rights/obligations of partiesto a transaction

-money laundering risk


24/59

` Computers and communication facilities enablesquicker funds transfer

` RBI-EFT

It is a scheme introduced by RBI to help banksoffering their customers the service to transferfunds from any bank branch to any other bankbranch. The RBI acts as service provider and

system regulator. It covers all major centers of thenation. The system operates as follows :


25/59

`

Step IThe remitter fills in the EFT application formgiving the particulars of the beneficiary

(city , bank, branch, a/c no, name of beneficiary)

and authorizes the branch to remit a specifiedamount to the beneficiary by raising a debt to theremitters account.

` Step II

The remitting branch prepares a schedule andsend the duplicate of the EFT application to itsservice branch for EFT data preparation.


26/59

` Step III

The service branch prepares the EFT data fileby using the software supplied by RBI andtransmits the same to local RBI. (National ClearingCell) to be included for the settlement of 12 noon,

2 pm, 4 pm or 6 pm` Step IV

The RBI at the remitting centre consolidates thefiles received from all banks, sorts the transactioncity wise and prepares vouchers for debiting theremitting banks on Day I itself. City wise files aretransmitted to the RBI offices at the respectivedestination centers.


27/59

` Step V

RBI, at the destination centers receives thefiles from the originating centers, consolidates

them and sorts them bank wise. Thereafter, bankwise remittance data files are transmitted to bankson day one itself. Bank wise vouchers areprepared for crediting the receiving banks

accounts the same day or next day.


28/59

` Step VI

On a day, half the receiving banks at thedestination centers process the remittance filestransmitted by RBI and forward credit files todestination branches for crediting beneficiarys

account.Limit- There is no value limit for individual

transactions.

Acknowledgement of Transfer- The receiving branchacknowledges every transaction it receives aftercrediting the beneficiaries account. This reaches theremitter bank on 3rd day


29/59

-No processing charge from RBI

Benefits :

- Interbank transfer of funds- Reconciliation is automatic

- Fast and reliable system

- Effective cash management ( via draft, TT etc )


30/59

` RTGS is an electronic payment system

` Payment instructions processed on a continuousor real time basis.

` Settled on a generic or individual basis (i.e nonetting of debits or credits)

` Such payments effected are final

` It uses INFINET ( Indian Financial Network) andSFMS ( Structured Financial Messaging System)

` Each bank is having a single gateway interfacecalled participant interface (P . I) for RTGS system


31/59


32/59

` Received from RTGS send settlement messagefor originating and beneficiary participants ofsuccessful transaction only to originator if its a

failure` RBI acts as a settlement agent

` Minimum amount of Rs 2 Lakhs

` RBI gives intermediary liquidity support

` Covers all types of transactions own account,institutional, customer

` Works on all 362 days of a year


33/59

` A/c number of beneficiary is most important

` Equivalent to SWIFT in Rupee.

` Authorization through digital signatures

` Each transaction has unique TransactionReference (UTR)


34/59

` Headquarters in LaHulpe- Belgium

` Basically a message transmission systemconcerning financial transactions between banks

` Established as a co-op society in 1973 by 239banks in 12 countries

` A common language for financial transactions(templates) & a shared data processing system

through a world wide communication network` Its a non profit organisation


35/59

` Now, +7000 members in over 200 countries ;India in 1991

` Hubs in Brussels, new York and Netherlands

` Functions round the clock` Most banks in India are members; can become

member by remitting a fee and each bank isallocated a Bank Identification code (BIC); a

directory of banks with codes


36/59


37/59

and the FIN centre arranges to transmit to the

Beneficiarys bank

` In those places, where banks do not have many

branches, they operate through correspondentbank for all transactions

` When messages are transmitted throughcorrespondent bank services, additional details

like corresponding bank name, Beneficiaryaddress, account numbers are also to be includedin the message.


38/59

` The messages transmitted through SWIFT isreceived within seconds by ultimate beneficiaryinstitution if receiver is logged in to the system. If

not, messages arranged in theQ

ueue at the FINcentre till the beneficiary logs in.

` Messages & Fields

Swift messages are generally exchangedbetween banks have been divided /grouped intodifferent categories like


39/59

-Customer transfers and cheques

-Financial Institution transfers

-Financial trading

-Collections-Documentary credits and guarantees

-Securities

-Precious metals and syndications

-Travellers cheques

-Supporting system messages etc


40/59

` Each is given a category code

` Under Each category, various types of messages

` Various message types are referred as MT and

are given three digit identification number` Normally the following appear on a swift message

-Date and time of message received

-Message input reference


41/59

-SWIFT input

-Sender

-Receiver

-Transaction reference number-Related reference

-Date

-Currency code

-Amount-Narrative


42/59

` Bank has to be instructed by customer givingdetails of customer, his bank name, a/c no:,SWIFT code of the bank

`

The sending bank debits customers account anddoes the needful

Advantages Of Swift

-Operation throughout the year, 24 hours-Totally system based and error free

-Messages transmitted very fast


43/59

-Confidentiality

-SWIFT assumes financial liability for accuracyand timely delivery

-UCP board supports SWIFT


44/59

` Most of the large banks in European countries andthe USA have their own independentcommunication networks. Other banks are alsomembers of some of these networks on a sharing

basis. The banks there use distributed dataprocessing technique with a central system actingas the main database

` CHHS, CHAPS, CHATS are some of these

networked systems which allow direct fundstransfer facilities in the USA ,UK and HongKongrespectively and are responsible for bringing aboutthe true concept of electronic funds transfer in

these countries.


45/59

` Clearing House Interbank Payment System(CHIPS )

- Started operations in 1970

-Run by Newyork clearing house-No reported settlement failure in its history

-Operational time round the clock

-Most of international fund transfer through

CHIPS. US $ being the favoured global currency.


46/59

-Domestic and International funds transferthrough CHIPS

-The settlement bank is Federal Reserve

-Chips has dual computers and so withparticipating banks

-It has direct interface with SWIFT system

` Clearing House Automated Payment System(

CHAPS)- Set up in the UK , offers almost instant

service


47/59

-Payments are guaranteed on receipt andcannot be recalled

-Major clearing branches are equipped with

CHAPS terminal-Allows direct transmission from SWIFT

-CHAPS network prevents fraud byimplementing full payment message

authentication-Has direct interface with SWIFT


48/59

` Clearing House Automated Transfer System(CHATS)

-Hongkong is hub of global financial activities

-Reliable communication networks is the backbone

-CHATS provides instantaneous interbanksettlement

-All interbank entries get validated at the pointof entry before transmission to CHATS system


49/59

` Two Level Funds Transfer System

-During the past few years ,Fedwire, Bankwireand POS has established themselves as some of

the major systems for EFT and settlement facilitiesFedwire :

The Federal Reserve Wire system is inoperation since 1956 used by the member banks

for EFT and is the main funds transfer system inUSA. About 800 banks are linked together fortransmission of funds and statements.


50/59

It is used primarily for transferring reserveaccount balances of depository institutions andgovernment securities , high value domesticpayments, bank to bank and third party transfersand corporate to corporate payments madethrough banks.

It is an x.25 protocol based packet switched

network and has large number of alternativeroutes for transmission of messages. To checkfraudulent activity, authentication and encryptionprocedures are implemented over the network.


51/59

BankWire:

It is the private sector electronic telenetworkowned by association of banks in USA; to transfer

messages with subscribing banks. Transfer offunds and administrative messages ,both aredone using this network.


52/59

` In the early 80s , a high level committiee wasformed under the chairmanship of Dr CRangarajan , the then governor of RBI to draw upa phased plan for computerisation andmechanisation in the banking industry over a fiveyear time frame of 1988-1989. The main focuswas on customer service and two models ofbranch automation were developed &implemented.


53/59

` Front office mechanisation where fornt deskoperations were computerised while back officework was done manually

`

Back office automation; front office manually

Both these helped customers to get error freeaccounting


54/59

` Constituted in 1988

` Detail plan to computerise all banking activities

` Recommendations to implement within 5 years

` Fully computerise 200 to 2500 large branches inurban and metropolitan centres


55/59


56/59


57/59


58/59


59/59

Banking Mod4

Documents

Transcript of Banking Mod4