IT in Banking – CS Professional Study Material

Chapter 6 IT in Banking – CS Professional Banking Law and Practice Notes is designed strictly as per the latest syllabus and exam pattern.

IT in Banking – CS Professional Banking Law and Practice Study Material

Question 1.
Attempt the following:
Distinguish between ‘internet banking’ and ‘tele-banking’. (Dec 2007, 5 marks)
Answer:
‘Internet banking’ and ‘tele-banking’:
Internet banking differs from tele-banking in the following ways:
(1) In internet banking, the customer himself accesses his account through the internet connected to the banks data base. The account details are displayed on the PC screen and can be browsed by him. In tele-banking this information is furnished to the customer from the call centre via telephone line.

(2) The customer cannot order cash withdrawals through internet banking, but he can transfer money from one of his accounts to another and even to a third party’s account, ambient, within the authorised limits. Such transfer cannot be done through tele-banking.

Question 2.
How does Electronic Clearance Scheme (ECS) operate? State the advantages of ECS to the companies and their clients. (June 2008, 5 marks)
Answer:
The customers willing to use ECS facility are required to fill in the Mandate form from the corporate/any utility service for ECS mode of credit and debit. The customers need to prepare the payment date and submit it to the “sponsor bank” and after that every thing takes place electronically. Advantages to clients

1. Payments within due date;
2. No more “loss in transit”;
3. No fraudulent encashment;
4. Effortless receipt;
5. No more correspondence with the companies;
6. No hassle of standing in long queues for payments;
7. No more disconnection of telephone/electricity line;
8. Account statement/pass book will show the source of credit and debit.

Advantages to Corporates:

1. Eliminates postal loss and delays as well as paper work and lengthy procedures;
2. Saves cost of stationery, printing & postage;
3. No fraudulent encashment;
4. Immediate receipt & payment of dues;
5. Automatic reconciliation;
6. Appreciation from investors/customers.

Question 3.
Describe the ‘internet banking’ services provided by the banks. (Dec 2008, 5 marks)
Answer:
In internet banking, the customer himself accesses his account through the internet connected to the banks data base. The internet banking services commonly provided by banks are as under:

• Transactional (e.g., performing a financial transaction such as an account to account transfer, paying a bill, wire transfer, and applications: apply for a loan, new account, etc.)
• Electronic bill presentment and payment (EBPP)
• Funds transfer between a customer’s own accounts, or to another customer’s account
• Investment purchases or sale
• Loan applications and transactions, such as repayments
• Non-transactional (e.g., online statements)
• Bank statements.

Question 4.
A wants to transfer funds electronically to B in Brussels and C in Kolkata respectively. A lives in Mumbai and he has a bank account there. Advise ‘A’ about right modes of transfer of funds and explain to him various features of electronic funds transfer. (June 2014, 5 marks)
Answer:
For transfer of funds to B in Brussels and C in Kolkata, the suitable mode of transfer is transfer of fund electronically. EFT is a computerized system for processing transactions between financial institutions routed through the clearing house.

Some of the features of electronic funds transfer are as follows:

• Credit transfers between banks from payer’s account to the payee’s account.
• Debit transfers between banks from payee’s account to payer’s account prior to authorized direct debit agreements.
• Transfer of funds is faster and secured.
• Risk associated with the physical movement of large sums of cash is avoided.
• Convenient for salary payments.
• Reduces congestion, lines & thefts.
• Reduced paperwork – view your remittance advice and EOBs online.
• Easy reconciliation of direct deposits with corresponding electronic remittance advice.

Various methods of transfer of funds electronically are:
(a) 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 provides to receive and/or pay bulk payments).

(b) Real Time Gross Settlement (RTGS): 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.

(c) 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.

(d) 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 Branch, Mumbai- SYNB0005087.

(e) 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.

(f) 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 cheques and negotiable instruments like demand drafts, pay orders dividend warrants, etc.

Question 5.
Explain how information technology has changed the face of banking in India. (Dec 2015, 15 marks)
Answer:
The banking system in India has matured in the last decade. Earlier the banking was manual and had the following difficulties/lacuna as:

1. The banking records were maintained manually.
2. The records of transactions in an account were hand written in ledgers and thus prone to errors.
3. The manual activity demanded building of procedures and rules to detect errors. Thus the bankers were required to maintain and update the general ledgers on daily basis and tally the same i.e. ensure that debits equal credits.
4. The major time of the staff was spent in in-house book keeping. This included general ledger and individual ledger balancing.
5. The customer was required to visit the branch for every transaction and had to wait in queues to be serviced.
6. The customer could be serviced at the branch where he maintained the account and could not avail of any facility at other branches.
7. The transactions were done through issuance of cheques and the system used to take 2 to 21 days to clear the cheques as the cheques were required to be sent to the branch of the payee where the account was maintained.

With the advent of IT in the banking system, all the problems mentioned above have vanished. As a result the following benefits have accrued to staff and customers:

1. The books are balanced automatically and thus there is very little in house book keeping to be done. The staff can concentrate on customer service and marketing of banking as well as investment products.
2. The customer is no longer required to visit his home branch only as he can avail of all the services from any branch.
3. The customer can do all his banking from home and office and even on the move through mobile banking.
4. Payments have been automated and now customers can make all payments electronically.
   The banks now offer the following facilities for payment: Electronic Funds Transfer, Electronic Clearing System (ECS), Real Time Gross Settlement (RTGS), Banks can settle interbank and forex transactions on real time basis, National Electronic Funds Transfer (NEFT).
5. Automatic Teller Machines (ATM): In order to automate all small cash transactions banks have setup ATMs in convenient locations for withdrawal and deposit of cash and for performing selected transactions.
6. Internet banking and mobile banking: The customer can do almost all transactions using internet and mobile.
7. Bill pay facility: Under this facility the customer can register the details of all service providers including credit card companies, insurance companies and mutual funds to whom the payments have to be made periodically. The bank would collect the details from the said service providers and remit the amounts to them.
8. Conveyance banking: Under this all accounts of a customer are grouped under one customer id and he can access them through a common login.

Question 6.
What do you understand by cheque truncation system (CTS)? (Dec 2015, 5 marks)
Answer:
Cheques are used as a medium for exchange of funds, and 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 cheques and negotiable instruments like demand drafts, pay orders, dividend warrants, etc. Special features of Cheque Truncation are:

• Cheque realization is faster.
• Quick realization helps the customer in better cash management.
• In the long run, it reduces the administrative costs of bank.
• Assists banks in reconciliation and reducing clearing frauds.

Question 7.
Explain the following terms with reference to electronic banking and IT activities in the banks: (Dec 2015)
(i) SWIFT
(ii) CHIPS
(iii) NEFT
(iv) RTGS
(v) DWH/EDW. (1 mark each)
Answer:
(i) The Society for Worldwide Inter-Bank Financial Telecommunications (SWIFT) provides the international lines used for such Inter-Bank advice.

(ii) Clearing House Inter-Bank Payment System (CHIPS) 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.

(iii) National Electronic Funds Transfer (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.

(iv) Real Time Gross Settlement (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.

(v) A Data Warehouse or Enterprise Data Warehouse (DWFI/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.

Question 8.
What are the Cyber Crimes? How Cyber Crimes can be managed? (Dec 2017, 3 marks)
Answer:
Cyber Crimes and its management
A Cyber Crime can be defined as “criminal activity carried out by using computer and internet”. A cyber crime can also be defined as “use of computers and / or other electronic devices via information system like computer network, internet to handle illegal activities like transfer of funds, withdrawal of funds through unauthorised access”.

In cyber crimes computers are either used as tool and / or targets. So the computer which is an electronic device is used as a medium of cyber crimes. Management of cyber crimes requires a holistic approach based on meaningful analysis of risk.

The areas that require attention are Network security, Software security, Host security and Data Security. In general, control system can be classified as: Preventive Controls, Detective Controls, Corrective Controls, Physical Controls, Internal Control, Computer Control, Information System Audit and Information System Security.

Question 9.
E-banking is beneficial to banks, as well as customers. Explain the benefits that can be derived by banks, as well as customers. (Dec 2018, 10 marks)
Answer:
Benefits from the bank’s point of view
The main goal of any firm is to maximize profits for its owners and banks are not any exception. Automated e-banking services enable the banks to reduce the transaction cost which will improve the profitability. Another benefit for those banks that offer such services would be perceived as leaders in technology implementation and those banks enjoy goodwill and a better brand image. The other benefits that would accrue to the bank that adopted e-banking are as under:

1. Procedures and processing of banking transactions can be standardized to eliminate frauds.
2. Better security of the systems can be ensured.
3. Accountability for frauds and irregularities can be fixed.
4. Manpower can be used fully, without any scope for disguised unemployment.
5. Performance can be measured and achievers or performers can be rewarded to improve the business.
6. Document or transaction and details can be retrieved easily without delay.
7. Increased speed in processing of banking transactions will enhance the image of the bank.

The main benefit from the bank customers, point of view is significant saving of time by the automation of banking services processing and introduction of an easy maintenance tools for managing customer’s money. The main advantages of e-banking are as follows:

• Reduced costs in accessing and using the banking services. Increased comfort and time-saving transactions can made 24 hours a day, without requiring the physical interaction with the bank.
• Quick and continuous access to information. Corporations will have easier access to information as, they can check on multiple accounts at the click of a button.
• Better cash management. E-banking facilities speed up cash cycle and increases efficiency of business processes as large variety of cash management instruments are available on Internet sites.

Question 10.
Information Technology (IT) has brought a revolution in the working of banks in India, it also carries various risks. Explain the various types of IT risks and control mechanism for managing these risks. (Dec 2019, 6 marks)
Answer:
IT risks can be classified according to their impact on the organisation, as listed below:
(i) Security Risk: The risk that information will be altered, accessed, or used by unauthorised parties. Sources of security risk could be external attacks, malicious code, physical destruction inappropriate access, unsatisfied employees, variety of platform and messaging types. Potential impacts associated with them are corruption of information, external fraud, identify theft, theft of financial assets, damage to reputation and damage to assets.

(ii) Availability Risk: The risk that information or applications will be inaccessible due to system failure or natural disaster, including recovery period. Sources of availability risks are hardware failure, network outages, data centre failures and force majeure. Potential impacts associated with them are abandoned transactions, lost sales, reduced level of customer, or employee confidence, interruption or delay of business critical processes, reduced IT staff productivity.

(iii) Performance Risk: The risk that’ under performance of systems, applications, or personnel, or IT as a whole will diminish business productivity or value. Sources of performance risk are poor system architectures, network congestion, inefficient code, inadequate capacity. Potential impacts associated with them are reduced customer satisfaction and loyalty, interruption or delay of business critical process, lost IT productivity.

(iv) Compliance Risk: It is a risk of information handling or processing fails to meet regulatory, IT or business policy requirements. Usually, it involves penalties, fines, or loss of reputation from failure to comply with laws or regulations, or consequences of non-compliance with IT policies.

Sources of compliance risks are regulations unique to each jurisdiction, legal actions, internal IT safeguards supporting compliance, inadequate third-party compliance standards etc. Potential impacts associated with them are – damage to reputation, breach of client confidentially, litigation etc.

Mechanism for controlling IT risks: An effective control mechanism is required for managing risks in IT areas. These controls are as under:

1. Preventive Controls: This control mechanism that stops errors and mistakes from occurring. Good layout of forms or screen to a large extent reduces the likelihood of mistakes while feeding the data.
2. Detective Controls: They identify the errors after they are committed. This is done through what is known as validation protocols or programmes.
3. Corrective Controls: These controls eliminate or reduce errors after identification of such data with errors or irregularities.

The basic purpose of these controls is to prevent the occurrence of errors or irregularities in the system. Secondly inspite of such prevention if such errors or irregularities continues to occur, they need to be detected and eliminated or corrected.

Question 11.
Kangana Tea Estate located in Dimapur district is a unit of Manisha Foods Ltd., Siliguri. The company operates in production and sale of fine quality Assam tea. Sanjay, aged 62 years, a long-time employee of the company, deals with day-to-day accounts function of Manisha Foods Ltd. You are the in-charge of treasury function of the company. You are on leave till another week from now, as there is a medical emergency, staying with your parents in a village that takes two days to reach from Siliguri.

Roshan, Managing Director of the company, is on an international business trip. He received as SOS from the estate manager that there has been fire in the Tea Estate office building. Though there has been no casualty, more than 20 employees got injured while escaping out of the building and 24 employees have been hospitalised in a private nursing home located in the nearest town, about 45 kilometers from the estate office. Rescue work is still on. You have received a call from Roshan, your MD, for ₹ 25 lakh to be made available to the Estate Manager at the earliest. He is not conversant with remittance of money through electronic mode by the bank.

Prepare a note for Roshan, giving details of the new age mechanism for transfer of funds electronically to enable him to issue suitable instructions to Sanjay. (Dec 2016, 10 marks)
Answer:
To
Mr. Roshan
Managing Director
Kangana Tea Estate

This is with reference to the various mechanisms for transfer of funds electronically. As a Manager-treasury functions, I would like to apprise you the various methods of transfer of funds electronically which are as follows:

(a) Electronic Clearing System (ECS):
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.

(b) Real Time Gross Settlement (RTGS):

• 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.
• The payments so effected are ‘final’ and ‘irrevocable’.
• The settlement is done in the books of the central bank (RBI).
• Both customers and banks can transfer fund monies the same day at regular intervals within the banking hours.

(c) National Electronic Funds Transfer (NEFT) :

• NEFT is a system similar to RTGS with some differences.
• Once the applicant for the transfer of funds furnishes full and correct details (correct details of account means correct name of the beneficiary, the account number, the branch and bank of the beneficiary and the 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.

(d) Internet Banking:

• Internet banking is one of the popular e-banking modes has changed the banking operations and offer virtual banking services to the clients on 24×7 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 website.
• 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.

(e) Core Banking Solutions (CBS):

• Core Banking Solutions has helped banks to offer better customer service.
• It has also reduced the cycle tirrje of payment, mainly in clearing process and the process helped to achieve an increased 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.

Mr. X
Manager – Treasury Function
Kangana Tea Estate

Question 12.
Write short notes on National Electronic Funds Transfer (NEFT).
Answer:
National Electronic Funds Transfer (NEFT)
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.