Chapter 1
Introduction
Abstract
In India, the digitalization of banking has been a revolutionary movement that has completely changed the
way financial services are provided. The government's goal for financial inclusion, the development of new
technology, and the expansion of the telecom industry has all contributed to the digitalization of banking in
India. The banking industry's digitization is probably going to keep being a major factor in the growth of the
Indian financial sector. Every financial transaction is significantly impacted by a variety of e-banking service
types. The Indian banking industry no longer functions without e-banking services. Banks should concentrate
on raising consumer knowledge of e-banking services as they expand. The banking industry will inevitably
become more digital as smartphone usage rises to meet global standards. Further changes to India's banking
sector are still to come. Keywords: Digital, banking, digitization, innovation, India, transformation, internet
banking, Jan Dhan Yojana,
Introduction
A group was formed to look into the situation by Dr. C. Rangaranjan, who had previously served as governor
of the Reserve Bank of India. From 1985 to 1989, the board of trustees planned the computerization and
automation of the financial sector with an emphasis on client administration. The Indian government
formally approved the Information Technology Act, 2000, in 2000 to legalize electronic trade and internet
transactions. The percentage of young Indians who feel comfortable doing all of their financial dealings
online has been rising steadily over the last several years. The banking business in India has lately seen
tremendous changes, with the use of information technology being one of the most essential, as a result of
demanding clients who have tended to limit their visits to conventional bank offices. All commercial banks in
India have adopted internet banking in one form or another, according to research by the Reserve Bank of
India. This is in reaction to customers' shifting preferences, as many now prefer to use their mobile phones
to handle their financial transactions. Banks are struggling to compete by utilizing outdated marketing
strategies as a result of their customers' increasing proficiency with computers. This means they have to
figure out how to attract the vast majority of their target audience. Because of this, the majority of India's
commercial banks have begun providing customers with the option to bank online.
Evolution of the Banking Industry in India
1921: There was only one bank in India, and that was the state-owned Imperial Bank of India. 1935: As the
country's central bank, RBI was founded. The Imperial Bank's function as a central bank was terminated.
1936-1955: With this expansion, Imperial Bank now has 480 locations nationwide. The State Bank of India
replaced Imperial Bank.
1956-2000: Fourteen major commercial banks were nationalized in 1969, and six more were nationalized in
1980. Competitiveness has been ratcheted up with the entrance of private companies like ICICI. Public sector
banks are gradually upgrading their technologies.
2000-2020: The Reserve Bank of India (RBI) granted the first banking licence to an NBFC in 2003,
transforming Kotak Mahindra Finance Ltd into a bank. Following its introduction in 2005, the government
abolished the Banking Cash Transaction Tax in 2009.
2020 onwards: The Reserve Bank of India (RBI) granted the first banking licence to an NBFC in 2003,
transforming Kotak Mahindra Finance Ltd into a bank. Following its introduction in 2005, the government
abolished the Banking Cash Transaction Tax in 2009.
Banks in India
Banks in India are classified into four categories:
Commercial Banks, Public-sector banks
Public Sector Banks (PSBs) are a major type of bank in India, where a majority stake (i.e., more than 50%) is
held by the government. In April 2019, Vijaya Bank and Dena Bank were merged with Bank of Baroda. On 30
August 2019, Union Finance Minister Sitharaman announced the merger of six public sector banks (PSBs)
with four better-performing anchor banks in order to streamline their operations and size. Two banks were
amalgamated to strengthen national presence, and four were amalgamated to strengthen regional focus.
Subsequently, the number of public sector banks has been reduced to 12 from 27. This new amalgamation
came into effect from 1 April 2020.
List of Public-Sector Banks in India as of 1st March 2023
Bank of Baroda, Bank of India, Bank of Maharashtra, Canara Bank, Central Bank of India, Indian Bank, Indian
Overseas Bank, Punjab & Sind Bank, Punjab National Bank, State Bank of India, UCO Bank, Union Bank of
India. Private-sector banks
At present, there are 21 private banks in India. List of Private Banks in India as of 1st March 2023:
Axis Bank Limited, Bandhan Bank Limited, CSB Bank Limited, City Union Bank Limited, DCB Bank
Limited, IDBI Bank Limited, IDFC FIRST Bank Limited, IndusInd Bank Limited, Jammu & Kashmir Bank Limited,
Karnataka Bank Limited, Karur Vysya Bank Limited, Kotak Mahindra Bank Limited, Nainital Bank Limited, RBL
Bank Limited, South Indian Bank Limited, Tamilnad Mercantile Bank Limited, YES Bank Limited. Regional
Rural Banks (RRBs)
At present, there are 43 RRBs in India as of 1st March 2023.
Foreign banks
List of notable banks that are incorporated outside India and are operating branches in India: AB
Bank, Abu Dhabi Commercial Bank, American Express, Australia and New Zealand Banking Group,
Barclays Bank Plc, Bank of America, Bank of Bahrain and Kuwait, Bank of Ceylon, Bank of China,
Bank of Nova Scotia, BNP Paribas, Citibank India, Credit Agricole Corporate and Investment Bank, Credit
Suisse, CTBC Bank, DBS Bank, Deutsche Bank, Emirates NBD, First Abu Dhabi Bank, FirstRand Bank, HSBC
Bank India, Industrial & Commercial Bank of China, Industrial Bank of Korea, JPMorgan Chase, KEB Hana
Bank, Kookmin Bank, Krung Thai Bank, Mizuho Corporate Bank, MUFG Bank, Qatar National Bank, Rabobank,
Sberbank, Shinhan Bank, State Bank of Mauritius, Societe Generale, Sonali Bank, Standard Chartered Bank,
Sumitomo Mitsui Banking Corporation, United Overseas Bank, Westpac Banking Corporation, Woori Bank
Foreign banks with representative offices
List of notable foreign banks with representative offices in India:
Access Bank, Banco Bilbao Vizcaya Argentaria, Banco BPM, Banco de Sabadell, Bank of Montreal, Bank of
Taiwan, Busan Bank, Caixa Geral de Depositos, Credit Industriel et Commercial, DNB Bank, DZ Bank,
Gazprombank, Intesa Sanpaolo, National Australia Bank, Natixis, Raiffeisen Bank International, Skandinaviska
Enskilda Banken, The Bank of New York Mellon, Toronto Dominion Bank, UBS AG, Wells Fargo Bank, Zurcher
Kantonalbank.
Small finance banks
At present, there are 10 RRBs in India as of 1st March 2023. Ujjivan Small Finance Bank, Jana Small Finance
Bank, Equites Small Finance Bank, AU Small Finance Bank, Capital Small Finance Bank, Fincare Small Finance
Bank, ESAF Small Finance Bank, North Small Finance Bank, Suryoday Small Finance Bank, Utkarsh Small
Finance Bank.
Payments banks
At present, there are 6 RRBs in India as of 1st March 2023. Airtel Payments Bank, India Post Payments Bank,
Paytm Payments Bank, Jio Payments Bank, Fino Payments Bank
Co-operative Bank
State Co-operative Banks (SCBs), at present, there are 34 SCBs in India as of 1st March 2023. Urban Co-
operative Banks (UCBs), as of 1st March 2023, 59 UCBs are operational in India.
Market Size
Since 2020, the overall worth of assets owned by banks across different industries has seen a significant rise.
According to the RBI's report on the Sectoral Deployment of Bank Credit, the aggregate assets of the public
and private banking sectors were US$1,553.57 billion and US$901.3 billion, respectively, in the fiscal year
2022-23.
Source: https://www.ibef.org/industry/banking-india/infographic
Growth drivers of Indian banking sector
Economic and demographic drivers: Positive demographic trends and increasing per capita income have
propelled India to number seven on the list of the world's most prosperous countries in 2018. Structural
economic stability and the legitimacy of Monetary Policy will help the sector. Rural lending aims to reach the
60% of the rural population that does not have bank accounts. Digital transactions now account for all new
bank accounts opened in rural India.
Policy support: The Pradhan Mantri Jan Dhan Yojana (PMJDY) allows individuals who do not currently have
a savings account to open one with no minimum balance requirement. Additionally, the individual can open
a small account if they self-certify that they do not possess any of the legally valid documents needed to
open a savings account.
Infrastructure financing: In order to fund infrastructure projects in the upcoming fiscal year, the Indian
government has allocated over Rs. 1 trillion to the state-owned National Bank for Infrastructure and
Development (NABFID). In honor of India's 75th anniversary of independence, there will be 75 DBUs spread
throughout 75 districts.
Open banking eco-system: Scalability, resilience, monitoring, and frictionless service are the four pillars of
open banking, which may expand access to financial services.
Cross-border payments: New regulations enacted by the Reserve Bank of India (RBI) make it easier for non-
resident Indians (NRIs) to pay their utility bills directly in India through a government-run payment portal.
The IBA and RBI collaborated on this project. It is owned by the National Payment Corporation of India.
Government initiatives: The government has decided to establish an independent Banks Board Bureau in
order to enhance the governance of public sector banks (PSBs). The Bureau's responsibilities include advising
public sector banks on leadership appointments and providing strategic and financial planning assistance to
these institutions. In addition to the chairman, the Bank's Board Bureau also includes three experts and three
ex officio members. Apart from the ex officio members, every member of the committee and the chairman
works part-time. To support renewable energy projects in India, IREDA teams up with financial institutions in
September 2023.
Journey of the Banking Industry till Financial Inclusion
Pradhan Mantri Jan-Dhan Yojana (PMJDY): The Objective of Pradhan Mantri Jan-Dhan Yojana (PMJDY)
is to ensure access to various financial services like availability of basic savings bank account, access to need-
based credit, remittances facility, insurance, and pension to the excluded sections, i.e., weaker sections &
low-income groups. This deep penetration at an affordable cost is possible only with the effective use of
technology.
Financial Inclusion - Background: The endeavours to incorporate the economically marginalized sectors of
society into the formal financial system in India are longstanding. The idea was initially proposed by the
Reserve Bank of India in 2005, and the implementation of Branchless Banking, carried out through Banking
Agents known as Bank Mitr (Business Correspondent), commenced in 2006. In 2011, the Indian Government
made a significant effort to promote a programme called Swabhimaan, which aimed to provide banking
facilities to over 74,000 villages having a population of more than 2,000 according to the 2001 census.
Financial Inclusion: Current Status – India: Despite the implementation of numerous strategies to
promote financial inclusion, poverty and exclusion remain prevalent in India's socio-economic and political
discussions, even after more than sixty years since gaining economic independence. Despite the significant
economic growth witnessed during the post-liberalization era of 1991, the positive effects have not reached
all segments of society. As a result, India nevertheless remains home to one-third of the world's
impoverished population. Mission Mode Objectives
It comprises the following six pillars. The first three pillars would be given thrust in the first year. Universal
access to banking facilities; Providing Basic Banking Accounts with overdraft facility and RuPay Debit card to
all households; Financial Literacy Program; Creation of Credit Guarantee Fund; Micro–Insurance; and
Unorganized sector Pension schemes like Swavalamban.
Role of Technology in Financial Inclusion
To make the banking facilities across the length and breadth of the country, latest technological products like
e-KYC, IMPS, AEPS, mobile banking, micro-ATM, Rupay Debit Card, etc., have the potential to emerge as a
game changer in terms of costs, convenience, and speed of reach. Core Banking Solutions (CBS) is a step
towards enhancing customer convenience through Anywhere, Anytime Banking. The adoption of CBS led to
various technological products like NEFT, RTGS, mobile banking, Internet Banking, ATMs, etc.
Challenges identified in the implementation of the Mission
i. Telecom connectivity
ii. Keeping the accounts "Live"
iii. Brand awareness and sensitization
iv. Commission to Bank on Direct Benefit Transfer (DBT)
v. Coverage of difficult areas
Key Banking Statistics
Source: Indian Bank’s Association
The combined assets of governmental and private banks in 2022–23 was $1687.59B and $1016.93B,
respectively. The total assets of all banks in 2022–23, whether public, private, or international, were 58.81%
held by public sector banks.
Source: Indian Bank’s Association
In the fiscal year 2022–23, interest income was more than 48.05 percent for public sector banks. Public
banks earned a total of US$ 102.48 billion in interest for the fiscal year 2022–23. Interest income for private
banks reached US$ 70.04 billion in 2022–23.
Source: Indian Bank’s Association
Public sector banks received around 49.52% of the total revenue in 2022–23. In the fiscal years 2022 and
2023, public sector banks had "other income" of $14.46 billion. "Other income" in the private banking
industry amounted to US$ 13.10 billion in the fiscal year 2022–203.
Analysis of Number of Accounts Opened Under PMJDY as on 31.01.2015, 27.11.2019 and 29.11.2023.
Public Sector Bank
Table 1: Public Sector Bank
From Table 1, total number of 98447525 accounts were opened as on 31 st January, 2015 out of 53300249
(54%) & 45147276 (46%) accounts were opened by Rural and Urban Public Sector Bank. Whereas total
number of 397410851 accounts were opened as on 29th November, 2023 out of
249302471 (37%) & 148108380 (63%) accounts were opened by Rural and Urban Public Sector Bank.
Public Sector Bank
300000000
200000000
100000000
0
2015 2019 2023
Rural Urban
Private Sector Bank
Table 2: Private Sector Bank
Private Sector Bank
10000000
0
2015 2019 2023
Rural Urban
From Table 2, total number of 5238483 accounts were opened as on 31st January, 2015 out of 3226397 (62%)
& 2012086 (38%) accounts were opened by Rural and Urban Private Sector Bank. Whereas total number of
14580745 accounts were opened as on 29th November, 2023 out of 7202200 (49%) & 7378545 (51%)
accounts were opened by Rural and Urban Private Sector Bank.
Rural Regional Bank Table 3: Rural Regional Bank
Rural Regional Bank
100000000
0
2015 2019 2023
Series 1 Series 2
From Table 3, total number of 21787281 accounts were opened as on 31 st January, 2015 out of 18489448
(85%) & 3297833 (%) accounts were opened by Rural and Urban Rural Reginal Bank. Whereas total number
of 96875869 accounts were opened as on 29st November, 2023 out of 83248456 (14%) & 7378545 (51%)
accounts were opened by Rural and Urban Private Sector Bank.
Products and Services offered by Banks in India
Indian banks provide a comprehensive range of products and services to meet the varied financial
requirements of individuals, corporations, and other sectors. The main offerings consist of Banking Products:
Savings accounts are specifically designed for individuals to deposit and withdraw funds while also
generating interest.
Current Accounts are specifically designed for enterprises and companies to facilitate their everyday
financial activities. These accounts do not accrue any interest on the balances.
Fixed Deposits are term deposits that have a set duration and established interest rates. They provide
higher yields.
Types of Loans
Home Loans: Loans offered for the purpose of acquiring or building residential homes.
Personal Loans: Unsecured loans designed for personal expenses, typically with a shorter duration for
payback.
Vehicle Loans: Financing options available for the acquisition of automobiles, motorcycles, or other means
of transportation.
Education Loans: Provide financial support for pursuing higher education, including covering expenses such
as tuition fees and lodging.
Business Loans: Financing options available for the purpose of expanding a firm, funding day-to-day
operations, or addressing special business requirements.
Investments: Banks frequently provide consumers with opportunities to invest in mutual funds. Insurance:
Banks provide a range of insurance products, including life insurance, health insurance, and general
insurance. Online banking services:
Internet Banking provides users with convenient and secure online access to their account information,
allowing them to easily perform tasks such as fund transfers and bill payments.
Mobile Banking refers to the provision of banking services through mobile applications, enabling users to
perform transactions and maintain their accts.
Unified Payments Interface (UPI) enables immediate movement of funds between bank accounts through
cell phones. Financial instruments
Debit cards are commonly utilized for making withdrawals from ATMs and conducting transactions, typically
associated with savings accounts.
Credit cards are available with a range of incentive programs and benefits, enabling users to make
purchases on credit.
Prepaid cards are cards that come with predetermined amounts of money loaded onto them, and they can
be used for certain purposes such as travel or gifting.
International trade and foreign exchange services
Foreign Exchange Services: Enabling the conversion of currencies and the transfer of money. Trade
Finance encompasses a range of services that facilitate international trade transactions, such as letters of
credit and bank guarantees.
Products related to retirement and pension
Pension plans are financial arrangements that offer individuals financial stability after they retire, typically in
partnership with insurance companies.
Employee Provident Fund (EPF) is a government-administered pension program designed for employed
individuals to save for retirement.
Benefits of digitization to the bank
It reduces operational costs by reducing office activities, minimizes errors, and lessens the number of
personnel needed for jobs. Implementing digital technologies can enhance the administration quality,
delivery, and efficiency of banks, thereby providing them with a competitive advantage. By removing
obstacles on land, it paves the way for the expansion of operations for small banks. As a result, this enhances
the ability of loan lenders to evaluate the financial stability of prospective borrowers. Various studies have
shown that the performance of the financial sector gradually improves due to the increasing utilization of
technology.
Government Initiatives
Initiatives like the Digital India campaign and the push for financial inclusion through programs like Pradhan
Mantri Jan Dhan Yojana (PMJDY) have played a crucial role in expanding access to banking services,
especially in rural areas.
Mobile Penetration: The widespread adoption of smartphones and increased internet accessibility has
facilitated the growth of mobile banking and digital payments.
Fintech Innovation: The rise of fintech companies has introduced innovative solutions, such as mobile
wallets, peer-to-peer lending platforms, and digital lending, disrupting traditional banking services.
UPI (Unified Payments Interface): UPI has revolutionized the way payments are made in India. It allows
users to transfer funds instantly between bank accounts using a mobile platform.
Digital Wallets and Payment Apps: Services like Paytm, Google Pay, PhonePe, and others have gained
immense popularity, offering convenience and security in transactions.
E-KYC and Aadhaar Integration: Aadhaar-enabled services have simplified customer verification
processes, making it easier to open accounts and access banking services remotely.
Data Analytics and AI: Banks are increasingly leveraging data analytics and artificial intelligence to offer
personalized services, manage risks, and improve operational efficiency.
Cybersecurity Measures: With the increase in digital transactions, there's a growing emphasis on
cybersecurity to protect customer data and financial assets.
Extent of electronic banking:
Electronic banking encompasses the following
Internet Banking: Banks offer a range of services through the web, which is an incredible medium. This
includes educating customers on the basics of the bank's products and services, assisting them with
questions or concerns related to their accounts or credit applications, and facilitating online transactions like
bill payments, asset transfers, and more.
Phone banking: often known as mobile banking, allows customers to communicate with the bank simply by
utilizing their mobile devices' keypads. One can use it to do things like store a cheque, transfer funds, pay
fees, see their account balance, locate an ATM, or acquire transaction history.
Automated Teller Machines (ATMs): These were the first widespread electronic access points for
customers. Customers can ask about their account balance, make money withdrawals, and more using these
devices, all without having to speak to a bank employee. Also, customers can print their passbook, store
money, and get a credit extension with the more advanced machines.
Plastic Cards: Financial institutions often issue plastic cards to their customers in the form of credit, debit,
or smart cards. These cards simplify the process of making instalment payments for the aim of offering,
providing easy access to credit for a specified period, or performing various types of precharacterized
monetary exchanges.
Electronic Clearing Service (ECS): ECS is mostly used to try repetitive and intermittent instalments
electronically. Organisations use it to pay phone/power/water taxes, cess, and so on, or to make large
payments towards profit, intrigue, pay, benefits, etc. circulation.
Challenges in execution
In order to fully participate in innovation and provide the necessary support for its development and
implementation, a nation needs a sufficient level of framework. However, the foundation in India is just
starting out. Although many have been anticipating it, the web network has not yet reached many. The
security and safety of information transmitted over the online is vulnerable to theft, unauthorised access,
and abuse because the web is an open communication infrastructure. No company in India is immune to
cybercrime or hacking; even the most reputable ones face these problems. Because of this, people no longer
have faith in the sophisticated banking practices of certain banks. Even though the Indian financial sector is
heavily regulated in terms of capital sufficiency requirements, provisioning and resource acknowledgment
standards, projects, etc., it is difficult to extend these regulations to digital banks.
Impact of Digitalization on Bank Performance
Digitalisation has transformed the banking industry, shifting from a branch-to-bank customer relationship,
empowering customers, and reducing branch dependency, thereby enhancing their financial obligations. The
Indian banking industry is focusing on cost reduction through digitalisation, despite incurring infrastructural
and training costs. As more people adopt digital platforms, cost benefits will accrue. Digital banking has
positively impacted bank profitability due to customer satisfaction and economic growth in India, motivating
external players to offer digital financial services. Digitalization has improved the banking industry's
efficiency, with government and industry efforts aiming to reduce cash transactions. Employee training and
feedback can enhance adaptability. The government's digital banking campaign aims for a less cash society,
necessitating robust systems like the Unified Payments Interface (UPI) to meet customer expectations and
competition. Government and private players address digital banking challenges, with increasing rural
penetration indicating potential for increased adoption. Increased incentives, high-speed internet, and
awareness programs boost customer confidence.
Conclusion
Traditional bank branches should replace their traditional physical locations with more modern forms of
proximity. Also crucial is the role of the Indian government in creating a conducive environment to promote
an optimistic outlook among customers. At the same time, traditional banks need to get a clue and realize
that they aren't the only game in town anymore. The new entrants, who are fintech startups, have a lot to
offer digitalized customers, and the two can actually work together to ensure success. The PMJDY program
has been incredibly successful. Banks and the government both face the problem of ensuring that these
accounts remain active. People from all walks of life should be able to effortlessly deposit and save money in
banks. It follows that people's lives have been improved by new banking technology and banks performance
has improved. There may be selective perception of consumers towards services provided by the private
banking sector. The study also found that the psychological behavior of consumers towards digitalization in
the private banking sector. Both public and private sector banks should focus on promoting e-banking
services and enhancing customer satisfaction. The banking sector needs to prioritize the dissemination of
awareness on the utilization of e-banking services, in addition to fostering growth and development.
Traditional cash payments are being replaced by Digital Wallets with Digitalization.
