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Indian Streams Research Journal

Vol.2,Issue.III/April; 12pp.1-4

Dr. Usha N. Patil Research Papers

ISSN:-2230-7850

INTERNET BANKING IN INDIA: RISK ANALYSIS AND ADOPTION IN AN EMERGING ECONOMY


Dr. Usha N. Patil Asst. Prof. & Head Department of Economics G.S. Gawande College Umarkhed Dist- Yavatmal ( M. S.)

Abstract
Today's world is one with increasing online access to services. One part of this which is growing rapidly is Internet Banking (IB). This is very convenient and the ready access To the Internet in all first world countries, coupled with the cost Savings from closing bank branches is driving the operation and adoption of these services. Internet banking allows customers to conduct financial transactions on a secure website operated by their retail or Virtual bank, credit union or building society. Information technology Services is considered as the key driver for the changes taking place around the world. Internet banking (IB) is the latest and most innovative service and is the new trend among the consumers.

The shift from the formal banking to ebanking has been a 'leap' change. Here I discuss about Introduction, Types of Internet Banking, The Internet Banking Risks associated with credit, strategic, transaction, compliance, reputation, Information security risk, Interest Rate Risk, liquidity Risk, Price Risk, foreign exchange Risk. Advantages and Disadvantages of Internet banking and Conclusion. I also cover several guidelines to How to Be Aware of the Advantages and Disadvantages of Internet Banking. Keywords: Internet banking, Risk analysis, Risk Management, Advantages and disadvantages.
Introduction:

behavior in the decision-making process. Risk management is an attempt to identify, to measure, to monitor and to manage uncertainty.
Types of Internet Banking:

Today all countries of the world are in the race to enhance their Internet Banking. Internet Banking creates new challenges for banks as it opens fresh way of exposure, from a supervisory perspective, risk is that events, expected or unexpected, which have an adverse impact on the bank's earnings or capital. Risk management is present in all aspects of life. The notion of risk is much larger. It is universal, in the sense that it refers to human

Financial institution Internet offerings can be broadly classified into three groups with distinct risk profiles: Informational this is the basic level of Internet banking. Typically, the bank has marketing information about the bank products and services on a stand-alone server. The risk is relatively low, as informational systems typically have no path between the server and the bank's internal network. This level of Internet banking can be provided by the bank or outsourced. While risk to a bank is relatively low, the server or website may be vulnerable to alternation. Appropriate controls therefore must be in place to prevent unauthorized alternations to the bank's server or website. Offers information about the bank's products and services ("brochure ware") and is low risk Communicative this type of Internet banking system allows some interaction between the bank's systems and the customer. The interaction may be limited to electronic mail, account inquiry, loan applications, or static file updates. Because these

Please cite this Article as :Dr. Usha N. Patil , INTERNET BANKING IN INDIA: RISK ANALYSIS AND ADOPTION IN AN EMERGING ECONOMY : Indian Streams Research Journal (April ; 2012)

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Indian Streams Research Journal


Vol.2,Issue.III/April; 2012

servers may have a path to the bank's internal networks, the risk is higher with this configuration than with informational systems. Appropriate controls need to be in place to prevent, monitor, and alert management of any unauthorized attempt to access the bank's internal networks and computer systems. Virus controls also become much more critical in this environment. Offers account-related information and possibly offers updates to static data (such as addresses). Since access is permitted to the bank's main systems, the risk is material. Transactional this level of Internet banking allows customers to execute transactions. Since a path typically exists between the server and the bank's or outsourcer's internal network, this is the highest risk architecture and must have the strongest controls. Customer transaction can include accessing accounts, paying bills, transferring funds, etc. for example, if the customer has never visited a branch throughout his entire relationship and prefers to carry out all his transactions remotely (this commonly happens with some online share trading sites).
The Internet Banking Risks:

Internet banking creates new risk control challenges for national banks. But rather accentuates the risks that any financial institution faces. From a supervisory perspective, risk is the potential that events, expected or unexpected, may have an adverse impact on the bank's earnings or capital. Effective management of a banking regular activity requires that bank authority have understood and control the bank's risk culture. Therefore, in our paper firstly we are going to analyze the various types of risks faced by Internet Banking. The following are the various types of risks associated with Internet Banking: Credit Riskthis is the risk to earnings or capital from a customer's failure to meet his financial obligations. Credit risk is found in all activities where success depends on counterparty, issuer, or borrower performance. Internet banking enables customers to apply for credit from anywhere in the world. Banks will find it extremely difficult to verify the identity of the customer, if they intend to offer instant credit through the Internet. Verifying collateral and perfecting security agreements are also difficult. Finally, there could be questions of which country's (or state's) jurisdiction applies to the transaction. Strategic Risk Strategic risk is the current and prospective impact on earnings or capital arising

from adverse business decisions, improper implementation of decisions, or lack of responsiveness to industry changes. The risk is a function of the compatibility of an organization's strategic goals, the business strategies developed to achieve those goals, the resources deployed against these goals, and the quality of implementation. The resources needed to carry out business strategies are both tangible and intangible. They include communication channels, operating systems, delivery networks, and managerial capacities and capabilities. The organization's internal characteristics must be evaluated against the impact of economic, technological, competitive, regulatory, and other environmental changes. Transaction RiskThis is the current and prospective risk to earnings and capital arising from fraud, error, negligence and the inability to maintain expected service levels. A high level of transaction risk may exist with Internet banking products, because of the need to have sophisticated internal controls and constant availability. Most Internet banking platforms are based on new platforms which use complex interfaces to link with legacy systems, thereby increasing risk of transaction errors. There is also a need to ensure data integrity and no repudiation of transactions. Third-party providers also increase transaction risks, since the organization does not have full control over a third party. Without seamless process and system connections between the bank and the third party, there is a higher risk of transaction errors. Compliance Riskthis is the risk to earnings or capital arising from violations of, or nonconformance with, laws, regulations and ethical standards. Compliance risk may lead to diminished reputation, actual monetary losses and reduced business opportunities. Banks need to carefully understand and interpret existing laws as they apply to Internet banking and ensure consistency with other channels such as branch banking. This risk is amplified when the customer, the bank and the Transaction is in more than one country. Conflicting laws, tax procedures and reporting requirements across different jurisdictions add to the risk. The need to keep customer data private and seek customers' consent before sharing the data also adds to compliance risk. Customers are very concerned about the privacy of their data and banks need to be seen as reliable guardians of such data. Finally, the need to consummate transactions

Please cite this Article as :Dr. Usha N. Patil , INTERNET BANKING IN INDIA: RISK ANALYSIS AND ADOPTION IN AN EMERGING ECONOMY : Indian Streams Research Journal (April ; 2012)

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Indian Streams Research Journal


Vol.2,Issue.III/April; 2012

immediately (straight-through processing) may lead to banks relaxing traditional controls, which aim to reduce compliance risk. Reputation Risk: Reputation risk is the current and prospective impact on earnings and capital arising from negative public opinion. This affects the institution's ability to establish new relationships or services. This risk may expose institution to litigation, financial loss, or a decline in its customer base. A bank's reputation can suffer if it fails to deliver on marketing claims or to provide accurate, timely services. National Banks need to a sure that their business continuity plans include the internet banking business. Regular testing or business continuity plan, communications strategies with the press and public, will help the bank ensure it can respond effectively and promptly to any adverse customer of media reactions. Information security riskThis is the risk to earnings and capital arising out of lax information security processes, thus exposing the institution to malicious hacker or insider attacks, viruses, denial-of-service attacks, data theft, data destruction and fraud. The speed of change of technology and the fact that the Internet channel is accessible universally makes this risk especially critical. Interest Rate Risk: Internet rate risk is the risk to earnings or capital arising from movements in interest rates. Interest rate risk arises from different between the timing of rate changes and timing of cash flows. Internet banking can attract deposits, loans and other relationships from a large pool of possible customers than other forms of marketing. Greater access to customers who primarily seek the best rate or term reinforces the need for managers to maintain appropriate asset/liability management systems, including the ability to react quickly to changing market conditions. Liquidity Risk: Liquidity risk is the risk to earnings or capital arising from a bank's inability to meet its obligations when they come due, without incurring unacceptable losses. Liquidity risk arises from the failure to recognize or address changes in market conditions affecting the ability of the bank to liquidate assets quickly and with minimum loss in value. Asset/liability and loan portfolio management systems should be appropriate for products offered through internet banking. Increased monitoring of liquidity and changes in deposits and loans may be warranted depending on the volume and nature of internet account activities.

Price Risk: Price risk is the risk to earnings or capital arising from changes in the value of traded portfolio of financial instruments. The risk arises from market making, dealing and position taking in interest rate, foreign exchange, equity and commodities markets. Banks may have exposed to price risk if they create or expand deposit brokering, loan sales, or securitization programmed as a result of Internet banking activities. Appropriate management systems should be maintained to monitor, measures, and manage price risk if assets are activity traded. Foreign exchange riskForeign exchange risk arises when assets in one currency are funded by liabilities in another. Internet banking may encourage residents of other countries to transact in their domestic currencies. Due to the ease and lower cost of transacting, it may also lead customers to take speculative positions in various currencies. Higher holdings and transactions in nondomestic currencies increase foreign exchange risk.
Advantages & Disadvantages of Internet Banking: Internet banking is a fact of life for many individuals today with a busy lifestyle. Some individuals will have a brick and mortar bank that offers Internet banking in addition to going to the brick and mortar location. Other banks exist only on the Internet that does not have a physical location. Internet banking is becoming very popular these days. It is more convenient than the traditional banking, which is why many people are becoming interested in it. Internet banking not only comes with advantages but also with disadvantages. In this article you will learn about the advantages and the disadvantages of banking online. Advantages: Benefits: Internet backing's major benefit to account holders is convenience. It allows an account holder to monitor usage of his account and perform basic transactions online for his banking account. Considerations: If an individual opens an account at an online-only bank such as ING Direct, access is limited to their account. If the bank account owner cannot find a location with Internet access, she will be unable to perform transactions on her banking account. Disadvantages: When using an Internet banking account, the account owner may have no face to face

Please cite this Article as :Dr. Usha N. Patil , INTERNET BANKING IN INDIA: RISK ANALYSIS AND ADOPTION IN AN EMERGING ECONOMY : Indian Streams Research Journal (April ; 2012)

INTERNET BANKING IN INDIA: RISK ANALYSIS AND ADOPTION IN AN........

Indian Streams Research Journal


Vol.2,Issue.III/April; 2012

interaction with a bank employee if the bank does not have a brick and mortar location. This can make resolving disputes more difficult as the account holder will have to make a phone call and possibly wait on hold, or be forced to send an email. Bonuses: There is some Internet banking companies such as ING Direct that will allow a customer to receive a monetary bonus for opening an account with them. The bonus varies based on the promotion the Internet banking company is running at the time. Warning: Conducting your banking over the Internet can be you at a significant risk of scams and fraud. Make sure when using your internet banking account you are accessing it through a secured network, and never provide your account password to anyone.
How to Be Aware Of the Advantages and

Expectations, vol. 21, pp. 213-225,2001. [3] Misra and Puri , Indian Economy, Himalaya Publishing House, New-Delhi, India 2008. [4] Mathew Johnson , A New Approach to Internet banking, Technical Report University of C a m b r i d g e C o m p u t e r Laboratory,September2008(http://www.cl.cam.ac .uk ) [5]Al-Hajri, S & Tatnall, A., Technological Innovation and the Adoption of Internet Banking in Oman, vol. 10, pp. 59-83,2008. [6] Amin, H., Internet Banking Adoption among Young Intellectuals, vol. 12, no. 3. 2007. [7]Bauer, KJ., Perceived Risk and Internet Banking, 2002. [8]Malhotra,, P & Singh, B., The Impact of Internet Banking on Bank Performance and Risk: The Indian Experience, vol. 2, no. 4, pp. 43-62, 2009

Reports: Int. J. Pure Appl. Sci. Technol., 1(2(2010), 67-78 Disadvantages of Internet Banking: 71 Int. J. Pure Appl. Sci. Technol., 1(2(2010), 67-78 ADVANTAGES: 1.Internet banking is fast and easy. Most of the 72 banks online offer great interest rates on your Int. J. Pure Appl. Sci. Technol., 1(2(2010), 67-78 savings and other accounts, which is very enticing. 77 2.You are able to bank from anywhere in the world, and there is not specific time-frame. You can do Websites:your banking 24 hours a day, 7 days a week, which www.sohoos.com www.vallstein.com is very convenient for bankers. 3.You are able to view your statements in real time, www.icicidirect.com www.apro.nl instead of waiting for it to come in the mail. www.rbi.org.in DISADVANTAGES: 1.If your computers stop working because of Newspapers: technical issues, you are not able to access your The Economic Times account from your personal computer. You may The Business Standard have to use the computer at the library or a friend's computer, and this can cause some inconvenience 2.When you have to withdraw money from your account you may have to use an ATM machine from another bank, and you will be charged a fee. 3.Your account may be compromised if you don't practice proper online banking techniques, such as making strong passwords, logging out, and closing your browser, after completing your online banking. [1]Agarwal, R, Rastogi, S & Mehrotra, A.,Customers 'perspectives regarding e-banking in an emerging economy, vol. 16, pp. 340351, 2009. [2] Aladwani, A., Online Banking: A Field Study of Drivers, Development Challenges, and
Please cite this Article as :Dr. Usha N. Patil , INTERNET BANKING IN INDIA: RISK ANALYSIS AND ADOPTION IN AN EMERGING ECONOMY : Indian Streams Research Journal (April ; 2012)

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