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|February 22, 1999||
I feel that the success of the current economic reforms and financial liberalisation must depend on the health and efficiency of the country's financial sector.
I would like to mention that the impact of information technology is already discernible on operations of some financial institutions.
The need of the hour, however, is to accelerate the pace of such technology application and persuade other institutions to adopt the latest available tools of information technology and transform themselves into vibrant, efficient organisations.
Information technology has been the driving force in the creation of the global financial sector that integrates banking, insurance, mutual funds and securities and trading industries.
Global power houses like GE Capital have become the world's largest financial services company due to the systematic and focused use of information technology in their worldwide operations.
GE Capital outsourcers its software development and card processing services to Indian software companies, thereby emerging as the lowest cost global financial service provider.
The Indian software industry has matured into a world class provider of information technology based solution to financial, manufacturing and telecommunications sectors.
Most leading financial services companies of the world like Citibank, J P Morgan, ANZ Grindlays Bank and Deutsche Bank are extensive users of Indian software industry for software development, support and maintenance. This helps them stay globally competitive.
With the liberalisation of the Indian economy and removal of entry barriers, the Indian financial sector will have to compete with global giants for a pie of the business that has until now been theirs by default.
The Indian financial sector will have to become global to compete with the global players in the global marketplace. Banks like the State Bank of India and the Bank of Baroda will emerge as global banks in due course.
What are the opportunities available for the IT industry which can turn the Indian financial sector into a global powerhouse?
What are the problems of the financial sector in the application of Information Technology?
Current status of computerisation
Financial sector in our country is well diversified. It primarily comprises public and private sector institutions like banks, foreign banks, development finance institutions, mutual funds, insurance companies and capital market intermediaries.
Considering that they basically operate in the service sector, application of information technology could bring considerable improvement in customer service.
The nationalised banks that are facing the heat of competition from foreign banks and new private sector banks are attempting to deploy better technology.
The number of fully computerised branches had gone up from 3,383 at March-end 1998 to 3,668 at September-end 1998.
A similar trend is reflected in partial branch computerisation that has gone up from 6,506 branches as on March-end 1998 to 6,981 branches as on September-end 1998.
But this is far from comfortable levels. Keeping in view that there are over 45,000 public sector banks branches, banks need to pursue computerisation more vigorously.
Apart from branch automation, certain other functions like inter-branch reconciliation, payroll and PF and MIS report generation are processed in a batch mode on a mainframe or a mini system.
The old private sector banks that predominantly have a regional spread are at par with nationalised banks with respect to computerisation and the use of information technology.
The foreign banks are technology savvy. Thanks to their parentage, they deploy the latest IT and communication infrastructure to gain competitive advantage in the marketplace. They use imported packages with minimal customisation.
The new private sector banks, that are fortunate enough to start on a clean state, are computerised to a large extent, mostly with home-grown software from companies like TCS and Infosys. The investment in information technology is more than Rs 10 million per branch.
The development financial institutions are slow and steady and have their own agenda of computerisation.
Some of them like the Industrial Credit and Investment Corporation of India and the Industrial Development Bank of India are more technology savvy and have been experimenting with ERP, datawarehousing and data mining after computerising the basic functional areas.
Insurance industry comprising of the Life Insurance Corporation and the other four General Insurance Companies are monopolies which are not IT savvy and are at the lower or intermediate level of computerisation.
However, the use of IT is likely to pick up in soon with the entry of private sector insurance companies.
As for mutual funds, the private sector companies with foreign collaboration rely on state of the art information technology to deliver their product to the customers.
The Unit Trust of India, the erstwhile monopoly of mutual funds, is investing substantial amounts to improve the IT infrastructure.
In the case of capital market intermediaries, the National Stock Exchange and the National Securities Depository Limited are two new organisations that have created state of the art systems for online trading and depository functions, using the world's largest VSAT based network.
Even though investment in IT based system are substantial, the benefits from the transparent online trading systems justify heavy investment in IT infrastructure.
Considering that the banking industry comprises a major chunk of the financial sector, I would like to draw an overview of its computerisation, the problems in the way of accelerating the pace of this computerisation and IT opportunities available to it.
Even in the banking industry I would especially confine myself to the public sector banks that enjoy the lion's share of the business.
Since liberalisation, the banking industry has really become place where only the fittest will survive. Now the public sector giants have no other option but to adopt the following principles:
I would basically touch upon the following aspects:
Bank automation in India dates back to the early Seventies when IBM machines and punched cards were used mainly for inter-bank reconciliation and payroll accounting.
The journey of Banking Industry from the stage of punch card based batch processing during the Seventies to the existing system of online processing of transactions achieved over last two decades have indeed been commendable.
The rapid beginning in automation of banking industry really started with the recommendations of the Committee on Computerisation constituted under the Chairmanship of Dr C Rangarajan, the then deputy governor of the Reserve Bank of India.
Earlier agreements paved the way for the introduction of 'automated ledger posting machine' for backoffice automation.
Union Agreement 1983
Union Agreement 1987
Union Agreement 1988
Banks were allowed by Unions to take up one branch in metropolitan centres (apart from their main office) for total branch computerisation project on an experimental basis.
These agreements paved the way for the introduction of ALPM for backoffice automation.
An ALPM is a single user PC with software for saving banks cash credit/overdraft, current accounts.
The focus of the ALPM package was more for backoffice housekeeping than front office customer service.
Considering the restriction imposed by earlier agreements, the progress achieved by public sector banks is laudable.
Union Agreement 1993
The historic agreement on computerisation signed between the Indian Banks' Association and bank unions during October 1993 marked a major turning point in technology upgradation in Indian banking.
The agreement permitted computerisation without any confines and to enable the Indian bank sector to become partners in the global economy and offer services on par with its counterpart the world over.
It provided for computerisation of all branches having an average voucher load of more than 750 in urban and metropolitan areas.
No restrictions were placed on the type of hardware, capacity of machines, number of machines etc. Banks were free to use communication facilities including PSDN, satellite.
Freedom was given to the banks to install ATMs on shared or otherwise, to use special devices like signature verification equipment, passbook printers etc. The agreement allowed introduction of single-window concept in branches.
Basic Problems in Computerisation
The level of computerisation in Banking Industry must have definitely been qualitatively as well as quantitatively better but for various problems faced by banks.
While computerising branches, banks have gone in for multiple vendors as they are required to choose the vendor with the lowest bid and also distribute the job over more than one vendor as a single vendor may not be capable of supporting the entire bank's requirements.
The banks have chosen one or two vendors for each zone and the branch automation packages were based on diversified platforms like Novell Netware, different flavours of Unix and proprietary operating systems.
The databases used range from Btrieve, to ISAM files to Oracle to Sybase to magic.
There are banks with multiple packages procured from diverse vendors. It is virtually impossible to support so many different packages in-house and the banks are forced to depend on vendor support.
Moreover, networking and interconnecting these different packages become an extraordinarily complex exercise.
As a result, each branch package becomes an extraordinarily complex exercise. As a result each branch becomes an individual island of computerisation.
State Bank of India has stuck to Bank Master, an international package customised to meet their requirement.
Canara Bank uses Infosys package (Oracle and Unix) for large branches and Canbank package (Novell and Btrieve) for smaller branches.
Bank of Baroda uses ISBS (Unix and Oracle) for large branches and Virmati Banking 1-2-3 package for smaller branches.
Compare this with the world's largest and most successful banks that have only one strategic partner each for hardware and software.
IBM AS400 hardware and Kapiti Banking Package provide a formidable combination which runs in all branches of Bank of Baroda in UK.
This solution runs successfully in Times Bank, Centurion Bank and IndusInd Bank.
This solution has been standardised by almost all the banks in the entire Gulf area. It may not be a state of the art solution but it takes care of all the basic needs of a bank and the high degree of parameterisation makes the implementation smooth.
Hardware purchase for branch automation
While making purchases or hardware, banks have been guided by the principle of a detailed tendering process and awarding the contract to the lowest bidder.
This results in the purchase of hardware and software from different vendors that are not compatible. As a result, standardisation becomes impossible, thereby offering customer support more difficult.
Bank of Baroda has procured hardware for ISBS package from six different vendors having six different flavours of Unix, which are not compatible.
Maintaining six different versions of ISBS software to support around 60 branches is a difficult task.
While the hardware and software are sold in the market by big vendors post-sale support / maintenance is provided by their franchisees.
Franchisees are small-time vendors and are unable to properly cope with the job of maintaining the hardware and replacing parts that fail.
Banks have been purchasing PCs from a very large vendor and his franchisees take around three weeks to replace a monitor or a hard disk in spite of vigorous follow up. The franchise model that works successfully abroad is not able to deliver results in this country.
Banks purchase standard application software packages like ISBS or BANC 2000 from large vendors like TCS, Infosys etc.
In the absence of source code, the software vendors provide the application software support.
For supporting software supplied by them, generally raw engineers are deputed, who in turn are unable to provide timely support to the branches.
It is observed that generally under the disguise of software support, vendors train their engineers on Oracle and Unix so that they can be deputed abroad.
It is further observed that once an engineer achieves proper skills of maintenance of software he either proceeds abroad or leaves for greener pastures, leaving the company high and dry.
In the entire process, the branches suffer due to shoddy software support. The vendors also charge exorbitant rates for such poor support. As the charges are based on man-day effort, the bank ends up paying more.
We have instances, where some software engineer has taken more than a week to load software, which should not take more than a few hours.
Implementation of any application software always involves burning the midnight oil as the workload during implementation and parallel runs increases multifold and the branch cannot increase the staff.
Implementation time is when the branch needs maximum support and hand holding and some of the large software vendors do not offer implementation support as a matter of policy.
Of course, they offer implementation support through their franchisees whose staff are neither well versed in the application software nor in banking operations.
The branch ends training the staff of the franchisees also. While some of the vendors sell their software they do not come forward to implement the same in branches.
Even though such software could not quite good, banks find it difficult to go for them, as they themselves cannot implement the software in view of inadequate manpower.
Choice of an appropriate solution
Today a range of solutions is available in the marketplace for branch / bank automation like...
The banks are at various stages of computerisation, trying to graduate to bank automation from branch automation.
They have invested substantial sums in hardware, software and training in the computerisation process over the past decade.
They are in need of a solution that can give them a detailed road map to migrate from branch automation to bank automation protecting the existing investments, minimising the additional investments and using an optimum mix of branch, cluster and centralised approaches utilising a judicious mix of communication infrastructure.
Hardware and software standards and upgradation
While computerising their operations banks have not gone for standardised hardware and software. The tendering system and choosing the lowest bid are also partly responsible for lack of standardisation.
Due to proprietary systems, banks were charged exorbitantly for maintenance. Due to rapid obsolescence of the systems, banks have been finding it difficult to upgrade the hardware and software.
Wherever it has been possible for them to do so, the cost of upgradation has been considerably high. One of the largest hardware vendors has quoted Rs 250,000 for 32 MB of additional memory whereas an entire server with 128 MB memory, 4 GB of hard disk, CD-ROM and operating system can be procured for less than that amount.
Lack of standard procedure
International banking packages are heavily parameterised and they normally maintain one version per country and all the banks in the country modify their procedures suitably to run the same standard version.
This enables the software vendor to offer service of the highest quality.
Due to lack of standardised procedure, Indian software vendor offers different versions of the same banking package for different banks. There are cases where the software vendor has customised the software to meet the needs of individual branches, resulting in multiple versions of the same software, making software maintenance a nightmare.
In other words, the software vendor does not maintain and enhance the software and the branch suffers.
Software vendors are responsible for this debacle, as they do not have banking consultants with banking domain knowledge who could advise the banks properly.
Information technology is getting more and more complex and with the integration of computers and communications, the users are finding it increasingly difficult to procure hardware, operating systems, RDBMS, application software and communication software and build a total banking solutions.
This has created a demand for systems integrators who offer to procure all the above and offer a total solution including implementation on a turnkey basis.
In India there is a dearth of system integrators providing total banking solution Such services are, however, available abroad which help banks to offer services efficiently and at a cheaper cost.
Such services enable to banker to concentrate on his core banking business rather than spending his time on support activities that can be conveniently outsourced.
Is banking only branch automation?
There are a number of large, medium and small vendors offering a total bank automation package at all India, regional and local level.
Surprisingly, none of the large or medium sized vendors offer other banking software applications like cash management package, service branch package, asset liability management package etc.
The main emphasis of all large and medium sized vendors is only branch situation since more than 40,000 branches are yet to be automated.
As a result, due to non-availability of software packages for areas other than branch automation, banks have realised only a fraction of the benefits that could be derived out of information technology.
Making an organisation IT driven, calls for recruiting outside talents and retaining them in the organisation. In the prevailing system of wages and compensation which is considerably lower than the market rates it becomes difficult to recruit high quality programmers, systems analysts and project leaders.
Even people brought into IT folds from within the organisation cannot be retained for longer time due to their compulsory rural posting.
Thus inadequate availability of manpower adversely affects the process of computerisation.
All the officers and staff will have to become IT literate to maximise the benefits out of information technology.
While IT training facilities are enhanced at the zonal and regional levels, the banks still lack adequate infrastructure for imparting quality IT training to all the officers and staff.
Many of the big software vendors do not invest on training infrastructure. Even the software vendors, who have training facilities, charge exorbitant fees for average quality training programs.
Many of the big-time vendors like Oracle, Microsoft rely upon franchises that lack adequate infrastructure in terms of hardware, software and qualified training instructors.
ATM and connectivity
Visa and MasterCard are two shared payment networks started by American banks that provides a worldwide payment network connecting around 120,000 ATMs belonging to member banks including a few in India and millions of merchant establishments all over the world.
World-over 'shared payment network' systems of the large banks in India have been working extremely well.
Swadhan is a shared payment network system that is run by the India Switch Company and coordinated by IBA.
The system has 84 ATMs belonging to 22 different banks, the performance of which is disappointing. The banks claim that the poor performance is due to low network up time.
The India Switch Company feels that the poor performance is due to lack of marketing on the part of the bank branches.
It is necessary to conduct a systems audit and find ways to increase the utilisation of the network and then extend the same to the other cities as well.
The network has not provided for dialup line as a back up for the lease line thereby increasing the network uptime.
While banks have gone ahead setting up ATMs, their utilisation is extremely poor. Unless fully utilised, the investment of Rs 2 million incurred in installing an ATM can hardly be justified.
Further, ATMs are generally supplied by international companies and some of them are found to have abruptly stopped supporting ATMs, leaving banks high and dry.
Communication infrastructure / VSATs
Non-availability of proper communication infrastructure has adversely been affecting connectivity of branches.
While the availability of communication infrastructure has improved during the course of last few years, it is still by and large suitable for telephony and not for data communication.
The cost of lease line is exorbitant in this country. But it is likely to come down in the future. Moreover, due to the unreliable nature of the lease line and the last-mile problem, a lease line has to have VSAT and dial up line as backups to provide a world-class failsafe communication backbone.
Recently, one of the multinational banks set up a world-class communication backbone connecting 60 branches in 15 cities at an investment of Rs 600 million with an annual recurring expense of Rs 150 million.
Reserve Bank of India is in the process of setting up a V-SAT network for all the public sector banks that will start with around 600 V-SATs to be increased to around 6,000 in the long run.
The banks have responded enthusiastically and Bank of Baroda has procured 24 V-SATs in Phae-1, connecting all zonal offices and some of the important regional offices.
While banks have taken decision to go for substantial number of VSATs they confront a number of problems in this area due to non-cooperation from landlords. Banks are finding it difficult to fix dish antenna to make VSATs operational.
Some of the branches are required to submit to dictates of landlords either through jacking up rent or other means at the cost of financial burden on banks.
The setting up of the network was inordinately delayed due to non-availability of bandwidth. At last RBI has been given only an eighth of a transponder that is just adequate to use the network as backup network for a lease line based network.
Due to non-availability of adequate bandwidth, branches cannot be connected with the VSATs to provide on line financial services.
Thus despite taking up VSATs, banks are obliged to go in for their own communication backbone at a substantial cost.
Moreover, DoT has been putting in restrictions in connecting different networks that will come in the way of getting maximum benefits out of a networked environment.
UPS & power supply
Due to erratic power supply position and voltage fluctuations, banks had to go for UPS at an additional cost. Since UPS are generally purchased from the local suppliers at the lowest price (L1) and their quality leaves much to be desired. Faculty UPS leads erratic power supply resulting in hardware/software crashes and data corruption brining the branch operations to a standstill.
Data security requirements
If banks are to go in for online financial transactions and messaging, it is necessary that all messages from one branch to another should be properly encrypted.
The software required for maintaining such security, unfortunately, is not readily available in the country. The US government had imposed unreasonable restrictions on the export of encryption algorithm.
Development of such algorithms locally will be time consuming and will delay the process of computerisation further.
Chief Vigilance Commissioner N Vittal has already instructed the Defence Research and Development Organisation to come out with suitable software to take care of security requirements.
Lack of service providers
In US and other advanced countries, total solution providers exist who invest in large data centres, centralised or distributed with the state of the art communication networks that offer to take over online processing of banking transactions and charge on the basis of number of transactions processed.
As the services are offered to multiple banks, the rate per transaction works out less expensive than the bank's in-house facilities.
Such facilities are offered by large hardware vendors abroad. None of the vendors, whether local or multinational, appears keen in investing in such an infrastructure in India.
This facility can come as a boon to those banks that lack the capital to invest and those banks that like to outsource the entire IT functions.
Legal hurdles in accepting computer outputs as primary evidence and absence of special laws like the EFT Act, as is prevalent in some Western countries, will not allow banks to derive the maximum benefits out of information technology.
Banks have developed a cadre of in-house auditors and external auditors to carry out internal audits and concurrent audits to minimise / eliminate revenue leakage and frauds.
At present, there is a dearth of qualified system auditors, both in-house and from external sources that can inspect and audit a highly automated banking system.
The cost of hardware and software being quite high, the capital cost of computerisation has indeed been huge.
Thus banks which is financially strong can only afford to go for computerisation in a big way.
A conservative study estimates that public sector banks need around Rs 180 billion to computerise the total banking operations with totally integrated banking software.
This works out to Rs 10 million per branch and covers the hardware, software and communication infrastructure.
Return on investment in technology
The benefits of computerisation in the form of increased productivity and higher return on investment could only be assured provided a man-machine ratio is maintained.
Due to non-adherence to the basic rule of the game that with the computerisation manpower has to be displaced judiciously, the return on investment on technology cannot be assessed properly.
The need of the hour is to lay down certain basic rules whereby returns on technological investment could be properly assessed.
Opportunities in commercial banking sector
The public sector banks with a network of over 45,000 branches that are reeling under competition from private sector / foreign banks have no option but to increase the pace of computerisation.
In fact this provides one of the largest opportunities for use of IT in financial services. No other country in the world can boast of such a large banking network.
CVC N Vittal has passed an order that...
Going by the estimates that a round 40 per cent of the branches account for 70 per cent of the total business in public sector banks, 18,000 out of a total of 45,000 branches need to be computerised within two years.
The task appear challenging, keeping in view that public sector banks have managed to computerise around 3,000 banks over the last five year.
The total investment to implement simple branch automation package in 15,000 branches will be to the tune of Rs 30 billion.
Can the hardware and software companies of this country accept the challenge of computerising 15,000 branches within a span of two years? Can they work jointly and prepare a total project plan for this exercise? Can they provide adequate manpower support to accomplish such a mammoth task?
If public sector banks are to compete head-on with their private sector counterparts, they need to treat their customers as bank customers rather than branch customers in the first phase so that they can get anytime-anywhere banking from any branch of the bank.
In the second phase, bank customers become banking sector customers when he gets service from even designated branches of other banks through a shared payment network system.
In the third phase, the customer makes use of the banks infrastructure for electronic debit (payment of utilities) and electronic credits (payments of dividend) transactions.
Therefore, a bank automation plan becomes imperative in the long run even though a branch automation plan can provide limited benefits in the short run (around three years).
A pre-requisite for evolving total bank automation plan calls for carrying out a business process reengineering study of all facets of banking operations and coming out with a clearly defined set of functional (user) requirements for total banking operations.
This study requires an inter-disciplinary team of functional experts (in different banking areas like branch banking, foreign exchange, treasury management, service branch function, inter branch reconciliation etc), system analysts, system designers, data base experts, data communication professionals, hardware experts, security consultants, implementation experts and so on.
It may even be possible to conduct a common study for all public sector banks so that functional requirements can be standardised at a broad level.
Do we really have any consultant with the requisite expertise to conduct such a study? Once the functional requirements are finalised then they can be mapped against the software, operating system, relational database management system and total turnkey solution covering the following areas can be identified:
Do we have any vendor who has adequate resources and who is willing to take up the responsibility to offer total turnkey solution which includes all the above and also the its infrastructure backup arrangement and contingency planning? Automation will be a long-term plan of immediate concern to all the banks.
Cash Management System
All corporate customers need an efficient cash management system that involves collection of cash at multiple centres and remitting them to corporate headquarters.
Such packages are available from small vendors that are localised and can offer support in only specific areas.
Cash Management System can be a money spinner for any bank with a large corporate customer base.
Is there any all-India vendor, whether local or multinational, who has a readymade cash management system package to be implemented on a turnkey basis or who is willing to invest in the development of cash management packages?
Integrated treasury management system
Due to fierce competition in the marketplace, the interest spread is shrinking and the risk profile of the average corporate customer is going up.
Under these circumstances, it may be prudent to balance the credit portfolio and rely more on integrated treasury management systems for profit maximisation.
Do we have any Indian software package, reasonably priced, that can meet the requirements of an integrated treasury management?
Asset liability management systems
RBI has been providing guidelines for asset liability management and has even specified detailed reporting requirements to be made effective from 4.99.
How many vendors have been proactive enough to study the ALMS requirement and come out with a total solution package?
The public sector banks have a legacy of selecting multiple branch automation packages, local or foreign, RDBMS based, flat file based, UNIX based or Novell based.
Today, the need of the hour is anytime-anywhere banking. Do we have any cost effective anytime-anywhere banking solution from any of the industry leaders that can integrate different banking packages.
Service branch computerisation
The service branch that is responsible for clearing millions of DDs and cheques and warrants is fraud prone and needs computerisation more than any other functional area.
Has any large vendor conducted a detailed study of the Service Branch operations to define the user requirement and come out with the automation package?
In the US, many of the banks outsource all the banking services. In other words there are service providers who set up large data centres and offer online transaction processing service and charge transaction based fees.
In such cases bankers can concentrate on their core banking business rather than diverting their attention to IT based issues.
Is there any vendor, whether Indian or multinational, who is willing to invest in such an IT infrastructure project. It can be a win-win situation for both banks and vendors.
ERP, data warehousing and data mining
ERP, data warehousing and data mining are the new technologies that have resulted in a dramatic rise in productivity in the manufacturing sector.
Can any vendor invest and offer a standardised ERP package for the banking sector that is integrated with data warehousing and data mining at a reasonable and affordable price.
The efficiency of an economy depends upon the efficiency of the national payment system.
RBI is in the process of introducing a 'real time gross payment systems'. Are the hardware and software vendors geared for the same?
Financial industry trends and application architecture
What are the key financial industry trends and who will drive them technologically between 1999 and 2004? What application architecture will drive new consumer centric financial systems between 1999 and 2004?
The business drivers are...
The key financial industry trends will be...
The emerging financial sector will be...
The following will be the key parameters for a successful banking enterprise in the future:
The main objectives of computerisation, in addition to detection and elimination of frauds is better customer service and achieving global standards.
This creates abundant opportunities for vendors of hardware, software, telecommunications and other infrastructure services.
The potential can be achieved provided both banks and vendors have:
This calls for a strategic partnership between the banking sector and the group of vendors working on a common IT plan for the banking sector in co-ordination with IBA and NASSCOM.
However, vendors must assure that they provide dependable hardware, software, quality service, reliable power and communication support and adequate backup arrangements.
K Kannan is the chairman and managing director of the Bank of Baroda. This article was the basis of his recent presentation on 'IT opportunities in the financial sector'. He delivered it at NASSCOM 99.
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