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November 10, 1997


N Vittal

Banking on IT

When currency is information; information is money.
But India's banks are yet to learn the lesson.

With the globalisation of the Indian economy, financial services are becoming crucial to good health.

Banking on IT
Compaq company
Zero duties promised
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When I say 'globalisation', I mean free movement across national borders of (i) physical capital like plant and machinery, (ii) financial capital like investments in the capital markets, (iii) technology and (iv) labour.

Time is money, more so in a global economy. Business velocity is the key to success. And the pace of any business, at the nuts an bolt level, can be deduced from the speed at which information is exchanged.

Today, that essential speed can be achieved only with the intelligent and extensive use of information technology, the synthesis of computers and communications.

It is therefore essential to talk of information technology when we consider financial services in the increasingly globalised world of trade.

International trends and happenings forced the Indian economy to begin a liberalisation process in 1991. Since then the national debate has focused on issues of reforms. Yet policy-makers are now at a cross-roads, chiefly because scant attention was paid to ensuring a good 'pace' for the reforms.

Bigger and bolder reforms in the Indian economy are guaranteed. Global trends will ensure that. It has happened in the past: the collapse of the communist ideology, symbolised by the implosion of the Soviet Union and the crumbling of the Berlin wall, had profound effects on India. The setting up of the World Trade Organisation at the end of the General Agreement On Tariffs and Trade discussions created a framework in which global trade is likely to continue. This has already formed the basis on which Indians are planning economic management.

Globalisation has made information technology the backbone of economy management. Issues relating to economy management may dominate and information technology, in turn, may change the meaning of globalisation as it makes national borders less significant. However, trade blocs may emerge. Kenichi Ohmae's The Borderless World has identified three large blocs: Japan and the Pacific rim countries; the European Union and NAFTA.

India recap

Since Independence, India has enveloped itself in a very highly regulated economy. The British Raj had ended and the 'Permit/License Raj' took over. It ensured that the country be bound by the most elaborate bureaucratic red tape. The nation's global competitiveness was reduced drastically.

The World Competitiveness Index, published by the Geneva-based World Economic Forum in its World Competitiveness Report, measures competitiveness by eight parameters: (i) openness, (ii) government, (iii) finance, (iv) infrastructure, (v) technology, (vi) management, (vii) labour and (viii) civil institutions.

On the list of 53 nations, India ranks a pathetic 45. For openness it scores 51, government 23, finance 38, infrastructure 48, technology 36, management 38, labour 30 and civil institutions 30.

When we look at improving our financial services sector in the global marketplace these indices should help in initiating the correct action and making course corrections to policy. Then India's overall competitiveness is sure to increase.

But let us be warned. The 'competitiveness of a country' is a very useful, though misleading, phrase. Michael Porter's The Competitive Advantage Of Nations puts the debate to rest by pointing out that companies compete and that the competitiveness of individual companies is going to depend a lot on business infrastructure like financial services.


Indian banks and IT - quo vadis, was published in the April-June issues of Management Review. The author, Indian Institute of Management Bangalore's, Professor S Jagdish says: 'Automation and mechanisation of banking processes in India have been debated since the 1970s. The National Institute of Bank Management had appointed a study group for the purpose as far back as in 1972; the Talwar Committee had addressed the issue in 1976 and these were followed in 1983 and 1988 by the Rangarajan Committee, whose recommendations did lead to some activity.'

As was expected, the exercise was resisted by bank employees and it was not until 1983 when an industry-level agreement was reached between the Indian Banks Association and the workmen's unions that mechanisation was eventually accepted.

In 1994, the Reserve Bank of India stipulated that 4,000 bank branches be computerised by end of 1996. The issue has since become urgent.

Indian banks, I mean the collection of all public-sector banks in the country, were, in the meantime, caught up in the global tide of phenomenal advances in information technology, immensely influencing all transaction-intensive businesses.

Economic liberalisation and consequent competition from foreign banks and domestic private banks also turned out to be powerful catalysts in hastening a change of the mindset.

Most new entrants to the banking sector have started out with an IT infrastructure with benefits such as a minimal workforce and costs, the ability to offer clients well focused transaction applications relying upon exclusive databases and a head start with the state-of-art technology without the economic and cultural burden of legacy systems.

IT has clearly helped such banks even out in terms of defining market positioning, concentrating on class banking, catering to a limited number of highly profitable corporate houses and high net worth clients and de-emphasising the low-profit, high-volume mass banking. The effects of these strategies are evident in their bottom lines and customer orientation.

Unfortunately, Indian banks, even now, appear to be focusing more on computerisation and not enough on meaningful use of IT in enhancing their overall strengths.

With some Rs 3 billion already invested in IT, and Indian Banks nowhere near the targeted automation of 4,000 branches by the end of the year, the question now is: Has this investment helped banks at all?

In any business, IT cannot be an end in itself. It must earn its keep through contributions to the value-addition capabilities of the organisation.

Banking is no exception. The key objectives of automation in banks were succinctly set out by the Rangarajan Committee: Improvements in customer service, decision making and productivity.

It is interesting to note that only 5,000 of 65,000 bank branches in India have been computerised. At this rate when will all the banking system get weird?

For an effective IT applications solution, the industry will also have to address the larger issue of creating the relevant infrastructure.


This will call for urgent and specific policy measures. The first is to build a 'National Information Infrastructure'. The departments of electronics and telecommunications are thinking on these lines already. In the government's Eleventh Five-Year Plan Rs 7 billion has been earmarked for building the National Information Infrastructure. What this means is that there will be nation-wide connectivity of telecommunications and computer networks so that all key sectors of the economy are fully supported.

The government has also set up a committee under the chairmanship of Bimal Jalan, member-secretary, Planning Commission, and the Reserve Bank of India's governor in waiting, to suggest policy measures to speed up the growth of the Internet in the country.

We can hope that the explosive growth of independent Internet services providers will lead to the rapid development of the National Information Infrastructure in India.

As far as telecommunications itself is concerned, the National Telecom Policy has provided the basic background for the entry of the private sector and multiple players in the system.

The Federation of Indian Chambers of Commerce and Industry task force on telecom has come up with a set of radical ideas to overcome the impasse due to the slow pace of development.

The present norm of granting duopoly in basic telephony should be scrapped and multiple players must be allowed to compete. This will lead to the market dynamics necessary for a significant rise in telephone density.

A function of the Telecom Regulatory Authority of India is to facilitate competition and promote efficiency in the operation of the telecom services so as to encourage growth of such services. Then how can one player, DoT, have a monopoly over nation-wide STD and international calls?

The SBI case

The State Bank of India has taken the initiative to set up an institution for information technology at Hyderabad and has initiated information technology in its various branches. The position today is:

SBI is on its way to become a world-class bank. It's transforming work environment from manual to computer-oriented procedures. It is revamping its work culture and systems. Also, as mentioned in Dr Rangarajan's Second Committee report on 'Computerisation in banks', SBI is fast marching towards the concepts of a single-window and on-time, real-time transaction processing environment in relation to branch banking.

Technology has been adopted as an integral part of the business of the bank. The synergy out of the merger of computers and communications has become the tool for providing technology related products to customers. Over 240 branches are already fully computerised. About 700 branches are partially computerised, 1,000 branches are slated for full computerisation in 1996-97 and another 1,000 during the next year.

ATMs have been set up at four urban centres and an additional 40 are proposed. These will also join IBA's ATM shared network. What is more, over 750 branches/offices, including all administrative offices, large, medium and all district headquarters branches across the country have been networked using SBI Datanet - a PC modem systems.

Satellite links are being used for reaching remote offices/branches. The 'SBI email' system is being used across the bank and Internet connectivity is also being set up to reach the world outside. Interconnecting fully computerised branches is rapidly becoming a reality.


Technology absorption is as important as technology induction. Orientation towards technology is a prerequisite. Rendering fast and efficient 24-hour, 365-day services, anywhere, including at the customers' sites, and providing such services that customers need, at competitive rates, are the challenges.

The banking industry is moving towards this. The State Bank of India is moving faster as it is a leader and a premier institution.

But Is the pace of computerisation and application of IT adequate in our financial services sector? As of today, only 5,000 out of the 65,000 branches of all the banks in India have been computerised.

Looking to the dimensions of the State Bank of India and its network within the country and abroad, should we not think of a more massive and a greater leap forward?

At the rate at which even SBI is computerising, when will it be at par with the leading banks of the world in the US, UK, Germany and Japan?

McKinsey's representative in India, Kito de Boer, pointed out in a talk last year, that Indians are suffering from an "aspirations deficit".

He said: "This is a personal view, but I feel that India as a whole suffers from an aspirations deficit. This is a great and fine nation going through a period of discontinuity that is of historic and unparalleled proportions.

"Yet it is a source of constant wonder that most of the clients, people and institutions we deal with are prisoners of their aspirations. Most of our fiercest battles at McKinsey are to persuade, bully, cajole and plead with the elite of this nation that the future does not have to be an extrapolation of the past. There is no sacred law that says peanuts have to be nudged.

"It's a choice with material consequences. Correcting this aspirations deficit is a big opportunity.

"For example, India should aspire to a GDP growth of 10 per cent, not 7 per cent. India should aspire to 100 per cent primary education. India should aspire to double the level of international trade. These are perfectly achievable aspirations which are powerful, energising and liberating. Just look at the impact or raising the FDI aspirations from $2 billion to $10 billion per year!

"The magnitude of the aspirations deficit is the one message we would like you all to think about. We recognise that the boundary between vision and illusion is narrow and that the gap between illusion and delusion is imperceptible. What is clear, however, is that to exceed one's aspirations is a tragedy and a failure of courage. At McKinsey we never want to hire anyone who regularly exceeds their aspirations.

"The world is expecting more of India than India is of itself."

Should we not raise our sights and think of stepping up the pace and the extent of information technology within the banking system? I do not know of the specific problems faced by the banks in the application of IT. But one thing is obvious. With experience gained so far, it should be possible for us to learn our lessons and then go for maximum impact, right across the banking and financial sector.

Some solutions

I would suggest that instead of investing directly in the infrastructure of information technology a strategy of getting the hardware of information technology on lease from the private sector or a source other than the Indian banks must be adopted.

This will ensure that the responsibility, maintenance of the equipment and keeping the system up to date will not be of that of Indian bank.

To make the leasing of equipment attractive, the government should give concessions, as it has done in the case of wind farms. The Income Tax Act could be made to provide for 100 per cent depreciation in the first years itself for any investment made in information technology. This will ensure that the leasing charges get substantially reduced. Then the entire manpower of the banks can focus on applying the information technology systems in their operations.

The next issue is: Are Indian banks following the correct strategy in focusing on branches? What about the total tree of the Indian banks? Should we not look at the whole banking system as one concerned with the efficient funds management?

As a customer, I have an acid test: How much time does it take to get an outstation cheque credited into my account? The Harshad Mehta scam proves that manual systems are time consuming and provide opportunities for fraud.

I am not advocating a movement which claims that IT will prevent frauds. In fact, there is need for better security systems and 'cyber laws' to prevent newer techno frauds. The point I am highlighting is that if our banking system gives faster service using IT, to that extent the pace of economic growth will be enhanced. If outstation cheques can be cashed quickly, the need for working capital for any industry may come down marginally. Every little bit helps.

How do we look at the whole banking system and apply IT solutions? There are specific companies which have focused on development of software for the financial services because all over the world financial services are one of the major users of computer software.

For instance, CMC, the public-sector enterprise of DoE has, with NCR, developed a software for the banking sector. There may be other competing solutions available. We don't have to reinvent the wheel but quickly see which option is the best possible and standardise on that.

We must also ready a time-bound programme to infuse necessary pace.

The there is the danger of India facing capital account convertibility by 2000 or beyond. The Tarapore Committee Report is already before the government and if capital account convertibility is imposed, the Indian rupee will be more vulnerable to speculations internationally.

What with the recent fluctuations in the currencies of countries like Thailand and Malaysia, this dimension of globalisation of financial services is an issue which India will also have to face.

In this context, therefore, it will be absolutely necessary to have a 100 per cent application of information technology right through our financial services system.

One of the causes for the Harshad Mehta scam in the early 1990s was the manual system in the public debt office of the Reserve Bank of India. This provided a float of 15 days which was utilised by unscrupulous elements to perpetrate the scam.

Imagine, the dangers we face if with the full capital account convertibility a part of our financial system is still on a manual base, providing the requisite float for speculators to wreak havoc with our system.

In short, therefore, I would focus on three broad areas on which action has to be initiated. The first is to improve the information technology infrastructure in the country by building the national information infrastructure.

The second would be to adopt policies which will make access to computer systems and information technology systems easier and affordable.

The third area is adopting on imaginative strategy for applying information technology within a time-bound period right across the financial services sector of India.

If we take action on all these three areas, I am sure India will be ready to meet successfully the challenges of global competition in the years to come.

Previous columns: Critical mass | T.R.a.I | Santa Clause 11(2) | The Broadcasting Bill | The death of distance | S.O.S, getting the message out of the bottle | Force 7 from FICCI | Of railroads and info highways | Techno Politics | Cheating death: Ways to resurrect ITI | The HAM-handed miracle | Electronic governance | Which came first? | The four-engine design | Learning to learn | Heads 'n hands | Post-mortem | Where's the cash | Mr T S Eliot's digital wisdom

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