BFSI: Banking on IT

Banking and financial services (BFS) continued to be the domestic IT market's
best-loved vertical-pegged at Rs 7231 crore, it accounted for 22% of the total
IT spending in FY 2003-04. The initial cycle of automation was finally over for
the banking industry, with the exception of a few laggards. Some of the areas
where FY 2003-04 saw an upsurge were analytics, risk management, business
process management (BPM), real-time gross settlement (RTGS), risk management,
shared ATM network services and outsourcing in the form of remote infrastructure
management.

Whatever new technologies were in the offing one thing became certain: as Dr.
Bimal Jalan, ex-Governor of Reserve Bank of India (RBI), postulated clearly,
"All IT adoption would henceforth happen in the banking sector only with
enhancing the profitability factor." All the events during FY 2003-04
reveal a trend that broadly fits in with Jalan's remarks-for, with respect
to IT adoption, the larger section of the industry was motivated more by RoI
rather than by desire to embark on brand building exercises.

Implementation
of core banking solutions followed an interesting pattern in 2003-04-most
private sector and MNC banks, and even the large PSU banks have already adopted
these. Therefore, it was turn of the remaining smaller PSU banks as well as the
cooperative banks that were still in the TBA (Total Branch Automation) phase to
go in for core banking with a vengeance. With RBI directives necessitating
adoption of centralized solutions, many banks that are yet to adopt core banking
solutions opted at least for consolidated MIS solutions. This was particularly
true for a number of smaller co-operative banks for whom core banking product
solutions were exorbitantly priced at Rs 5-8 crore. Further, even keeping in
mind AMC fees, consolidated MIS solutions offer a more attractive option-where
a bank is charged close to 10% of the license charges for a consolidated MIS,
the amount goes up to 20-25% for core banking applications.

TBA was the flavor of the year for most rural banks. Quite understandably,
since these banks cannot afford to burden their customers with the cost of
technological initiatives. Branch automation on an average cost anything between
Rs 5-7 lakh per branch, while a core banking application cost up to Rs 35 lakh
per branch. Given India's size and the gradually improving nature of our
communication systems, most PSU banks followed a model that had a mix of branch
automation combined with the centralization of data. These banks followed the
80/20 principle as regards centralized solutions insofar as a centralized
solution was adopted for the bigger branches, while the other branches continued
to follow the branch automation model. Core banking provided solutions to 35-45%
out of a total of 68,000 bank branches in the country, accounting for about 70%
of business volumes.

But even for several large PSU banks that went in for core banking in FY
2002-03, payment spilled over to FY 2003-04 since the entire adoption cycle was
not yet complete. For instance, Bank of India's core banking solution resulted
in an order of Rs 80-100 crore per annum spread over 2.5 years. Canara Bank
invested Rs 100 crore over a three-year timeframe between April 2002 to March
2005, while Bank of Maharashtra invested Rs 150 crore on core banking during FY
2003-04.

Developments on the regulatory side also created a compelling case for the
automation of Indian banks. During the year, RBI goaded Indian banks to improve
their risk management system by building an investment fluctuation reserve (IFR),
by making provisions for problem assets, and by putting in place systems that
monitor unhedged external liabilities. The RBI insisted that along with
risk-based internal audit, banks must also put in place proper risk management
architecture, strengthen IT, address human resources and set up compliance
units. While many have already adopted some of these measures, a host of other
banks are expected to do so this year.

In India, the Money Laundering Act 2003 worked out the modalities of
disclosure for financial institutions regarding reportable transactions and
confiscation of the proceeds of crime, declaring money laundering an
extraditable offence and sought to promote international cooperation in the
investigation of money laundering. With the Act likely to come into force in
2004, banks in India have had to consider the prevention of money laundering a
critical business-sustaining activity. Accordingly, eight PSU banks besides
private banks like the ICICI, which has offshore entities, have started
deploying different anti money laundering (AML) systems.

With Real Time Gross Settlement (RTGS), expected to bring India's bond and
money markets on par with international practices, finally becoming operational,
many of the urban branches in 128 cities in the country have fallen into the
ambit of RTGS. The system went 'live' on March 26, 2004, with State Bank of
India, HDFC Bank, Standard Chartered Bank, and Saraswat Co-operative bank being
the first to adopt it. 19 more banks joined the RTGS fray soon after; these
include Bank of Baroda, Punjab National Bank, Canara Bank, Union Bank of India,
Indian Overseas Bank, Central Bank of India, Dena Bank, BNP Baripas, IndusInd
Bank, and ING Vysya Bank. RTGS was implemented in India by LogicaCMG in
collaboration with Sanchez Capital Services, while the Hyderabad-based Institute
for Development and Research in Banking Technology (IDRBT) developed the
structured financial messaging system (SFMS), a web-enabled software for
inter-bank messaging in RTGS.

With SEBI extending Straight Through Processing (STP) to the entire market to
smoothen the transaction process, the market regulator came up with a roadmap
that focused on areas such as disclosure norms, accounting standards and
corporate governance as also on improving the quality of intermediaries. The STP
initiatives were part of the SEBI efforts to reduce the settlement cycle to T+1
by April 2004, and these reduced the amount of time required to execute and
settle a trade by improving the communication between the three relevant parties
— the brokers, the custodians and the fund managers. The new secure messaging
system offered by NSDL largely automated the communication between these
parties.

The Indian banking industry was in a transition phase. On the one hand, the
PSUs, the mainstay of the Indian banking system, were in the process of shedding
their flab in terms of excessive manpower, excessive non Performing Assets (NPAS)
and excessive governmental equity, while on the other hand, the private sector
banks were consolidating themselves through mergers and acquisitions. This made
it an ideal time for the introduction of Business Process Management (BPM). A
large number of BFSI institutions like Citibank, ICICI Bank, HDFC Bank, IDBI
Bank, BNP, Standard Chartered Bank, Bank of Punjab, State Bank of India, besides
financial services like GE Countrywide, and insurance players like Max NewYork
Life Insurance, Bajaj Allianz and ICICI Prudential Life Insurance adopted BPM
this fiscal.

IT infrastructure outsourcing was yet another interesting trend that emerged
during the year. While Bank of India outsourced its entire IT activities to HP,
others like HDFC Bank, BNP, IDBI Bank, Standard Chartered Bank and Morgan
Stanley outsourced their IT infrastructure management partially to integrators
like CMC, Wipro Infotech and Netmagic who have their own data centers. Some, who
were willing to develop their own IT skill sets, tried spinning it off into a
separate business altogether, with this taking two paths-either that of
products developed, like s1 (the Internet banking solution created by Security
First National Bank), or the creation of a services company that produced its
own applications, like IDBI Intech.

Convenience banking by means of different delivery channels became the
buzzword, with new channels like mobile and Internet banking coming to the fore.
But even as telecom service providers like Reliance Infocomm tied up with banks
like HDFC or SBI to deliver mobile ATM services, this sort of endeavor turned
out to be more ornamental as opposed to emerging as profitable business drivers.
With proliferation of plastic money, Indian banks went for increasing ATM
installation as banking through ATM significantly reduced the costs of physical
banking. More than 7500 ATMs were added during the fiscal, taking the total base
of ATMs in the country to about 11,000.

However, India still has to do a lot of catching up, considering that China
has 65,000 ATMs, UK 100,000 and US 300,000. A number of other functionalities
like utility payments and routine transfers were also included under the purview
of ATMs. For example, currently, from Mumbai ICICI ATMs can be used to purchase
railway tickets, and one expects to see the addition of more such functions this
year. ATM growth was uniform across the country. In the south, Corporation Bank
and Canara Bank added 600 and 300 ATMs respectively, while Oriental Bank of
Commerce went all out in the north, United Bank of India in the east, and Bank
of Baroda and Union Bank of India in the west. UTI Bank even installed an ATM at
Thegu (Sikkim) at a height of around 13,200 ft. mainly for the Army, while SBI
had a floating ATM on a boat for the Kochi-Vypeen Islands.

Some banks like State Bank of India, HDFC Bank and ICICI Bank outsourced
their ATM infrastructure management to third-party vendors like NCR,
Euronetworks and Diebold. Many banks also formed consortiums to share ATM
network services, this being especially helpful for banks that did not have a
strong subscriber base in certain regions to justify their own presence. At
present, there are about 10 such consortiums, with a few of them being bilateral
arrangements. Some of the prominent consortiums include Cashnet, an arrangement
between IDBI Bank, Citibank, Standard Chartered Bank and UTI Bank and CashTree
between Bank Of India, Indian Bank, Syndicate Bank, United Bank of India, Dena
Bank and Union Bank of India, as well as one formed by Punjab National Bank, UTI
Bank, Global Trust Bank, Andhra Bank, Oriental Bank of Commerce and Vijaya Bank.

Rajneesh De in Mumbai

BFS IT Procurement

Banknet India, an IT-focused banking research company, conducted a Special Study
on IT Procurement in the Financial Sector, analyzing 129 IT-related tenders,
RFP, RFI, and Expressions of Interest (EOI) issued during FY 2003-04 by the
financial sector, and also examining the guidelines of major organizations and
regulatory authorities. The survey's salient findings include:

• In India there are no central laws or defined guidelines that public
  bodies must follow for their procure—ment. However, to bring about greater
  transparency in the procurement and tendering processes, Central Vigilance
  Commission (CVC) has issued a few guidelines.
• Indian commercial banks and other financial bodies normally follow a
  3-stage procurement process.
• The financial sector's preferred mode of procurement for their IT
  procurement requirements is through Expression of Interest, while RFI/RFPs
  were used for only 23% of their total IT requirements.
• In terms of hardware, after PCs, the second most popular category related
  to note counting machines, kiosks, etc.
• The most sought after software was operational software, with software
  relating to data warehousing, card management and web-based coming next in
  the demand chain.
• Banks and other financial bodies preferred increasingly to outsource their
  technology related work, resulting in that, 28% of the total tenders studied
  were floated for outsourcing related requirements.
• ATM Management came second, after hardware maintenance, and constituted
  18% of the total outsourcing related tenders.

Source: Banknet India

Insurance: Driven by CRM

After
all these years of being clubbed under the rubric of the ubiquitous BFSI,
insurance in FY 2003-04 merited eparate mention, as IT spending in this sector
has grown from Rs 270 crore to Rs 668 crore. With the LIC monopoly being finally
broken by the entry of nearly 20 private players, this was indeed a sunrise
sector for IT adoption, with CRM being the most-favored technology, with almost
the whole segment taking to it. Insurance companies witnessed unacceptable
customer churn levels, thanks to which they focused on retaining existing
customers.

Additionally, the emphasis was on selling more products to them, improving
profitability this way rather than through seeking new customers.
Customer-focused strategies required CRM to help acquire customers through
various touch points and to translate operational data into actionable insights
which would aid in serving customers proactively.

Bigger players like ICICI Prudential Life Insurance Company adopted CRM in a
big way: where the company was earlier using GoldMines (a sales and marketing
tool) and HEAT (an operational CRM solution) from FrontRange Solutions, this
year it decided to invest in Teradata's CM3 and SAS's statistical tool for
BI. CRM helped ICICI Prudential Life Insurance capture five lakh customers
through effective event-based marketing and lead tracking to cross- and up-sell
products. CRM also helped Aviva Life Insurance, which catered to close to
100,000 customers with this solution, categorize and segment customers and align
them with the products that best suited them.

CRM components such as sales force automation, contact centre segmentation
and campaign management tools matured and found wider adoption with large
insurance companies. The insurance vertical has crossed the IT threshold for
process maturity beyond which an investment in CRM yields good returns. The need
to integrate customer data from multiple channels and to increase sales-force
productivity (including agents') and to run productive marketing campaigns
continued to drive demand for CRM software. Insurance firms spend close to 12%
of their IT budgets on CRM software and services, and this cost percentage
includes operational CRM and spending on BI tools.

Another emerging trend has been that of insurance companies joining hands
with banks by becoming channel partners for insurance. Tata AIG had a marketing
alliance with HSBC, Birla Sun Life had one with Citibank, IDBI and LIC allied
with Corporation Bank, while Kotak Life Insurance had an arrangement with Kotak
Bank. This strategy helped insurance firms increase their footprints to cover a
larger proportion than they could earlier of the customer base in the 20-30
years demographic profile. CRM helped connect a bank's high net-worth
customers with insurance firms.

Insurance may also see a faster adoption of mobile computing in the year to
come. Insurance applications specifically developed for the PDA and interfaced
with back-end insurance management software help agents directly log in queries
and policy details. Most insurance companies also went in for Disaster Recovery
sites.