FOCUS: BFSI: Charge of the Bank Wagon

In the liberalization and financial reforms era, banks and financial services
are all about information and competitiveness. And we can see the change in
mindset coming in at an inspiring pace. India’s largest PSU bank, State Bank
of India, announced two major IT investments entailing an outlay of Rs 700 crore
in the past year. More than anything else, it put to rest the doubts of many
other banks smaller than SBI, but with the same baggage of legacy. Competition
from neo-banks in the private sector–those that had the advantage of starting
off on a clean slate and small scale–have started threatening PSU banks, by
moving within striking distance. Private banks are skimming off the creamy layer
of corporate business, and banking habits of consumers are also getting changed.

“There are
10^11 stars up there. That used to be a huge number. But it’s only
100 billion. That’s less than the national deficit! We used to
call them astronomical, now we should call them economical”

Richard Feynman

Public sector banks account for 80% of the total assets and income while
foreign and new private sector banks account for 8% and 6%, respectively. Public
sector banks also account for 86% of the gross non-performing assets (NPAs), a
measure of risk and inefficiency. The government does not intend to infuse
additional capital to support the growth of PSU banks. It intends to reduce its
equity stake to 33% in PSU banks, retaining the public sector character of these
banks. The capital market gives lower discounting to stock prices of PSU banks,
when compared to private sector banks, due to the perceived inefficiency, lower
productivity, and higher NPAs of the PSU banks. Various regulatory requirements
designed to help India participate in the global financial services industry are
to be complied with by these banks. Technology is the only route to achieve
this. This is the milieu in which a PSU bank chairman, an experienced banker,
operates. And these are the very circumstances that are forcing these chairmen
to accelerate the technology efforts in their respective banks.

Indian banking product vendors like Infosys, TCS, and iFlex, have the
experience of hawking their products in the global market. Until the past few
years, these vendors found the Indian market to be a nightmare. The heads of PSU
banks wouldn’t go in for their products because it had dreaded structural
implications–centralizing the present 4-tier structure in PSU banks. Even
those that bought the ‘centralized core-banking solution’ logic wouldn’t
take the decision, deferring it to a time when their term got over. In fact, one
prominent PSU bank raised an RFP for computerization three times over and
deferred it to a point that even their World Bank loan for the project lapsed.

Moving to the center
But now many of the PSU banks have decided to go in for a centralized
core-banking solution. The move is highly investment intensive in terms of the
infrastructure build-up, software, and training costs. According to reports, SBI
would invest Rs 500 crore in the IT architecture project and an additional Rs
200 crore in the trade finance project over the next three years. This would
result in around 35% of its staff being redundant (about 75,000 employees). The
bank has already shed 20,784 employees in a VRS exercise that costed Rs 2,271
crore. However, the bank is not planning another VRS and has reportedly decided
to retrain and re-deploy these personnel and gradually reduce staff through
natural attrition. But the move is strategic for SBI. And so it would be, for
most other PSU banks as well.

The central theme behind computerization in PSU banks through the nineties
has been that of automation of tasks at the branch level for manpower
productivity and quick customer service for customers visiting the branch. The
customer belonged to the branch and not to the bank. These systems were in the
form of isolated front office computerized counters for ledger posting,
balancing of books, interest calculations, printing passbooks, periodical
statements, and reports. The branch was connected through a local area network
or a Unix-based machine running an RDBMS. The back office of the bank per se had
limited computerization. There was limited or no connectivity amongst branches
and their regional and zonal offices. There was no bank-wide MIS available and
no connection between the organizational layers. Total branch automation is a
sort of a movement that continues even today with banks gradually covering
important branches.

The management of the bank gets no information to be able to proactively
manage the business. For example information on maturity patterns of assets and
liabilities, sensitivity of interest rates structure changes, or access to
computerized databases for credit and investment management function. To plan
and monitor the profitability of any bank, the senior managers would need a
variety of information placed in the context of their decision-making. Says AG
Prabhu, banking technology consultant, “The system offered neither a
customer-centric view nor a bank-wide view. Linkages with electronic banking
channels for funds transfer and bill payments and settlements were poor. With
the overall risk profile of the bank going up, the entire bank is affected and
the situation needs to be remedied.”

Architecture imperatives
The three major parts of a bank’s technology imperative are–transaction
processing, information systems, and strategic technology–with full
integration amongst them. The topmost priority for PSU banks is to put the
transaction processing in place over the next three years. In the meanwhile,
electronic banking channels and payment systems for funds transfer and bill
payments can be taken care of. A corporate MIS for the bank should be rich
enough and complete with costing and pricing of different products and services,
external data like socio-economic parameters and profitability ratings for
individual customers, companies and groups of companies, for the management to
take operational as well as strategic decisions for all functional areas of
banking. Various analytical models can be applied on this MIS data for areas
like asset liability management, optimization of investment portfolio, and
optimization of credit allocation to different sectors and regions.

Deepak Ghaisas, CEO (Indian operations) of iFlex Solutions, says–”Banks
should go in for a BPR before they embark on a centralized solution. Don’t ask
us to customize our product to your existing process. It would result in merely
automating your existing process along with all its inherent
inefficiencies.” The VRS offered to bank employees had an overwhelming

But the resultant impact in many bank branches was the inadequacy of staff to
man counters. “Such a situation can be avoided if a BPR is done,” adds

What after all is the IT architecture suited to a bank expecting growth?
Simply put, it is an overall systems framework for the development and
implementation of application systems. Such a framework comprises common
systems, components, designs, and standards as well as shared tools, facilities,
and infrastructure that can be employed across multiple application systems,
reports an industry white paper. The most critical of these is the common
bank-wide critical systems, rather than systems that are personal, local or
departmental in nature. The scope of an enterprise architecture lies beneath the
various application systems of the bank, serving as a common platform or
foundation. At the same time, it is positioned independent of the implementation
details of particular computer hardware, operating systems, communication
protocols, and other specific configuration characteristics. Such an
architecture should be able to interface with a wide array of channels and other
systems like–dealing room systems, ALM systems, portfolio analysis system,
Internet trading system, CRM system and institutional delivery channels like
ACH, and SWIFT. The principles on which this architecture is built are:

n  Processing
high volumes of data with scalability and continuous availability;
n  Separation
of application services from data management and user interfaces through layered
multi-tiered information access to data warehouses;
n  Inter-operation
of application components through message-based architecture;
n  Platform-independence
of application services;
n  Flexibility
for migrations.

This then, is what the centralized core banking solutions are all about.
Interestingly, RBI does not advocate nor oppose a centralized core banking
architecture. In a recent speech to IBA members, RBI deputy governor Vepa
Kamesam said–”One of the prime thrust areas for the future would be
completion of branch computerization and networking of banks.” While
technology has resulted in facilities such as ‘Total Branch Automation’, ‘Single-window
Service’ and other account-related functions in the recent past, the thrust
areas of the present relate to the use of technology for providing centralized
systems for banks where centralized data exists with decentralized access to
branches and their constituents. This would result in the customer being treated
as a customer of the bank as a whole rather than of a particular branch.

Overcoming centralization woes
So what are the caveats of centralized core-banking solutions? It takes too
long to implement and is investment-heavy. Says Prabhu, “By the time the
PSU banks implement the core-banking solution, the private sector banks would
have taken a major lead in terms of business.” Adds H Tripathi, managing
director of InfraSoft–”It is a mirage to create a 1,000-branch core
banking solution which will take five years to implement.”

Also, there is no proof that it will actually work though theoretically
centralization has got its benefits. Some of the core-banking projects signed up
in the past two years have reportedly gone too slow. For instance, Syndicate
Bank spent Rs 25 crore and managed to centralize only ten branches in two years.
Similarly, Vysya Bank, which went in for Profile–a core banking solution from
Sanchez, has reportedly managed to put 35 branches, against a plan of 200. The
fact is–the pace is too slow.

The real issue is the readiness of the bank to respond to a centralized
system when the structure of the bank itself is not so. A PSU bank has four
tiers–the branch, region, zone, and HO. These are actually centers of
administrative and executive powers. Monitoring of NPAs and suit filing and
recovery are the responsibilities of the regions and zones. Rural banking which
feeds the treasury and rural credit is the responsibility of the rural branches,
regions, and zones. A core banking solution demolishes this entire structure.
Says Tripathi, “Banks should be realistic and understand that a centralized
solution has got its structural and business implications. The fact is there is
no functional proof of the concept under the present structure, though a
centralized solution in itself is not wrong.”

But technology is not without choices. There are middle-of-the-road options
available. One is called cluster banking while the other is the ASP mode. In
cluster banking, interconnections are done through an ATM switch. “The
investment and time-to-deploy is reduced to one-fourth that of a centralized
solution,” avers Tripathi. Bank of India has deployed ten cluster servers
for 600 branches for ATM connectivity and MIS consolidation. Similarly,
Corporation Bank has gone in for a cluster-banking approach for 300 of its
branches. The ASP option is more suited for the smaller banks like co-operative
banks. The advantages of the ASP option are numerous, but the practice is yet to
take off. Presently there are two ASPs in the banking area–one hosted jointly
by IBM, Midas Kapiti, and Indus Ind Infotech and another a JV between HDFC,
iFlex, and Lord Krishna Bank.

Managing risks
The New Basel Capital Accord or Basel II seeks to contribute to the safety
and soundness of the financial system of a country by implementing minimum
capital requirements on credit, operational and market risk; executing new
supervisory review processes; and improving market disclosure. Complying to the
Basel II requirements is important for any Indian financial institution to
participate in the global financial services industry.

Basel II requires banks to collect and store a minimum of two years worth of
historical data with full data integrity and timeliness, effectively integrate
different risk types and guarantee accurate calculation of risk measures–possible
only with a robust IT architecture and sound reporting and analytic capability
to predict and analyze performance and risk data.

Data in decentralized systems like the Indian public sector banks is
unconsolidated. Such banks will find it difficult to effectively manage credit
risk. Operational risk management, heavily dependent on statistical probability
distribution models, would be impossible with scarce data to begin with.
Analytic tools manage market risks with the results interpreted to comply with
regulatory reporting and risk disclosure requirements. A complete risk
management strategy therefore requires a centralized data warehouse with the
requisite reporting and analytic tools. The idea is to capture
inter-relationships between various types across geographies, departments, and
lines of business. RBI’s Kamesam said–”It is imperative that the banks
in India study the proposed capital adequacy framework, identify the transition
path and initiate steps to be fully prepared for adoption of the new standards
when introduced.” Specifically about risk management, Kamesam exhorted–”Banks
need to evolve an integrated risk management system depending on their size,
complexity and the risk appetite.”

The risks associated with the bank’s operations have been complex and
large, requiring strategic management. RBI has issued guidelines on ALM systems
and on integrated risk management systems in banks. Due to diversity and varying
size of balance sheets, banks have been advised to design risk management
architecture, dictated by the size, complexity of business, risk philosophy,
market perception and the level of capital. To fine-tune risk management systems
in banks, RBI has since issued draft guidance notes on credit and market risk.

The Reserve Bank is making rapid progress towards setting up ‘Real Time
Gross Settlement’ (RTGS). RTGS, when operational, will provide a new
generation of high value payments systems that would enable the core of the
banking system across the country to make secure inter-bank payments across the
country. The transactions will cover the entire general transactions and central
accounting of the RBI, including the bank’s general ledger. It is expected to
enable about 205 Indian banks and financial institutions to interface directly.
By underwriting all payments with collateral held at the Reserve Bank of India,
the RTGS system will reduce ‘systemic risk’ in the Indian banking system,
thereby providing increased integrity and security for all inter-bank
transactions. Improvements are also being brought about in the payment system
through the Centralized Funds Management System (CFMS), which enables funds
managers of banks to obtain a national position of balances in their accounts
with the Reserve Bank. The CFMS covers the four major metropolitan centers and
would soon be extended to most other locations of RBI offices.

The initiatives are expected to reduce all kinds of costs that exist in the
financial marketplace. These costs result in the widening the bid-ask spreads
and form a kind of social tax or a deadweight loss on savers and investors in
the economy. A favourable impact of the IT initiatives is evident on the
transaction costs, inventory-carrying costs, and most importantly on adverse
information costs and the spreads, in general, are beginning to narrow down in
the Indian banking sector.

CRM and banks
Financial institutions are developing more intensive knowledge about retail
customers and corporate clients so that they can execute relationship management
strategies designed to enable them to interact with individual or corporate
customers in the most appropriate and desired manner.

A CRM term that’s now emerging in the financial industry is C²RM that
stands for corporate client relationship management. A team comprising product
specialists anchored by a relationship officer manages the many-to-many
relationship with the corporate entity and a customized product set. CRM, retail
banks’ customer relationship management is designed for a large volume of
customers, while C²RM is designed for a more complex product set used by fewer
clients who are corporate entities. Both CRM and C²RM depend on internal and
external data. Execution of CRM and C²RM relies on data and technology to
create knowledge about the customer or the client. Banks combine internal data
with data obtained from external sources to create a repository, a data
warehouse. This is further analyzed to create customer or client profiles to
identify opportunities. This analysis results in customer intelligence that can
be used to decide on actionable points to maximize business opportunity and
minimize risk.

People often think CRM is about call center or sales force automation.
Effective CRM usage in financial services helps improve customer acquisition and
increase cross-selling. But this has to be applied consistently across the
entire enterprise.

That is, for the project to succeed- there has to be a one-view of the bank
and a data warehouse in place. Unfortunately, this is not the case for most
banks in India, including the private banks that may be a shade better in that
these banks have a centralized architecture and integration of multiple channels
of customer delivery. Even those who have CRM solutions deployed, the benefits
are “on the way”. But definitely, these are not lost cases. CRM
requires the discipline of science, coupled with the skill of an art. CRM itself
is a long-term vision but short-term benefits can be proved–for example, by
simply optimizing channels, banks can save on mailing costs and increase return
on marketing campaigns. CRM has evolved from being a technology-driven
sophisticated tool for marketing to being a key component of business strategy
in the financials services industry.

In the private sector, ICICI Bank and HDFC Bank have put in place the
building blocks for an elaborate CRM solution. UTI Bank has implemented a CRM
software with respect to it’s priority banking offering for it’s high net
worth clients, where the software carries out profiling and analysis, contact
management, data analysis, and cross-selling. The bank is currently evaluating
various products for its mainline CRM. Among foreign banks, HSBC’s CRM system
is a proprietary sales support system developed to enhance the bank’s response
to its retail customers. HDFC Bank has also taken the first step by investing in
a data warehouse solution procured from i-Flex.

ICICI Bank has invested in a large Teradata data warehouse, which allows
business managers to get a single-window view of various accounts of a customer
across different products and channels. Currently, a powerful Campaign
Management solution–NCR Communication Manager–is being implemented at the
bank, the country’s second largest. In the operational CRM space, investments
in a Siebel sales force and customer service and support application have been
made. ICICI Bank has started to link customers’ accounts. An employee manning
the call centre can now get a unified view of all the relationships that a
customer has with the bank. The bank is expecting two clear benefits–one, the
cost savings in acquiring new customers, and the second is much improved
customer service.

Most organizations have a variety of “touch points” with their
customers, including relationship managers, sales force, sales office, field
service, help-desk, accounts, branches, call centers, interactive voice response
systems, kiosks, web sites, mobile telephones, interactive television, automated
teller machines, electronic mail, letters and fax. Customers are now demanding
multiple channels and consistent 24×7 service across all of these channels
irrespective of their location. In effect, banking services can be accessed
“Any time, any place, anywhere.” Banks must therefore provide a
synchronized and consistent level of service across all channels, integrating
new technologies into their channel mix. It is becoming increasingly important
for banks to manage their brand across all customer touch points, ensuring
consistent appearance, and also consistent levels of service to their customers.
The ability to launch new products across all these channels in a coordinated
and cost-effective fashion is vital. The use of any system that can manage all
of these channels, in an economical, efficient and proactive manner, and the
leveraging of this capability to enhance customer relationships, will
distinguish the successful players. Banks who are able to move quicker will see
this as an ideal platform on which to steal a march on slower rivals and gain

Easwardas Satyan

Future of ATMs and Smartcards

From bartering to cash to cheques, ATMs, credit cards, debit cards and
smartcards–the means to purchase necessities, luxuries and equities have
evolved greatly overtime. ATMs, the Internet, call centers, instant messaging,
mobile phones, and wireless-enabled handhelds are giving people round-the-clock
access to cash, retail goods and services. In this age of accessibility, people
no longer need to visit their bank to retrieve their money–it comes to them.
Financial service sector organizations are competing with one another to deliver
to their customers the most sophisticated access points to funds.

has lead to the development of technologies such as smart-cards, which have the
capability to store large amounts of personal and account information more
securely; and to the re-invention and enhancement of traditional, remote
channels such as the ATM.

It is not only the emergence of new markets that have lead to substantial
growth, but software application advancement is also driving the next generation
of ATMs. New open standards for ATMs are enabling closer integration into a bank’s
channel mix. This allows banks to have a more consolidated view of accounts,
thereby giving customers a more seamless banking experience as they move from
channel to channel. Internet technology has led to the development of the
browser-based ATM, which enables collaboration with other electronic channels
even easier. At present, ATMs can issue coupons, prepaid telephone cards, stamps
and other profit generating items as well as print statements and dispense

Even further down the road, biometric technology may be used to recognize
customers by their physical characteristics and used as a tool to guarantee
cardholder verification. Graphics and sound will become more appealing, creating
a more user-friendly experience. Coupled with the CRM capabilities and the power
of targeted marketing, the ATM can be a powerful as well as profitable tool for
financial institutions.

have been a lot slower to take off. A lot of this can be attributed to poor
marketing and a failure to understand their full potential. Ovum predicts that
2.7 billion smartcards will be shipped in Europe annually by 2003. On a global
scale, the US has made rapid developments in multi-application smart-cards and
in Asia, there has also been huge growth. The power of a smart-card comes from
the data that can be loaded onto the embedded microchip, and used to facilitate
a variety of functions from mobile telephone communication, car parking payment,
to identity verification during internet banking. The big draw card for
smart-cards in the financial services industry is the security factor and their
capacity to reduce fraud. Smart-cards are a secure way for customers to
communicate online with the bank, as well as transact over the Internet. They
can also be used for network security, as smartcards are ideal for carrying
digital certificates and private keys that individuals will need to operate
within a PKI.

In the past, the major inhibitors to smartcards for financial institutions,
have been their limited capacity and cost. However, in recent times, memory
capacity of smartcards has increased significantly, and combined with dramatic
price cuts, the cost-benefit arguments that have traditionally weighed against
this technology are being rewritten. Put simply–banks are implementing
solutions which enable their clients to manage their money while faced with this
multitude of spending choice securely, conveniently and on a global scale.

Easwardas Satyan

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