After a successful stint with IT in financial inclusion, the RBI is now pushing for better reforms in the IT infrastructure of banks, with a special emphasis on PSU banks. By Pupul Dutta
The Indian banking scenario has undergone a makeover in the past few years, courtesy technology adoption. What started as a mere automation of the routine work processes in banks around the 1980s has graduated to a business process reengineering level enabling banks to do business anytime, anywhere and also widening their reach without relying on having a physical process through branches.
Technology adoption has helped banks reach the doorstep of their consumers overcoming the earlier limitations of setting up a brick and mortar branch to reach out to more consumers. A shining example of this would be the Business Correspondent (BC) model wherein representatives of banks help rural customers open savings (no frills) account without actually visiting a bank branch. According to a CII-Deloitte Report on Catalyzing Inclusive Growth in the North: Role of Financial Services and Institutions that was released this year, “With improvement in technology and innovation, the business correspondent (BC) model is now receiving a huge impetus and models such as FINO and EKO have thrived in this environment as they help banks reach out to the unbanked through technology-enabled branch-less banking.”
FINO, so far, according to reports has about 60 lakh customers of which 65% were previously unbanked. At the same time, the EKO model allows branch-less banking to customers through the use of basic cell phones.
The Reserve Bank of India (RBI), has specified some focus areas for banks in its report IT vision document 2011-17 released last year. The report indicated the significance that needed to be accorded to the enhanced use of IT in areas like MIS, regulatory reporting and financial inclusion along with the need for appropriate risk mitigation measures and business continuity management.
“The report envisages banks to work towards utilizing technology for cost reduction of small value transactions, improved customer service and the effective flow of information within the bank and to the regulator. The document further emphasizes the need to move towards an integrated IT environment for tapping the synergistic benefits of holistic system implementation,” said Anand Sinha, Deputy Governor, Reserve Bank of India at a conference.
PSU banks in India are believed to be slow adopters of technologies. This is because of their legacy networks and slow decision making process.
Most banks, adhering to RBI guidelines, have automated the majority of their processes. However, when we talk about IT initiatives then it’s just Business Intelligence (BI) and Core Banking Systems (CBS) that are on the minds of CIOs of PSU Banks.
What the Regulator specifies
According to the RBI, one of the objectives of IT initiatives is to lower operating costs, whereby it turns financial inclusion into a profitable business. This, in turn, will help create a huge upside for banks in the form of stable deposits.
Also, given how important mobile phones have become as a means for communication, using this technology for funds transfer as well as retail payments holds huge potential. As such, mobile banking is the most happening area of development in the banking sector and is expected to complement, and to an extent replace, the credit/debit card system in the future. “While it has the potential to overcome issues relating to cost, infrastructure and resources; it does pose some new issues of its own,” said Sinha of RBI.
RBI has established the National Payment Corporation of India for focused attention on the development and implementation of requisite technologies for enabling new modes of delivery.
Sinha added that, so far, banks in the country had just focused on technologies pertaining to transaction processing, data storage, service delivery, etc. This needs to move a step further. “Our priorities were to make banking better, convenient and more accessible. Now, that banking in India has reached a stage where many such services are running on technology-enabled processes, we can look forward to improving other areas which were not, hitherto, the focus of our attention and have a huge scope for improvement, such as internal management and back end processes,” he said.
Currently, while data storage and retrieval are on computerized systems, the administrative processes are largely manual, warranting huge resource deployment. “This adds to costs, impacts efficiency and reduces the effectiveness of internal controls. Further, in the existing models followed in many work areas in banks, data flows and reporting for MIS as well as external filings require manual intervention and multiple database access or sourcing,” said Sinha.
With banks still largely dependent on manual intervention, the timeliness of data submission as well as the quality of data has been greatly affected. Errors in submitted data and, sometimes, subjective interpretations of data submission requirements, have led to incorrect decisions being taken and, at times, serious consequences in the past.
“Hence, the RBI has taken the initiative in the form of an automated data flow project through which an attempt is being made to ensure that all banks start furnishing reports to the RBI by means of automated processes, which do not require manual intervention. This will ensure that reporting is error free, direct from business data and timely,” Sinha added.
Vendors speak
Most vendors believe that banks are still hesitant when it comes to the adoption of new technologies, with the Cloud being one area where they fear to tread. Given the newness of the technology and apprehensions about security, banks certainly are a long way away from taking advantage of Cloud computing.
BI and core banking rule the roost at PSUs. Banks have also realized the importance of disaster recovery and the majority of them either have parallel software running in the system or a third party vendor managing it for them.
“Traditionally, nationalized banks have been believed to be conservative when it comes to adopting new technologies but there is a change in their mindset. This occurred because of the transformation in the user base and technology. There is the threat of losing younger customers if these PSUs are unable to meet their needs. Therefore, adopting technology is not an option any more. It’s part of survival and successful business strategy,” said Shibu Paul, Country National Sales Manager, Array Networks.
Array’s customers include Bank of Baroda, Axis Bank, Indian Overseas Bank, Punjab National Bank etc. These banks use its application delivery controllers to enhance the availability and performance of their critical applications.
Many large government banks are planning to adopt platforms such as CRM, BI & Analytics and Business Process Management. Though most banks today are using BI, BPM is still at a nascent stage. This had irked RBI’s Deputy Governor KC Chakrabarty, who some months back had lambasted PSU banks for not adopting technology.
“In recent years, we have seen several PSU banks engaging the consultants for projects like bank transformation to increase the productivity of employees and adopt a customer-focused approach for sales and service in order to change the look and feel of the branches. They have also implemented many recommendations resulting in the adoption of cutting-edge technology. However, the adoption of new technology is largely dependent on the various factors such as IT maturity of the bank, the business vision, quality of IT staff and the processes,” said Rakesh Sinha, Director – Banking & Capital Markets, Microsoft India.
Not about cost reduction
Although RBI has stated that one of the prime reasons to adopt technologically advanced solutions is to reduce operating costs, it does not hold true in the current scenario. It’s not always true that a company manages to bring down operating costs albeit it helps in getting a larger chunk of business and managing it better.
“Given the fact that costs do not come down almost immediately, the return on investment in IT proves to be vastly profitable in the long run. For example, data warehousing projects cost a lot for the banks; nonetheless, if implemented properly, banks can transform themselves with the information, which will be made available. Secondly, most of these technologies result in vast savings of manpower which can be deployed elsewhere,” said Sinha of Microsoft.
A noticeable trend in past few years shows that, despite an increase in business over the last five years, recruitment has been low as compared to growth. “Banks have not recruited employees in proportion to the increase in business. Some of them have not even recruited enough to compensate for the people who retire each year,” Sinha said while explaining how manpower reduction had led to lower operational costs.
The use of business productivity tools also helps reduce cost, improve efficiency, increase customer satisfaction and improve employee morale. At the same time it also helps in centralizing processes giving the management better control over the activities of employees.
Beyond CBS
Almost all banks have adopted CBS along with disaster recovery solutions given the imminent threat of data loss due to numerous reasons. However, there is more to IT adoption than just CBS. To begin with CRM helps understand customers better and also in providing better services. Similarly, WAN optimization is being adopted increasingly by many PSUs as it helps in relieving congestion, speeding up file transfers and making applications more responsive.
“Banks today have moved beyond CBS and are deploying lot of enterprise Web applications. These applications are deployed at the central site and are used all over the country and due to this the pressure on bandwidth increases manifold. WAN optimization comes in handy in such situations as it helps in caching and increases the response time of applications,” said Pranay Jhaveri, Vice President, BFSI, Cisco. A case in point is that of United Bank of India, where Cisco helped the bank in achieving WAN optimization.
“Disaster recovery is another compliance requirement so the majority of banks have DR centers. Currently, banks are exploring the option of near site DR as that would bring the costs down and ensure zero data loss,” Jhaveri added.
CIO’s take
Public sector banks are fast advancing in terms of technology and catching up with their private sector counterparts and they also seem to have a clear understanding about the few applications or solutions that they would require.
Ajay Misra, General Manager – ITD, Punjab National Bank (PNB), said, “We are using all available technology including transaction and data management solutions. However, when it comes to the Cloud, we have our own notions and cannot really give up on the apprehensions. The technology is new and, given the sensitivity of the data, we cannot consider it till it gets established.”
Talking about disaster recovery solutions, he said, “DR solutions are a must in the current day scenario. With tons of data that the bank deals with, losing even a single number can be fatal for the business.”
PNB has an off-site data recovery center that boasts of a 100% power backup solution. Oriental Bank of Commerce (OBC), on the other hand, stores its data at a primary data center situated in Mumbai.
Talking about the benefits of technology, SC Sinha, Executive Director, OBC, said, “With improvement in networking technologies and falling prices, WAN optimization is being undertaken in a massive way by most banks. Also, RBI has recommended setting up of video conferencing and online meeting infrastructure that will reduce traveling cost and time. Banks have started revamping their WAN and are planning in this direction.”
Almost all banks have met their targets of financial inclusion and are in the next phase of implementing IT initiatives. A source from Bank of India (BoI) who did not wish to be identified said, “All of our policies are in place and we are all set to start the second phase of implementation of IT projects.”
When asked about security policies and audits for ascertaining the level of protection, most banks have layers of security besides the usual firewalls. “We get internal audits done from time to time so that we don’t leave any loop for a possible hacker,” said a source at BoI.
Challenges
It is an open secret that despite their formidable size and profits, PSU banks still lag behind their private/foreign counterparts. “These banks due to various reasons ranging from labor union conflicts to internal challenges are unable to grow and evolve at the same rate as their private sector kin. Sometimes business teams find it difficult to explain the merits of IT expansion to management and the IT advancement stops there,” said Subir Bhatnagar, VP and Global Head – Solutions, AGC Networks Ltd.
The sheer sprawl across the length and breadth of the country poses another challenge as there are many banks that are still in the process of finishing their CBS deployments.
Another challenge is the awareness level amongst PSU employees. “The awareness level at the critical individual level is high but at the institutional level it is rather low; there is no clear focus on technology being leveraged for differentiation; it is seen as more of an aid to operations. Unless technology decisions become strategic, from being operational as they are currently, things would not change,” said P Venkatesh, Director and Co-founder, Maveric Systems.
The future
The entire process of selection of a vendor and awarding of contracts is tedious and time consuming. Also, the lack of convergence between business and IT is a dampener in the growth of technology. Lastly, the system of transfers in PSUs, where officers must be moved every three years, slows down the pace of any project as it has to restart from scratch whenever a new officer takes charge.
The next level of investment is expected to be in the area of technologies for customer acquisition and retention. It is expected that BPM tools, analytics, dashboard-based approach, breaking down large databases into data marts etc. will have an enthusiastic and fresh infusion into PSU banks. Given the large size of PSUs all these solutions will see huge traction in the coming years.
