M. Guruprasad
Director Research, Universal Business School
Email : mguruprasad@ubs.org.in
A strong banking sector is important for flourishing economy. The failure of the banking sector may have an adverse impact on other sectors. In India banking as an institution originated in the late 18th century primarily to cater to the needs of the British. Post independence the nationalisation of major private banks in 1969 – an important milestone in the Indian banking system made banking accessible to the unbanked population in India.
It is important to note that the opening up of Indian economy is almost in correspondence with the worldwide IT, internet revolution in the early 90’s. Another major transformation is the global scenario was the emergence of international Banking norms also known as the BASEL norms.
The use of Information Technology in all spheres of financial and banking sectors is a deep reality. The sector has enabled the banking sector to go beyond its traditional role and is now playing an increasingly important role in its key areas of operation as securitization, risks preference and liquidity among others to which IT helps in a big way. It has assumed such high levels that it is no longer possible for banks to manage their IT implementations on a standalone basis. With I.T. revolution, banks are increasingly interconnecting their computer systems not only across branches in a city but also to other geographic locations which high-speed network infrastructure and setting up local areas and networks are now exposed to a growing number.
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Prior to the 1991 reforms, India’s Banking system/ sector had long been characterised as highly regulated business. The unparalleled growth achieved in the post- nationalisation era in terms of geographical spread and quantum of resources mobilization, was strictly regimented through various policy directives. No doubt, as a result, the system was quite stable and effective in domestic resources allocation and the social objectives of helping the command economy culminated into commercial constraints thereby eroding the financial performance of the banks. In other words, the system suffered in terms of systemic and institutional competitiveness and operational efficiency. This was when the need to develop a sound commercial banking system was felt. This was worked out mainly with the help of the recommendations of the Committee on the Financial System (Chairman: Shri M. Narasimham), 1991. The reforms in the financial sector thus supplemented the structural changes in the real economy reflecting a paradigm shift towards increased market orientation.
Reserve Bank of India (RBI) implemented Basel I norms from 1992 onwards. The post 1990 scenario world over saw banks increasing their trading activity by investing in securities which exposed banks to price risks, and responding to this, in 1996, the Basel Committee suggested that banks maintain capital funds against market risk by following either the standardised measurement approach (SMA) or internal measurement approach (IMA) to meet the unforeseen losses arising out of market risks. Basel I was followed by Basel II, Basel III.
a)To understand the various government policy initiatives towards introducing technology in the Indian banking sector (Commercial Banks and Cooperative banks).
b)To understand the progress of Technology adoption in the Indian banks
The present study is based on the secondary data collected from different journals, magazines, sites and published data from various issues of RBI and different Public sector banks. Various research studies on this subject have also been referred in this study.
Several definitions of electronic banking exist in the literature. According Daniel (1999), IT means the provisioning of information and services by a bank to its customers via computer, telephone or television. According to her, it can also mean the access to the banking services via kiosks or ATMs located in work places or at public locations such as an airport or a railway station. This definition holds good for the retail electronic banking purposes, as it is the scope of the present study.
Uppal (2007) takes a broader definition to include all the services provided by banks through all types of electronic delivery channels such as telephone, internet, and cell phone and so on. Hence as per this definition banking services such as internet banking, telephone banking, mobile banking and services provided through ATMs are all brought under its purview. More than 50 million of the US adult population is banking online according to a new survey by the Pew Internet & American Life Project
(Susannah Fox and Jean Beier, 2006) Survey on internet banking in U. K. by Forrester Research during 2007 showed that about 31 percent of British adults use online banking.
The Indian government can bring in financial inclusion by setting up ATMs and providing mobile/online banking facilities. Further, experts suggest that the number of ATMs need to increase by 5 times to reach 160,000-190,000 in the coming decade31. (The Indian banking sector recent developments: Growth and Prospects, IBEF report 2013 Jan)
N.M.Nair (2014) Banking sector plays a very important and crucial role. With the use of technology there had been an increase in penetration, productivity and efficiency. It has not only increased the cost effectiveness but also has helped in making small value transactions viable. It also enhances choices, creates new markets, and improves productivity and efficiency. It has been noticed that financial markets have turned into a buyer‘s markets in India.
Sharma M.C. and Sharma Abhinav reported that Indian public sector banks that hold around 75 % of market share do have taken initiative in the field of IT. They are moving towards the centralized database and decentralize decisions making process. They posses enviable quality manpower. Awareness and appreciation of IT are very much there. What is needed is a ‘big push’ the way it was given in the post nationalization period for expansionary activities.
Sreelatha T and Chandra Shekhar Reveled that Technology has charged the face of the Indian banking sector through computation, while new private sector banks and foreign banks have an edge in this regard. Among the total number of public sector bank branches, 97.8 percent are fully computerized at end – March 2010 whereas all branches of SBI are fully computerized. Dhingra Sanjay explained that there are at least five different types of approaches in the literature that have been employed in measuring IT effectiveness. Of those, three are econometric approaches i.e. stochastic frontier approach (SFA), distribution-free approach (DFA) and thick frontier approach (TFA), which are parametric, and two linear programming approaches which are nonparametric i.e. data envelopment analysis (DEA) and free disposal hull (FDH). Most of studies on banking have used either SFA or DEA approach to calculate the effectiveness.
V.Leeladhar (2006),(RBI) had identified a few broad challenges faced by the Indian banks. They are enhancement of customer service; application of technology; implementation of Basel II; improvement of risk management systems; implementation of new accounting standards; enhancement of transparency and disclosures; and compliance with Know Your Customer (KYC) aspects.
Considering the objectives let us look in to the key role played by the Indian Government in grooming the technology initiatives in the banking industry.
The foundation for large-scale induction of IT in the banking sector was provided by the recommendations of the committees headed by Dr. C. Rangarajan, in 1984 and 1989. Subsequently, in 1994, the Reserve Bank constituted a committee on ‘Technology Up gradation in the Banking Sector’. The committee made a number of recommendations covering payment systems including setting up of an autonomous centre for development and research in banking technology. The IDRBT was created as a sequel. The Institute has established and operates the Indian Financial Network (INFINET), performs research in banking technology and provides consultancy services apart from providing educational and training facilities for the banking sector.
Subsequently, some of the major landmarks Banking Technology and Transformation in India are,
•The introduction of MICR based cheque processing – a first for the region, during the years 1986-88;
•Computerisation of branches of banks – an activity which commenced from the late eighties with the introduction of ledger posting machines (LPMs), advanced ledger posting machines (ALPMs), followed by stand alone computer systems which metamorphosed into network based systems and the latest development pertaining to the installation of Core Banking solutions;
•Facilitating computerisation of Government business
– from the late nineties which has now resulted in all branches handling Government business perform their functions using technology;
•The setting up of the Institute for Development and Research in Banking Technology (IDRBT), Hyderabad in the mid nineties, as a research and technology centre for the Banking sector;
•The commissioning in 1999, of the Indian Financial Network as a Closed User Group based network for the exclusive use of the Banking sector with state-of-the- art safety and security. The network supports applications having features such as Public Key Infrastructure (PKI) which international networks such as S.W.I.F.T. are now planning to implement
•Commencement of Certification Authority (CA) functions of the IDRBT for ensuring that electronic banking transactions get the requisite legal protection under the Information Technology Act, 2000;
•Ensuring Information Systems Audit (IS Audit) in the banks for which detailed guidelines relating to IS Audit were formulated and circulated;
•Enabling IT based delivery channels which enhance customer service at banks, in areas such as cash delivery through shared Automated Teller Machines (ATMs), card based transaction settlements etc.;
•Providing Guidelines for Internet Banking, which facilitated the banks to ensure that common minimum requirements relating to Internet Banking offerings were provided for;
•Providing detailed specifications to banks on the configuration of systems relating to critical inter-bank payment system applications such as Real Time Gross Settlement (RTGS) System, Negotiated Dealing System (NDS), and Centralised Funds Management System (CFMS) etc.
•Implementation of the National Financial Switch (NFS) to ensure interconnectivity of shared ATMs and to provide for funds settlement across various banks.
•Establishment of e-payment gateways for the benefit of customers (such as the gateways for funds transfers and other account related transactions) and for facilitating e-commerce.
•Sharing of information through the secured internet website for the Centralised Data Based Management System-Internet (CDBMSI) project.
•Providing a platform for transmission of electronic messages across banks using common standards, for facilitating ‘Straight Through Processing’ (STP) in the form of the Structured Financial Messaging System (SFMS), which will be similar to the SWIFT messaging pattern;
•Setting up connectivity of all clearing houses of the country so as to enable the introduction of the National Settlement System (NSS)
•Introducing a secured web site for internet based data transfer to Central and State Government. Government Departments may populate the data from the secured web site to their own systems based on their requirements.
Technology evolution and application in Indian banking can be termed as an era from Mechanization to Mobile banking
It can be classified into the following phases Mechanisation (1980s), Automation (1990s), Computerisation of Nationalised banks, Tech savvy Foreign and New Indian Private Banks, Introduction of new technology applications across the Indian Banking sector.
Due to these factors, some of the emerging Trends in Banking Technology in India are as follows
•Electronic Payments
•CRM Initiatives
•IT Implementation and Management
•IT for Internal Effectiveness
•Managing IT Risk
•Mobile Banking
Indian banking industry thus adopted various technology applications in banking. They are classified in to:
1.Data Warehousing
2.Data Mining
3.Electronic Data Interchange
4.Corporate Web Sites
5.Management Information System
Automated Teller Machines (ATMs), net banking and mobile banking etc and are also becoming gradually more an integral part of the services provided by the UCBs. In addition, IT has enabled the efficient, accurate and timely management of the increased transaction volume that comes with a larger customer base.
Another important aspect with regard to technology implementation for internal purpose in UCBs is the Management Information System (MIS). The MIS reports generated help the top management as an effective risk management and a strategic decision making tool.
The Cooperative banks have also been directed by the RBI to become CBS enabled by 31st March 2013.
The urban cooperative banking sector is highly heterogeneous with concentration in a few states like Maharashtra and Gujarat. The technology solution to be proposed is expected to help these banks to improve efficiency of their transaction processing capabilities, housekeeping and customer service as a means to meet the competitive pressure on these banks. In other words, the solution to be provided needs to provide a level playing field to these banks in terms of access to IT solutions. Maharashtra is at the top in implementing CBS in urban cooperative bank. As on March 2012, in Maharashtra state124 UCBs out of 523 UCBs have implemented CORE banking solution.
RBI initiative for IT implementation: The usage of Information Technology (IT) is critical for the survival and growth of banking Institutions as Information Technology usage not only helps banks to reduce their cost of operations, but also enables them to offer products and services at competitive rates to their customers. The Government of India has observed that UCBs without CORE banking solution (CBS) do not integrate well with the banking system and hence there is a need to quickly adopt this model. CBS is a necessity in today’s banking scenario. UCBs are, therefore, advised in their own interest, as also in the interest of their customers, to adopt CBS at the earliest.
There is a wide variance among urban cooperative banks with regard to the usage of Information Technology. In their report, the committee by Shri. R. Gandhi (2008) mentioned that till March 31, 2007, 16 out of 1853 banks had implemented core banking solution, with some of them even offering to set up/share data centers with smaller UCBs, while over 50 banks did not even have computers. The remaining banks existed somewhere in between. But over a period of time there has been a good progress of IT in Cooperative banks.
In the context of the cooperative banks, a large part of this sector has been computerised. Whether it is the major loan accounts, the investment operations or the clearing systems, they all have been computerised at the head office level. Many Urban Cooperative banks are in the process of shifting to core banking. Large parts of the cooperative sector now tick with a Core Banking System developed by the National Informatics Centre (NIC), the government’s web services organisation, which has brought them into the technology mainstream. Six thousand PACS in Rajasthan, 89 PADBs in Punjab, one Chandigarh SCB, three branches of Delhi Financial Corporation and 315 locations of Treasury Saving Banks in Kerala are using Co-operative Core Banking Solution.
Taking the IT revolution ahead, Samruddhi Cooperative Bank based in Maharashtra launched the lender’s first ever RuPay Card. With India adopting its own bank card, it turned the world’s sixth country to have its own card after China, Japan, and others. Telengana’s AP Mahesh Co-operative Urban Bank based in Hyderabad has various techno- enabled initiatives and services this year. It is the first co- operative urban bank in the cooperative sector in South India that is extending tech-savvy services to its customers on a par with the private sector banks. Presently the bank is functioning with a network of 42 branches covering four States viz., Telangana, Andhra, Maharashtra and Rajasthan. After seeing the IT based success in the bank, the RBI has permitted the bank to extend its network to Gujarat State as well.
The Co-operative Bank of Rajkot is equipped with high technology using Enterprise Banking Solution and Any Branch Banking at all branches for its customers. The bank has also installed Core Banking Solutions and its 11 branches are equipped with onsite ATMs. The bank also provides facilities such as locker at 26 branches, RTGS, NIFT and Online tax payment through HDFC in Rajkot city. The Tiruchi District Central Cooperative Bank (TDCCB) has effectively brought all 52 branches in Tiruchi, Karur, Ariyalur and Perambalur districts under the CBS. With the help of CBS, the bank facilitates the transfer of funds through National Electronic Fund Transfer (NEFT), Real Time Gross Settlement (RTGS) and Direct Benefit Transfers (DBT). CCBS is implemented at more than 100 cooperative banking locations across Meghalaya and Chhattisgarh.
Reserve Bank of India has played an important role in implementation of information technology in banking sector. Reserve Bank of India constituted a working group to look into the different issues relating to e-banking and recommend technology, security, legal standards and operational standards keeping in view the international best practices. The group has made a number of recommendations on information security in e-banking. The most important note was that security infrastructure should be properly tested before using the systems and applications for normal operations. RBI had appointed various committees to work in this area. The government of Maharashtra and the Reserve Bank of India has signed a Memorandum of Understanding (MoU) to facilitate the development of the urban co- operative bank sector in the state of Maharashtra. Based upon this MoU, a State Level Task Force for Co-operative Urban Banks (TAFCUB) has been constituted for Maharashtra. As part of its developmental role, the Reserve Bank would also be assessing the training and computerization needs of the urban cooperative banks in the State of Maharashtra with the objectives of upgrading their human resource skills and technological infrastructure so that they improve their operational efficiency and quality of management information systems.
In the context of the cooperative banks, a large part of this sector has been computerised. Whether it is the major loan accounts, the investment operations or the clearing systems, they all have been computerised at the head office level.
The Cosmos Cooperative Bank, Pune, in Maharashtra and The Kerela State Cooperative Bank have moved for core banking solution and many Urban Cooperative banks are in the process of shifting to core banking.
The Cooperative Banks of all levels — State, District and Cooperative Urban banks — therefore have to also ensure that technologies are at par with the private banks. Slowly but steadily, India’s cooperative banks are emerging out of technological weakness. Large parts of the sector now tick with a Core Banking System developed by the National Informatics Centre (NIC), the government’s web services organisation, which has brought them into the technology mainstream.
The Indian banking sector has been adapting innovations in technology especially the information technology to achieve efficiency in providing wide range of products and services to the customers. The reforms in the 1990s, which led to expansion, consolidation and liberalization of the banking and financial sector in India, brought in many changes and challenges. A number of private and foreign players entered the Indian market with superior technologies that helped them service their customers efficiently through multiple channels such as ATMs and online banking.The Technological infrastructure has become an indispensable part of the reforms process in the banking system. The Banks are trying to satisfy their customers wherever they are.For this banks are exploring new financial products and service options that would help them grow without losing existing customers. And any new financial product or service that a bank offers will be intrinsically related to technology. Automation is the basic thing that banks need to have in place. It involves a combination of centralized networks, operations, and a core banking application. Automation enables banks to offer 24x7x365 service using lesser manpower. But to be really competitive, banks need to think beyond just basic automation since every bank is competing with technology. According to experts, the Future of technology applications in Banking include Mobile Wallets, Banking on the drive, Bank on your wrist, Smart Branches, Robotics, Video Banking.
IT is central to banking. It has moved from being just a business enabler to being a business driver. In a manner the banking and financial services sector—being the early adopters of any new technology—defines the roadmap for
future technology adoption. Banks are focused on three areas: meet customer’s service expectations, cut costs, and manage competition.
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