Dataquest :

Traditionally, BFSI has always been the most significant contributor to the country's domestic IT consumption-FY 2004-05 saw no change in the status quo. At Rs 10,543 cr, the financial sector again proved to be the most lucrative vertical accounting for nearly a quarter of the domestic industry. This is an almost 46% jump over last year's IT spend by the BFSI players, at Rs 7,231 cr. While the first phase of automation in this sector was almost complete even before 2004-05, what spurred the growth this year were the twin trends of increasing IT infrastructure outsourcing as well as banks joining the Real Time Gross Settlement (RTGS) network of the Reserve Bank of India (RBI).

Speaking strictly according to timeline, the phenomenon of IT infrastructure outsourcing started in FY 2003-04 when Bank of India awarded a 10-year contract, valued at $150 mn, to HP Services. Under the terms of the agreement, HP is implementing and managing data warehousing and document imaging as well as providing integrated channel management, including telebanking, Internet banking and ATMs. Most importantly, it supervised the implementation and management of Finacle core banking solution from Infosys across Bank of India's 750 branches in India. Since signing the agreement in February 2004, the BoI-HP collaboration has been so successful that it was selected as the winner for the Outsourcing Center's 2005 Outsourcing Excellence Awards in the "Best First Steps" category.

Not only was the Bank of India deal HP's largest in Asia-Pacific, it also spurred other banks to jump into the total outsourcing bandwagon. Bank of Baroda, again, selected HP as its strategic IT partner. The bank, along with HP, has planned and implemented an architecture that would include an integrated deployment of more than 40 applications such as core banking, phone banking and Internet banking as well as CRM, human resource management system (HRMS) and cheque truncation systems.

The BASEL II Conundrum

The RBI has taken a view that only those Indian banks that get 20% of their business from abroad need to follow Basel-II norms. But, still, most private sector banks as well as large PSU banks have expressed keenness to conform to Basel II standards. SBI, which derives only 6% of its business from international operations, is still ready to go the Basel II way. In India, banks have been following the earlier Basel-I since 1993-94. In fact, regulators require a minimum capital to asset ratio of 9%, which is above the 8% level mentioned in the Basel-II accord. Despite being one of the fastest growing economies in the world, Indian banks are far behind their western counterparts in modern risk measurement and management tools for credit, market and operational risks. Traditionally, most Indian banks have relied on policies and procedures instead of quantitative evaluations, as the primary tools for risk management.
However, the road to Basel-II will not be an easy one for Indian banks. The significant hurdles on its way are:

IT infrastructure: The technology infrastructure in terms of computerization is still in a nascent stage in most Indian banks. Computerization of branches, especially for those banks which have their network spread out in far flung areas, will be a daunting task. Penetration of information technology in banking has been successful in the urban areas, unlike in the rural areas where it is insignificant.

Data management: Collection of data for the last three to four years, a requirement for conforming to the provisions of Basel-II is another difficult task. Due to a late start in computerization, most Indian banks lack robust data capture, cleansing and management practices, and this will serve as the single largest limitation in adopting the accord. Moreover, to get rid of the common tradition of individuals maintaining paper work, will be another daunting task.

Risk management resources: Experts say that dearth of risk management expertise in the Asia Pacific region will serve as a hindrance in laying down guidelines for a basic framework for the new capital accord.

Communication gap: An integrated risk management concept, which is the need of the hour, to align market, credit and operational risk, will be difficult due to significant disconnect between business, risk managers and IT across the organizations in their existing set up.

Huge Investment: Implementation of Basel-II will require huge investments in technology. According to estimates, Indian banks, especially those with a sizeable branch network, will need to spend well over $50-70 mn on this.

It was not only the PSU banks which were in the fray, even Yes Bank, a new age private bank, outsourced its entire technology requirements for its offices and branches across India to Wipro Infotech. Wipro's responsibilities include implementing core infrastructure and hardware, branch rollouts, networking, managing the datacenter and back-up support for disaster recovery. A unique "pay-per-use" model will help Yes Bank stave off up to 30% in costs, progressively over the next seven years. The arrangement ensures that Yes Bank's initial technology investments are minimal, and its overall IT spends are variable and predictable, in line with its planned growth. The arrangement protects Yes Bank against all obsolescence and redundancies in technology and insulates it from carrying forward any legacy systems.

The Big Deals

Total IT infrastructure outsourcing, including ATM networks, came into the limelight following HP's large deals with Bank of India and Bank of Baroda, and the Wipro-YES Bank arrangement
A number of banks, both PSU and private, joined RBI's Real Time Gross Settlement (RTGS) network throughout the year involving large scale IT deployment
Integrated risk management systems and web-enabled inward remittances facility came into the mainstream
Most banks started gearing up for BASEL II compliance next year

The second agreement mandates improved operational efficiencies in banking systems by introducing international best practices. Wipro will implement these in Yes Bank, and then jointly offer these to the international banking and financial services sector.

BFSI Rules

Ranking 2003-04

Ranking 2004-05

Top IT Users

Spending 2004-05 (Rs cr)

BSNL

350

ONGC

200

Punjab National Bank

170

Bharti Cellular

150

Indian Post

150

ITC

120

Allahabad Bank

100

Union Bank of India

Indian Bank

Central Bank of India

Vijaya Bank

Bank of Maharashtra

Hindustan Lever

Idea Cellular

National Insurance Company

UTI Bank

BHEL

BPCL

United Bank of India

Oriental Bank of Commerce

Source: DQ-IDC India Survey: Megaspenders 2005

More than 50% of the Top 20 IT Megaspenders were from the BFSI segment

IT infrastructure outsourcing and joining RTGS networks were the new trends that spurred the 46% jump

It was not just the entire IT infrastructure outsourcing that was the order of the day, HDFC Bank, as did some other banks, became the first private-sector bank to outsource its entire ATM management to NCR. With over 1,000 ATMs across 192 cities, HDFC Bank has the third-largest ATM network among private banks and the fourth largest network in India. NCR provides HDFC Bank with a total suite of services, including ATM monitoring and management, caretaker services, deposit-
processing services, consumables (ATM and non-ATM) as well as cash replenishment.

If IT outsourcing was the initial catalyst for BFSI IT spending this year, the real meat was provided by a host of banks joining RBI's RTGS network throughout the year. The RTGS system went 'live' on March 26, 2004 with the State Bank of India, HDFC Bank, Standard Chartered Bank, and Saraswat Co-operative bank joining it in round 1. Very soon ICICI Bank, IndusInd Bank, BNP Paribas, Bank of Baroda, Bank of India, Canara Bank, Central Bank of India, Corporation Bank and Union Bank of India followed suit. At present, around 4,934 bank branches are under RTGS at 399 centers and daily transactions through RTGS route are worth Rs 44,000 crore. Other banks to join the party throughout the year included ABN-Amro Bank, Andhra Bank, Bank of Rajasthan and ING Vysya Bank.

HDFC Bank has achieved complete Straight Thru Processing (STP) by integrating all 470 branches to the RTGS network. This move enables all HDFC Bank branches to receive and credit client accounts online for all incoming RTGS credits. The branches can also make outward remittance online for their client requests, as long as the beneficiary is a member of the RTGS network. HDFC Bank reportedly processed 15,000 transactions, valued at Rs 1,10,928 crore, through RTGS in May alone.

Beyond RTGS and outsourcing, the Indian banking sector also witnessed a host of significant IT deployments.

Bank of India (BoI) introduced an internet-enabled inward remittances facility called 'Star e-remit'. The facility, operated through the 200-year old Bank of New York (BNY), is aimed at facilitating remittances from NRIs based in the US. The facility uses the 'automated clearing house' (ACH) direct debit program of US banks with which BNY is registered.

Few banks like the Oriental Bank of Commerce (OBC) and the ICICI Bank launched mobile recharge facilities at their ATM network.

A lead was taken by the Institute of Development & Research in Banking Technology (IDRBT) in security solution, which is an eternal concern area with the BFSI segment. The institute set up a fully functional technology demonstration lab powered by Cisco at its campus in Hyderabad. Cisco set up this lab to train all IDRBT, RBI and other public sector banking professionals on end-to-end security and wireless solutions.

Cheque Truncation was another hot IT area in the BFSI segment and is expected to continue in the current year as well. Punjab National Bank (PNB) was among the first banks to deploy the first image-based cheque clearing system in India. This provided clearance of inter-city cheques within 48 hours after the cheque is presented, at selected centers using cheque truncation, where there is image based cheque clearing system. Earlier it took about 15-20 days for clearance of outstation cheques. PNB was the first bank to launch the Intra Bank Inter City Cheque truncation project by using NCR's ECPIX (Electronic Cheque Presentment with Image Exchange) technology. After a successful pilot run the system was introduced by connecting MICR Centres located at Lucknow, Nagpur, Jaipur, Kanpur, Ludhiana, Chandigarh, Jalandhar, Agra, Allahabad and Varansi.

Vijaya Bank entered into an agreement with ICRA to implement an enterprise wide integrated risk management system. The project takes care of the entire requirements of risk management in the bank. It includes implementing the Reserve Bank of India guidelines on risk management and covers areas in credit risk management, market risk management, asset liability management, operational risk management, risk focused internal audit, Basel II framework, etc. The project is also expected to develop a robust MIS with complete integration with the core banking solution, to support effective implementation of a risk management system in the bank.

This was possible only after Vijaya Bank succeeded in networking 60 of its branches and deploying core banking solutions across them. In fact, core banking deployment, though lesser than previous years, still continued amongst Indian banks. Canara Bank achieved cent-per-cent computerization, which included all the branches in the rural and semi rural areas of the country. All the 2,476 branches, 57% of which were rural, were fully computerized during the year. Even SBI's Frankfurt branch replaced its existing solution with Flexcube during the year.

The BFSI segment will continue to lead the domestic IT spend for the foreseeable future. With banks getting on the IT bandwagon with a vengeance, DQ estimates that the growth for IT players in the segment will be well above industry growth rates.

Rajneesh De