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 response.

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 Ghaisas.

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 C˛RM 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 C˛RM is designed for a more complex product set used by fewer clients who are corporate entities. Both CRM and C˛RM depend on internal and external data. Execution of CRM and C˛RM 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 24x7 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 marketshare.

Easwardas Satyan