Banking and financial services (BFS) continued to be the domestic IT market's best-loved vertical-pegged at Rs 7231 crore, it accounted for 22% of the total IT spending in FY 2003-04. The initial cycle of automation was finally over for the banking industry, with the exception of a few laggards. Some of the areas where FY 2003-04 saw an upsurge were analytics, risk management, business process management (BPM), real-time gross settlement (RTGS), risk management, shared ATM network services and outsourcing in the form of remote infrastructure management.

Whatever new technologies were in the offing one thing became certain: as Dr. Bimal Jalan, ex-Governor of Reserve Bank of India (RBI), postulated clearly, "All IT adoption would henceforth happen in the banking sector only with enhancing the profitability factor." All the events during FY 2003-04 reveal a trend that broadly fits in with Jalan's remarks-for, with respect to IT adoption, the larger section of the industry was motivated more by RoI rather than by desire to embark on brand building exercises.

Implementation of core banking solutions followed an interesting pattern in 2003-04-most private sector and MNC banks, and even the large PSU banks have already adopted these. Therefore, it was turn of the remaining smaller PSU banks as well as the cooperative banks that were still in the TBA (Total Branch Automation) phase to go in for core banking with a vengeance. With RBI directives necessitating adoption of centralized solutions, many banks that are yet to adopt core banking solutions opted at least for consolidated MIS solutions. This was particularly true for a number of smaller co-operative banks for whom core banking product solutions were exorbitantly priced at Rs 5-8 crore. Further, even keeping in mind AMC fees, consolidated MIS solutions offer a more attractive option-where a bank is charged close to 10% of the license charges for a consolidated MIS, the amount goes up to 20-25% for core banking applications.

TBA was the flavor of the year for most rural banks. Quite understandably, since these banks cannot afford to burden their customers with the cost of technological initiatives. Branch automation on an average cost anything between Rs 5-7 lakh per branch, while a core banking application cost up to Rs 35 lakh per branch. Given India's size and the gradually improving nature of our communication systems, most PSU banks followed a model that had a mix of branch automation combined with the centralization of data. These banks followed the 80/20 principle as regards centralized solutions insofar as a centralized solution was adopted for the bigger branches, while the other branches continued to follow the branch automation model. Core banking provided solutions to 35-45% out of a total of 68,000 bank branches in the country, accounting for about 70% of business volumes.

But even for several large PSU banks that went in for core banking in FY 2002-03, payment spilled over to FY 2003-04 since the entire adoption cycle was not yet complete. For instance, Bank of India's core banking solution resulted in an order of Rs 80-100 crore per annum spread over 2.5 years. Canara Bank invested Rs 100 crore over a three-year timeframe between April 2002 to March 2005, while Bank of Maharashtra invested Rs 150 crore on core banking during FY 2003-04.

Developments on the regulatory side also created a compelling case for the automation of Indian banks. During the year, RBI goaded Indian banks to improve their risk management system by building an investment fluctuation reserve (IFR), by making provisions for problem assets, and by putting in place systems that monitor unhedged external liabilities. The RBI insisted that along with risk-based internal audit, banks must also put in place proper risk management architecture, strengthen IT, address human resources and set up compliance units. While many have already adopted some of these measures, a host of other banks are expected to do so this year.

In India, the Money Laundering Act 2003 worked out the modalities of disclosure for financial institutions regarding reportable transactions and confiscation of the proceeds of crime, declaring money laundering an extraditable offence and sought to promote international cooperation in the investigation of money laundering. With the Act likely to come into force in 2004, banks in India have had to consider the prevention of money laundering a critical business-sustaining activity. Accordingly, eight PSU banks besides private banks like the ICICI, which has offshore entities, have started deploying different anti money laundering (AML) systems.

With Real Time Gross Settlement (RTGS), expected to bring India's bond and money markets on par with international practices, finally becoming operational, many of the urban branches in 128 cities in the country have fallen into the ambit of RTGS. The system went 'live' on March 26, 2004, with State Bank of India, HDFC Bank, Standard Chartered Bank, and Saraswat Co-operative bank being the first to adopt it. 19 more banks joined the RTGS fray soon after; these include Bank of Baroda, Punjab National Bank, Canara Bank, Union Bank of India, Indian Overseas Bank, Central Bank of India, Dena Bank, BNP Baripas, IndusInd Bank, and ING Vysya Bank. RTGS was implemented in India by LogicaCMG in collaboration with Sanchez Capital Services, while the Hyderabad-based Institute for Development and Research in Banking Technology (IDRBT) developed the structured financial messaging system (SFMS), a web-enabled software for inter-bank messaging in RTGS.

With SEBI extending Straight Through Processing (STP) to the entire market to smoothen the transaction process, the market regulator came up with a roadmap that focused on areas such as disclosure norms, accounting standards and corporate governance as also on improving the quality of intermediaries. The STP initiatives were part of the SEBI efforts to reduce the settlement cycle to T+1 by April 2004, and these reduced the amount of time required to execute and settle a trade by improving the communication between the three relevant parties – the brokers, the custodians and the fund managers. The new secure messaging system offered by NSDL largely automated the communication between these parties.

The Indian banking industry was in a transition phase. On the one hand, the PSUs, the mainstay of the Indian banking system, were in the process of shedding their flab in terms of excessive manpower, excessive non Performing Assets (NPAS) and excessive governmental equity, while on the other hand, the private sector banks were consolidating themselves through mergers and acquisitions. This made it an ideal time for the introduction of Business Process Management (BPM). A large number of BFSI institutions like Citibank, ICICI Bank, HDFC Bank, IDBI Bank, BNP, Standard Chartered Bank, Bank of Punjab, State Bank of India, besides financial services like GE Countrywide, and insurance players like Max NewYork Life Insurance, Bajaj Allianz and ICICI Prudential Life Insurance adopted BPM this fiscal.

IT infrastructure outsourcing was yet another interesting trend that emerged during the year. While Bank of India outsourced its entire IT activities to HP, others like HDFC Bank, BNP, IDBI Bank, Standard Chartered Bank and Morgan Stanley outsourced their IT infrastructure management partially to integrators like CMC, Wipro Infotech and Netmagic who have their own data centers. Some, who were willing to develop their own IT skill sets, tried spinning it off into a separate business altogether, with this taking two paths-either that of products developed, like s1 (the Internet banking solution created by Security First National Bank), or the creation of a services company that produced its own applications, like IDBI Intech.

Convenience banking by means of different delivery channels became the buzzword, with new channels like mobile and Internet banking coming to the fore. But even as telecom service providers like Reliance Infocomm tied up with banks like HDFC or SBI to deliver mobile ATM services, this sort of endeavor turned out to be more ornamental as opposed to emerging as profitable business drivers. With proliferation of plastic money, Indian banks went for increasing ATM installation as banking through ATM significantly reduced the costs of physical banking. More than 7500 ATMs were added during the fiscal, taking the total base of ATMs in the country to about 11,000.

However, India still has to do a lot of catching up, considering that China has 65,000 ATMs, UK 100,000 and US 300,000. A number of other functionalities like utility payments and routine transfers were also included under the purview of ATMs. For example, currently, from Mumbai ICICI ATMs can be used to purchase railway tickets, and one expects to see the addition of more such functions this year. ATM growth was uniform across the country. In the south, Corporation Bank and Canara Bank added 600 and 300 ATMs respectively, while Oriental Bank of Commerce went all out in the north, United Bank of India in the east, and Bank of Baroda and Union Bank of India in the west. UTI Bank even installed an ATM at Thegu (Sikkim) at a height of around 13,200 ft. mainly for the Army, while SBI had a floating ATM on a boat for the Kochi-Vypeen Islands.

Some banks like State Bank of India, HDFC Bank and ICICI Bank outsourced their ATM infrastructure management to third-party vendors like NCR, Euronetworks and Diebold. Many banks also formed consortiums to share ATM network services, this being especially helpful for banks that did not have a strong subscriber base in certain regions to justify their own presence. At present, there are about 10 such consortiums, with a few of them being bilateral arrangements. Some of the prominent consortiums include Cashnet, an arrangement between IDBI Bank, Citibank, Standard Chartered Bank and UTI Bank and CashTree between Bank Of India, Indian Bank, Syndicate Bank, United Bank of India, Dena Bank and Union Bank of India, as well as one formed by Punjab National Bank, UTI Bank, Global Trust Bank, Andhra Bank, Oriental Bank of Commerce and Vijaya Bank.

Rajneesh De in Mumbai