Y V Reddy: Use of technology in the financial sector - significance of concerted
efforts
Address by Dr Y V Reddy, Governor of the Reserve Bank of India, at the Banking Technology Awards
Function 2006, at the Institute for Development and Research in Banking Technology, Hyderabad,
2 September 2006.
* * *
Shri Arvind Sharma, Director, IDRBT, members of the Governing Council of the IDRBT, fellow bankers
and distinguished guests,
It gives me immense pleasure to be here with friends from the banking fraternity. In fact, being here is
part of my annual pilgrimage to the Institute for Development and Research in Banking Technology
(IDRBT). At the outset, I would like to compliment the Governing Council, faculty and staff of the
IDRBT for continuing with their mission with distinction.
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 Upgradation 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.
In my remarks today, I would like to highlight the need for concerted efforts to enhance the use of
technology in the financial sector to ensure efficiency, stability, competition and above all service to
the common person.
Technology and the RBI
I would like to enumerate for record a few technology-related initiatives of the RBI. First, the
establishment of the mechanised cheque processing systems using the Magnetic Ink Character
Recognition (MICR) technology in India. These have been acknowledged the world over as systems
which have stabilised well with overall reject rates of around 1% while, I understand, that the
international rates are around 2%. Those who operate these systems, therefore, deserve to be
complimented.
Second, the technological infrastructure created by the IDRBT since the establishment of the INFINET
in 1999. This was aimed at sharing expensive IT resources so as to achieve the economies of scale.
One of the notable achievements of the IDRBT has been the implementation of Public Key
Infrastructure (PKI)-based electronic data transfer with very high security levels.
Third, the introduction of the Real Time Gross Settlement (RTGS) System. It has not only resulted in
compliance with the Core Principles for Systemically Important Payment Systems of the Bank for
International Settlements (BIS), Basle but has also paved the way for risk-free, credit push-based fund
transfers settled on a real time basis and in the central bank money. We had an occasion to compare
our RTGS system with other RTGS systems for placing before our Board for Payment and Settlement
Systems. It emerged that the Indian RTGS system, which has the 'Y' topology, is considered to be the
optimal choice and this topology has also been adopted by several central banks, which have
implemented RTGS. Our approach towards intra-day liquidity and potential gridlock resolution follow
international patterns. An evaluation of the various components of the RTGS system vis-à-vis the
critical evaluation parameters set by the Bank for International Settlements, Basle indicates that we
are close to the best on most of the parameters.
The facility for inter-bank funds settlement through RTGS is available today across more than 23,700
branches of banks spanning more than 500 centres in the country. While it is reassuring to note that
transactions with large aggregate value are being settled through the RTGS system, with average
daily settlement amounting to more than Rs. 60,000 crore, there is still scope for routing many more
systemically important payments through the RTGS. For the purpose, enhancing the customer
awareness at the user level would be an urgent imperative. It is essential that the RBI, banks and
large players in the market make concerted efforts in this regard so as to ensure that all large-value
customer payments across financial markets, which have systemic implications, flow into the RTGS,
such as payments in the equity and debt markets. Once the system achieves a critical mass of usage
by the participants, a tipping point would be reached and it should be possible for the financial
regulators to consider making the RTGS as the preferred mode for specified large-value transactions
in the financial markets.
Fourth, creation of electronic fund transfer systems. It is not necessary that all the fund transactions
are settled on a real time basis. It is, therefore, important to expand the reach of other electronic
payment mechanisms for small-value customer transactions across the country. Towards this end, the
Reserve Bank implemented the Electronic Funds Transfer (EFT) System in the mid nineties, which
was later upgraded as the Special Electronic Funds Transfer (SEFT) System in 2003 and has now
been further enhanced as the National Electronic Funds Transfer (NEFT) System since November
2005.
The NEFT system, an improved version of the EFT system, has enhanced security features and
facilitates retail funds movement with multiple daily settlements, which enable customers to receive
funds within two hours of the settlement. Today, the NEFT facility covers more than 5000 branches of
32 banks spread across 200 centres. The Reserve Bank has taken up as its mission, the expansion of
the reach of NEFT to cover all computerised / networked branches of banks as outlined in the
Payment Systems Vision document. The plan is to provide NEFT facilities initially at all the RTGS
customer-enabled branches and thereafter, extend the same to cover almost all the computerised
branches of banks across the country.
Finally, a major initiative, as far as funds movement is concerned, is cheque truncation. In order to
improve efficiency and substantially reduce the time taken for cheque processing, the Reserve Bank
has initiated steps to introduce a Cheque Truncation System (CTS). A pilot project is scheduled to
commence in the National Capital Region in Delhi by the end of this year.
Over the years, the role of the Reserve Bank is changing in tune with the increased levels of maturity
of the markets and the financial system as a whole. The role of the Reserve Bank in future would be of
a catalyst of change as detailed in the Financial Sector Technology Vision Document published in
2005. In realising this vision, the need for shared efforts towards setting up of world class IT systems
will gain greater significance. As a first step, the Reserve Bank has, through the IDRBT, facilitated the
setting up the National Financial Switch, which provides such an opportunity to the financial sector. I
would urge the banks to make extensive use of this facility. IDRBT is also revamping the entire
INFINET structure in consultation with the users to make it more efficient in tune with the international
practices. Perhaps, a formal benchmarking of the functioning of our system with the global standards
and practices may have to be done and the outcome placed in the public domain.
Technology challenges for the banking sector
The entire approach towards technology-based banking has shown significant improvement since the
initiation of reforms in the 1990s. The number of public sector banks which has migrated (or are in the
process of migration) to Core Banking Systems (CBS), is an indication of the progress in this regard.
The unique feature of the CBS is that the concept of branch-based banking gives way to the
bankbased banking treating the constituent as the customer not of a particular branch but of the bank as a
whole. Today, 21 public sector banks have embarked on the use of such systems and the number of
CBS-enabled branches exceeds 14,000 as against 14 banks with about 5000 CBS-branches a year
ago. Some of the banks are reportedly facing teething troubles in this area but I trust every effort
would be made to stabilise the system to the satisfaction of all customers. I would urge that an
assessment of the efficiency of functioning of CBS in all the banks be attempted to facilitate necessary
improvements.
The commercial banks have to address various emerging challenges including those arising from
large-scale IT deployment. These include the impact of CBS, more scientific risk management, better
asset-liability management, ensuring effective anti money laundering measures, and the security
concerns relating to implementation of IT in banks.
One issue, which often gets raised in any discussion on technology implementation, is the cost it
entails. Products such as smart cards, which may not require significant initial capital costs and which
can be easily implemented for a large customer base, hold the promise for the future.
Let me highlight some of the critical factors, which need to be adequately addressed while dealing with
IT. Prime amongst them is the need to ensure appropriate security and integrity of the system.
Security in IT systems is only as effective as the weakest link and as financial intermediaries, the
banks have to ensure that security features incorporated in IT systems are the best of the breed. With
ever-evolving information technology, the security concerns do not remain static and a system of an
ongoing critical review of the efficacy of security features and measures needs to be instituted.
Integrity of the data processed and stored in IT systems has to be ensured by the banks at all times
and adequate back up, including real time replication, to the extent possible, provided for.
Another major requirement relates to disaster recovery management and the fail-safe business
continuity plans. In today's world, customer expectations are high and ensuring uninterrupted
availability of the IT resources, even in the event of a rather extreme contingency, assumes
significance. The banking community, therefore, needs to put in place appropriate contingency plans
and test their adequacy at regular intervals.
While the Reserve Bank is providing a common system-wide communications infrastructure, the
ultimate objective should be for each bank to develop its own communications network so that the
movement of funds within the banks is entirely managed through their own networks. This will avoid
excessive dependence on INFINET and improve the overall systemic efficiency. Though a few banks
have already done so, there is scope for further progress in this regard by others.
There are several co-operative banks too in the system which extend banking services and some of
them also have relatively large-scale operations. Perhaps, it is essential that the use of technology in
the co-operative banking sector too is enhanced, as appropriate, to bring them closer to the level of
the commercial banks.
Technology and financial inclusion
We have been highlighting the need for financial inclusion which involves the provision of banking
services to the vast multitude of population so far excluded from such services. As far as increasing
the scope and coverage of financial inclusion is concerned, some of the challenges which need to be
effectively addressed include lack of adequate infrastructure in rural areas, relatively low volumes of
transactions, comparatively higher transaction costs, and other factors such as the literacy levels of
target customers.
Technology offers an excellent tool to effectively address the above challenges. Lack of infrastructure
is being addressed in a variety of innovative ways, leveraging technology. Some of these include use
of computer systems which do not require uninterrupted electric power supply, networking using radio
frequency and other non-conventional methods, centralisation of processing systems leading to lower
processing costs, provision of home-grown customised systems such as the low cost, multi-lingual
ATM developed by the IIT, Chennai - all of which provide an impetus towards greater financial
inclusion.
In South Africa, technology has been deployed to widen the financial inclusion with the introduction of
MZANSI account, which is a card-based, limited-service, affordable savings account integrated with
the merchant point-of-sale outlets, ATMs and even Post Office outlets. In Philippines, the card-based
retail money movement system has won great acclaim. In India, the Reserve Bank, along with the
IDRBT, is working on the use of multi-application smart-card systems which can serve as a bank
account and also function as a store of electronic cash, as a data repository for essential information
relating to the card holder, with built-in security features such as biometric identification, and which can
also double up as an entitlement identifier or as a social security card.
It is gratifying to note from a NABARD report that a pilot project on smart cards has already been
launched with Sri Visakha Grameena Bank in Andhra Pradesh, which has been one of the front-runner
banks in financing Self Help Groups (SHGs). It is expected that with enhanced use of rural-oriented
technology, the bank would be able to provide value addition to services offered to the rural clients
and further expand its outreach in a sustainable manner. Banks could consider the feasibility of using
smart cards for the 'No Frills Accounts' so as to help expand the coverage of the banking services and
facilitate the garnering of the much-needed low-cost deposits. Here again, the approach of sharing of
IT resources would have much to commend itself.
Technology and the government sector
It would be appropriate to also outline certain aspects of application of technology to the Government
business since RBI is the banker to the Central and State Governments. If we scan the technology
initiatives of the States, we find a large divergence in technology absorption across the States. While
States like Andhra Pradesh, Maharashtra, and Karnataka are generally ahead of others in
eGovernance, this is just beginning to happen in the States like Madhya Pradesh, Uttar Pradesh, Bihar
and the North East. As far as Central Government receipts are concerned, the Government's tax
collection processes underwent a metamorphosis with the introduction of Online Tax Accounting
System (OLTAS) for direct taxes. Enthused by the success of OLTAS, the Central Board of Excise
and Customs, in consultation with the Reserve Bank, has introduced the EASIEST (Electronic
Accounting System in Excise and Service Tax) project which envisages a comprehensive e-payment
module that can be utilised by the banks' corporate customers. The pilot project for this is in an
advanced stage of completion. Acceptance by the Government of electronic challans, based on
formats to be available on their web sites, would make the process tax-payer friendly. It would also
substantially reduce paper usage, provide for Straight Through Processing and obviate errors arising
from the reconciliation process, wrong data entry, etc.
Another significant initiative taken in this sector by the Reserve Bank was the computerisation of State
treasuries throughout the country. After detailed examination of the various aspects, steps are now
underway for the establishment of electronic linkage amongst the State Treasuries numbering 3022,
agency banks, Finance Departments of the State Governments, Office of the Accountant General and
the Reserve Bank of India. This will help in speedier accounting of receipts and payments of the State
Government departments, apart from serving as a road map for achieving end-to-end connectivity
amongst various accounting agencies involved.
It needs to be noted in this context that while use of the state-of-the-art technology within the banking
system is an asset, it also poses a challenge to the conventional banker and government accountants
due to increase in the speed and complexity of transaction processing. The banks have to ensure that
all transactions conducted as agents of Government are secure from end-to-end and are retrievable at
any point of time. A successful example of this is the electronic import-licensing system of the
Directorate General of Foreign Trade which has an electronic payment facility integrated with the IT
systems of the banks.
I would like to take this opportunity to mention that at a recent conference of the State Finance
Secretaries, the Finance Secretaries of several State governments expressed the view that the
technological base and efficiency of services rendered by some of the banks handling Government
business needed to be improved significantly. Relationship banking encompassing both, lending with
a social focus and operating as a banker to the Government, is valuable but if the quality of service in
handling Governments' transactions is not of high standards, some of the banks may not be able to
retain their Government business at the current levels. Concerted efforts are, therefore, required by
the States and their respective bankers in this regard.
Technology and markets
Technology has played a significant role in improving the efficiency of the financial markets. The
Negotiated Dealing System (NDS) has been functioning well. The introduction of Order Matching NDS
(NDS-OM), has helped further in securing better price discovery, transparency in trading, reporting
and electronic bidding at auctions. The NDS, implemented since February 2002, provides a platform
for screen-based trading in government securities to the member banks and primary dealers with a
facility to strike on-line deals anonymously and, thus, experience more efficient price discovery. The
process involves the reporting of deals to the Clearing Corporation of India (CCIL) Ltd. which
generates the settlement - gross for the securities and net for the funds leg. At the end of the day, the
settlement information is transmitted to the RBI for effecting the same in its books. The CCIL also acts
as the central counterparty for the trades by guaranteeing the delivery of securities as well as funds.
We are in the process of fully integrating the NDS settlements with the RTGS. In order to improve the
functioning of the corporate bond market, a High Level Expert Committee on Corporate Bonds and
Securitisation (Chairman: Dr. R.H. Patil) has suggested various measures to revitalise the corporate
bond market through setting up of trade reporting systems, trading platforms, auction platforms and
clearing & settlement systems. The trade reporting systems suggested for corporate bonds is on the
lines of Trade Reporting and Compliance Engine (TRACE) of National Association of Security Dealers
(NASD) in the US. Such on-line real-time data dissemination will help the participants in making
efficient trading decisions and at the same time, enable the regulators to obtain and monitor
information on the market trends. These recommendations are under examination by the agencies
concerned.
Concluding remarks
The basic objective of deployment of technology in the financial sector should be to progressively
move away from paper-based transactions, which include use of currency notes, cheques or challans,
and to the extent possible, switch over to electronic means using RTGS or NEFT or any other
electronic mode.
It is opportune that we are today recognising the valuable contributions of the path breakers in the field
of banking technology. The identification of technology leaders and their recognition in the form of
Technology Awards is a pointer that we are capable of excelling in our respective fields. The awards of
today are not a destination but only mark a good beginning - of a more exciting and challenging era
ahead of us in our march towards a technologically advanced and efficient, effective, progressive and
inclusive financial system.
I wish you all success in your future endeavours.
Thank you.