V Leeladhar: Banking with technology - the road ahead
Keynote address by Mr V Leeladhar, Deputy Governor of the Reserve Bank of India, at the
IT@BFSI-200 Conclave, Bangalore, 9 June 2005.
* * *
Ladies and Gentlemen,
I deem it a privilege to be present at this conclave being conducted by the Indian Banks' Association,
on an appropriate topic at an appropriate time and to an appropriate audience who would be the
catalysts of change as banking in India is poised for greater leaps in the near future. I am sure that
bankers in India are feeling the positive impact of the technological revolution in the way banking is
being transformed. Banks need to be ready to take on the challenges unleashed by various external
forces such as competition, globalisation, shrinking margins, and internal forces relating to human
resources, need for changes in procedures etc. To my mind, a substantial portion of these challenges
can be easily addressed by technology; I shall, therefore, dwell a while on the role of technology in the
banking of the near future.
Banks in India need to be complimented on the inculcation of technology in a large way in their
day-to-day operations. Credit must be given to Indian Banks who have brought on the new wave of
techno-banking in the country. In a short span of less than two decades, customers of banks have felt
the positive impact of technological solutions implemented by banks. The customer of banks of today
have a virtual menu of options as far as delivery channels are concerned and all these are the benefits
of technology, with the most visible benefits happening in the areas of payments for retail transactions.
A variety of cards, Automated Teller Machines, electronic based funds transfers, Internet banking,
Mobile banking are all some of the latest technology based payment solutions, which have gained
large acceptance amongst the Indian banking public. With technological solutions rapidly evolving,
more new products and services may soon become the order of the day.
While addressing a critical topic such as Technology which has today become a basic necessity rather
than a luxury in the banking sector, I must examine the various components which comprise the
building blocks on which banking would be functioning in the morrow. I would, therefore, enlist some of
the major aspects which, to my mind, appear to be the corner stones in the road that we are paving so
that the highway would ensure free, safe and secure conduct of banking business.
The first major aspect which needs to be addressed is that of Consolidation. Banking in India has
evolved as a mix of various independent functions. Thus we have credit functions as a separate
activity, deposit taking as another different function, a host of payment facilities - each as a distinct
activity, other services and so on. It is now time to look at consolidation of all these inter-related
functions. Technology has already provided an answer in the form of Total Branch Automation, which
has now given way to the Core Banking Systems, and the facility of single-window service at
branches. While this traditional approach towards consolidation may be ensuring that the customers of
today are retained by a bank, the growth of new clientele will, however, be related to other progressive
measures to be taken by banks. An outward looking consolidation holds the key. Consolidation of all
types of financial services which a customer of a bank may require needs to be offered by banks.
While some steps have been taken by banks in the form of universal banking and the offering of
related financial services such as insurance, tax advice, securities market operations, depository
functions and the like, the future may witness alliances with service providers who may in today's
context appear to have to relationship with traditional banking concepts. For example, a mobile phone
user, who is a customer of particular telecommunication service provider, may switch preferences to
another bank if the phone company does not link its services to that of a particular bank with whom the
user is banking with. Thus strategic alliances with varied service providers may become a necessity.
The next major challenge arises out of the forces of competition. Traditional concepts relating to
competition from other players in the same line of business will indeed exist but these will pale into
oblivion in the form of competition from hitherto unexplored and unanticipated areas. Easy finance
schemes by retailers of consumer durable articles will obviate the need for short term loams by
customers of banks, thus resulting in a dwindling retail loan portfolio. Banks can overcome this
challenge by providing refinance to the retailer who would be in requirement of funds for improving his
business turnover portfolio. The essence of this is that competition may have to be exploited as an
opportunity. Planning for the unanticipated and looking for opportunities hold the key to the successful
bank of the future. In this connection, I draw your attention to the report of the RBI group on rural credit
and microfinance and suggest that banks which are first movers would stand to gain substantially in
terms of expanding their retail portfolio.
Technology implementation comes with its attendant requirements too. A few major aspects which
need to be reckoned relate to the
• Need for standardisation - across hardware, operating systems, system software, application
software to facilitate inter-connectivity of systems across branches
•
Need for high levels of security - in an environment which requires high levels of
confidentiality, security is an important requirement
•
Once both the above are achieved, the next logical approach would be towards
communication and networking - use of networks which would facilitate centralised
databases and distributed processing. Exploitation of computer networks by banks would
result in savings in cost and increase in efficiency
• Need for a technology plan which has to be periodically monitored and also upgraded
consequent upon changes in technology itself
•
Need for business process re-engineering with the large scale usage of computers - the
objective is not to merely mechanise activities but to result in holistic benefits of
computerisation for both the customer and the staff at branches
•
Need to address the issue of Human Relations in a computerised environment especially
from the point of Human Resources Development
•
Sharing of technology experiences and expertise so as to reap the benefits of technology
implementation across a wider community
All these changes have, however, a host of attendant challenges. Prominent among them is the
paradigm shift in the concept of security. With the delivery channels relating to funds based services -
such as movement of funds electronically between different accounts of customers - taking place with
the use of technology, the requirements relating to security also need to undergo metamorphosis at a
rapid pace. Various concepts such as digital signatures, certification, storage of information in a
secure and tamper-proof manner all assume significance and have to be part of the practices and
procedures in the day-to-day functioning of banks of tomorrow. I must at this juncture, add that all
these would be added requirements and the well established practices of today may also have to not
only continue but also co-exist along with the new requirements. Security requirements have to be
provided from a two pronged perspective - first for the internal requirements of the banks themselves
and the second relating to the legal precincts of the laws of the land. It will be a matter of satisfaction
to note that the INFINET (Indian Financial Network) is a safe, secure and efficient communications
network for the exclusive use of the banking sector, which provides for inter-bank communication -
which implies that banks have to now function as a group and at the same time competing with one
another too. The key advantage of the INFINET is its own security framework in the form of the Public
key Infrastructure - PKI, which is in conformity to the provisions of the Information Technology Act,
2000.
An effective security policy which would offer a shared vision of how the controls in the workplace
should be implemented with the objective of protecting data, information and eventually, the economic
value of the organisation. This has to be supplemented by education and training in these areas and
reinforced by the actions and concerns of the top management so that a culture of security can be
created. These controls have to be supplemented by surveillance, monitoring and auditing to detect
unusual usage patterns and deficiencies. Banks have to put in place such a policy and ensure that it is
being implemented effectively, and then audit the IT related functions so as to ensure that there are no
lapses or deviations from the approved Information Security Policy.
Another major challenge relates to the bridging the divide caused by distances. Today, banking has
broken all geographical barriers and demand from customers relates to 'anywhere and anytime
banking'. Currently, IT based offerings such as Internet and Mobile Banking have provided customers
with the means for meeting the requirement of being able to perform banking transactions from
anywhere. The death of distances have also necessitated that banks in India do not merely look
inward. Developments elsewhere in the world have also a strong impact on the efforts of Indian banks
and these have to be factored in an always vibrant world of technology based banking. Added to this
is the fact that markets have shrunk digitally and this gap would reduce further in the morrow. It would
be necessary to prepare ourselves for functioning in a very small knit shrunk world. Information
availability across a large section of people will bring in the challenge of being able to process such
large masses of information. This is an opportunity not only for the banking sector but for other sectors
including the IT industry as well. Banks will, therefore, brace themselves for co-operation and
co-existence and geographical boundaries may move away into oblivion just as sharing of resources
(such as ATMs) has already commenced propagation.
digital divide
We have all heard of the which is a challenge to be overcome by the banking industry as
well. While the average Indian customer may be as technology savvy or even better than his Western
counterpart, the cultural aspects of his relationships may necessitate a personal touch to the offerings
of banks. Further, all the technology based offerings by banks have a bias towards the major towns
and cities and the need for reaching the mid size cities as well as the large rural population assumes
significance. These pockets hold promises of substantial growth prospects and today with networking
capabilities being available at much higher reliability levels than before and at affordable costs, banks
may have to pay attention to these segments of the country as well.
to re-orient their internal processes and procedures.
To achieve all these, banks will also have Just as
mechanisation of processes in a manufacturing company required changes in the steps involved in the
production cycle, suitable changes in the job processes within banks will also have to be made. No
technology implementation is complete without the attendant changes in the basic way of process
functions at the organisation where such implementation shave been made, and if technology
implementations have to be successful, they have to be accompanied by suitable changes in the
Business Processing
process flows across all sectors of the economy, which is at the base of
Re-engineering. It is essential that banks embark upon Business Process Re-engineering in a large
scale and preferable even before the large scale implementation of technology has commenced.
The management of external relationships is another requirement which would have to be taken care
of by bankers of the future. Convergence of the services of more industries and organisations is
emerging so as to provide holistic service offerings to the discerning customer, and banks would be
the prime target by customers if they have to provide service levels which match their expectations.
This would necessitate that banks operate in an environment which will facilitate ease of
interoperability. Just as inter-operable IT systems and Straight Through processing (STP) will become the
order of the day, inter-operable business domains will also prevail and banks have to overcome this
challenge in their stride. This will also be observed in managing external functions such as Business
Process Outsourcing, management of IT service providers and better vendor management - all of
which are hitherto unknown domains for the banks' personnel.
The challenges staring at banking today need not result in a feeling of inadequacy. The I T framework
in India is on strong ground and the industry has been showing significant growth rates in the previous
years, with the financial sector having benefited immensely from the offerings of IT. Banks, for their
part, have proved their mettle and I must add that in the few years since liberalisation, banks in India
have proved that they can not only withstand the forces of change but blend the changes gracefully in
such a manner as to even provide a challenge to the hitherto existing leaders in the line of business.
Banks have commenced to grow laterally and at an exponential rate. We have the best talent of
personnel and the best institutes to develop more resources and the best brains to manage these
changes.
Our society has held a pride of place of being largely knowledge based, ever since the time of the
Vedas and the early days of the world. As India develops into a formidable force, it is Information
Technology which holds the key to the process of transformation. Our key strengths lie in knowledge
processing and as bankers we have been performing this function quite well both for our customers as
well as for the growth of our own organisations. This underlying strength will ensure our key to
success.
As banks are poised for challenging but exciting times ahead, I am sure that this conclave will also
provide substantial inputs as the day progresses on the various opportunities which banks will harbour
for implementation within their respective confines. I am sure that this conclave will provide the
kindling fire of transformation which banks in India will light up with enthusiasm and as Indian Banking
transcends all barriers and gains greater coverage, they would make a mark as world leaders in
providing unparalleled, efficient service at affordable rates resulting in high levels of customer
satisfaction and an overall vibrant economy. Lastly, before I conclude I would like to draw your
attention to the two vision documents , one relating to payment system and the other a draft of the
proposed financial sector technology that RBI have recently put out on its website. These documents
set out our vision for the next three years. We welcome your reaction. Need less to say your
preparedness should be synchronous with the vision of the Central Bank.
I wish the conclave all success.
Thank you.