Anand Sinha: Technology in banking - in pursuit of excellence
Address by Shri Anand Sinha, Deputy Governor of the Reserve Bank of India, at the IDRBT
(Institute for Development and Reasearch in Banking Technology) Banking Technology
Awards, Hyderabad, 4 August 2011.
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Inputs provided by Shri P K Chophla and Smt. Nikhila Koduri are gratefully acknowledged.
Director IDRBT, Shri B Sambamurthy, faculty members and officers of IDRBT, officials from
banks, members of the selection panel, my colleagues from Reserve Bank and all the other
participants. It is indeed my privilege to be present here today to honour the recipients of the
banking technology awards and deliver the key note address for the 7th edition of the
awards. I am grateful to IDRBT for giving me this opportunity. My heartiest congratulations to
all the winners.
This is a special moment for me to be presenting the awards to banks for their contribution
towards adoption and implementation of technology in different domains of their businesses.
As I look at this, I feel both humble and inspired. Humble, because I can honestly say that, a
decade ago, I could not have imagined or predicted the impact of technology that is so
overwhelmingly prevalent today. Inspired, because banks have employed the present day
technology very successfully and have pushed the right levers to bring about a tremendous
impact to their business potential. The role of IDRBT in this long and interesting journey has
been commendable. It has essayed, to perfection, its role as a service provider and also as
an "incubator" for research and development activities in the area of banking technology.
My remarks today are divided into two main parts. In the first part, I would be touching upon
the contribution of technology to the Indian banking industry, the role played by IDRBT and
the significance of banking technology awards, in fostering the technological developments
of banks. In the second part, I would be delving into a few issues in the area of
businesstechnology alignment that are critical in fully leveraging the benefits of technology by banks.
I. Contribution of technology in changing the face of banking
Technology adoption has changed the face of banking in India. What started as a mere
automation of some routine work processes in banks in the mid 80's has moved on to
become business process re-engineering which has resulted in making banking services
branchless, anytime and anywhere; facilitated new product development and, enabled near
real time service delivery. Technology has helped banks to reach the doorsteps of the
customer by overcoming the limitations on geographical/ physical reach in branch banking
and easing the resource and volume constraints posed by the brick and mortar model. All the
stakeholders have benefitted from the expansion of delivery channels, product innovation
and efficiency enhancement which have been facilitated by technology adoption. Banks,
however, need to guard against losing personal touch with their customers in such
technology driven environment as this would result in their losing valuable information
needed for their business. Overall, technology that began its journey in Indian banking as an
enabler, has now become a business driver, and is poised to be an inseparable part of
banking business process. This journey has come to the present stage by virtue of the push
given by the Reserve Bank and the whole hearted co-operation by Industry participants.
Reserve bank and banking technology
Reserve Bank of India started this push with the Rangarajan Committee Report I & II on
Computerization in Banks, followed by Saraf and Vasudevan Committee Reports. Some of
the significant developments during this journey have been introduction of MICR based
cheque clearing, automation of bank branches, computerization of Govt. business, setting up
of IDRBT, commissioning of INFINET, launching of IT based delivery channels, providing
guidelines for internet banking, implementation of NFS etc. The role played by the Reserve
Bank continues.
As you all know, RBI has recently released an IT vision document 2011-17, which identifies
the key focus areas for banks in India. The document indicates the significance to be accorded
to the enhanced use of IT in areas like MIS, regulatory reporting, financial inclusion along with
the need for appropriate risk mitigation measures and business continuity management. It
envisages banks to work towards utilising technology for cost reduction of small value
transactions, improved customer services and effective flow of information within the banks
and to the regulator. The document emphasizes the need to move towards integrated IT
environment for tapping the synergistic benefits of holistic system implementation.
Setting up of IDRBT - contribution in banking technology & research
Setting up of the Institute for Development and Research in Banking Technology (IDRBT),
Hyderabad in the mid nineties, as a research and technology centre for the banking sector
was a major step to facilitate and support the "technological revolution" in banking. It was set
up in the year 1994 as an apex level institute for spearheading technology absorption in the
Indian Banking and the financial sector. It focuses on the training, research and development
activities in the field of information technology. The commissioning of INFINET as the
backbone for financial communication has been a major achievement for IDRBT. IDRBT also
acts as a Certifying Authority (CA) for issuance of digital certificates for players in the
banking and financial sector. Structured Financial Messaging System (SFMS), a secure and
common domestic financial messaging solution for intra-bank and interbank applications,
developed on the lines of SWIFT was the brainchild of IDRBT. IDRBT has also been active in
dynamically assessing the needs of the banking community and in organizing trainings and
workshops in relevant IT related areas to address such needs. It has been performing its
designated role as an important component of RBI's banking technology push and continues
with its endeavor.
Reaching for the skies - banking technology excellence awards
Institution of the excellence awards is a step in the direction of encouraging effective
adoption of technology by banks. Instituted in the year 2001, with the primary objective of
encouraging and recognizing excellence in implementation of Technology for better customer
service, operational efficiency and expansion of banking services to the hitherto uncovered
sections of society, the category of awards has been changing with the change in the
technology deployment focus from time to time. This year, banks have been divided into two
categories - large and small, to enhance the spirit of "sporting competition" amongst banks
by ensuring a level playing field.
II. Alignment of technology and business objectives - critical issues
Having given the background of the role of technology in banking development and the role
essayed by Reserve Bank and IDRBT, I would now like to touch upon a few focus areas in
the business-technology alignment which could become critical in our journey in pursuit of
technological excellence.
Leveraging technology for financial inclusion - the journey so far, introspection and
way ahead
Banking, as all of us know, is an industry that provides vital service and support to the
economic and financial sectors. As such, it has to cater to all the diverse segments of
society. However, more than 50 per cent of the adult population in our country is still
excluded from the financial sector. It is not just people in the rural areas; many of the lower
income categories of the urban population are also excluded from the banking fold. This is
largely because of the way the supply of such services is organized. Our existing banking
business model has done laudable work in some of the areas, but has not been able to
adequately address these specific challenges. For instance, transaction costs of financial
services to the poor are much larger in comparison to their revenue generation potential in
the short term. From the demand side too, there is financial illiteracy and the consequent fear
of approaching formal institutions. With this huge chunk of our populace being deprived of
basic economic facilitators, or alternatively seen, with this huge resource base remaining
untapped, it would not be feasible to achieve our growth potential.
Technology has the potential to influence financial inclusion in a big way and help resolve
many of the above problems. The use of technology in extending banking outreach is an
area of contemporary focus in India. Thanks to the versatility of information technology,
innovation is giving us the hope that new business models like Banking Correspondents
(BCs), innovative payment devices, Unique Identification number allocation etc. will enable
us to achieve financial inclusion, while addressing some of the cost and beneficiary
identification issues. Ultimately, the objective is to lower the operating costs through
technological innovations whereby, financial inclusion becomes a profitable business. This
will result in a huge upside to the bank in the form of stable deposits. Financial inclusion
would be a catalyst to growth and would also contribute indirectly to financial stability.
We hope that the initiatives in this space, encouraged by Government as well as Reserve
Bank, shall get enthusiastic support from the banking fraternity and help us achieve the
dream of inclusive growth, which can catapult India into the next orbit of development in the
foreseeable future.
Wings of change - mobile banking
Over the last few years, the mobile and wireless market has been one of the fastest growing
in the world. Mobile phones have become an essential as well as conveniently available
communication tool for almost every individual. Using this technology for funds transfers as
well as retail payments holds a huge potential. As such, mobile banking is the most
happening area of development in the banking sector and is expected to complement, and to
an extent replace, the credit/debit card system in future. While it has the potential to
overcome issues relating to cost, infrastructure and resources; it does pose some new issues
of its own. The main amongst these pertain to the dependence on service providers, network
availability and security. It would also require deep appreciation of management aspects
which relate not only to appropriate technology deployment and performance at backend but
also to issues such as front end contact with the customer to provide necessary confidence
and convenience. All these issues are receiving due attention for prioritized resolution. RBI
has also established National Payment Corporation of India for focused attention on
development and implementation of requisite technologies for enabling new modes of
delivery.
Electronic payment systems
One of the areas where technology has facilitated significant revolution is payment systems.
It started with the mechanization/ automation of certain processes by introduction of cheque
sorters and readers, MICR based clearing etc. and has moved on to use information
technology for efficient funds transfer mechanisms such as ECS, NEFT, CTS, RTGS. The
focus has shifted from the initial needs of capacity management for handling increasing
volumes, to efficiency enhancement in transaction processing for the benefit of businesses,
markets as well as retail customers. We are witnessing increasing utilization of these delivery
mechanisms and have to think about the next higher level of technology and sophistication to
meet the rising expectations of the market participants. RBI has already initiated work
towards introduction of new generation RTGS, which will be able to handle rising volumes,
provide better functionalities and has better technological adaptability. Our journey towards
leveraging technology for making our payment systems at par with the best in the world will
continue with appropriate contributions from all concerned.
Another important benefit derived from information technology deployment is the ability of
banks to provide innovative delivery channels. Online banking, debit & credit card payments,
ATM access to other bank customers, Point of Sales terminals etc. have all changed the way
bank customers are able to transact for their day to day needs, thereby creating a huge eco
system of convenient banking facilities which substantially reduces the need for physical
proximity and handling of cash. It also provides access to a large number of global retail
markets to our citizens.
Use of IT for improving internal effectiveness - significance and benefits
Focus of technology in Indian banking, so far, has, mainly, been on transaction processing,
data storage, service delivery, and rightly so. These were our priorities to make banking
better, convenient and more accessible. Now, that our banking has reached a stage where
many of such services are running on tech enabled processes, we can look forward to
improving other areas which were not, hitherto, focus of our attention and have huge scope
for improvement, such as internal management and back end processes. Currently, while
data storage and retrieval are on computerized systems, the administrative processes are
largely manual, warranting huge resource deployment. This adds to costs, impacts efficiency
and reduces effectiveness of internal controls. Further, in the existing models followed in
many work areas in banks, data flows and reporting for MIS as well as external filings require
manual interventions and multiple database access/ sourcing. This not only affects the
timeliness of data submission but also the quality thereof. Errors in submitted data and,
sometimes, subjective interpretations of data submission requirements lead to wrong
decisions and, may be, serious consequences. RBI has taken the initiative in the form of
automated data flow project, through which an attempt is being made to ensure that all banks
start furnishing reports to RBI by means of straight through/ automated processes which do
not require manual intervention. This will ensure that reporting is error free, direct from
business data and timely. I hope, all of you will whole heartedly co-operate and ensure early
implementation of this initiative.
Challenges in IT usage - costs and risks
Wide spread technology deployment in the banking business has brought to the fore some
new issues and challenges. These can be broadly divided into two categories - Costs and
Risks. Costs - in terms of increasing expenditure on IT deployment and, risks - resulting
from - reliance on IT systems without necessary safeguards. Cost aspects can be addressed
by synergizing IT deployment objectives with the broader, strategic business objectives to
ensure adequate operational and management controls over purchase as well as
maintenance of appropriate technology solutions. Oversight and Governance mechanisms
have to be strengthened to ensure that costs involved in IT management are properly
evaluated and controlled, technology deployment decisions are based on holistic and
considered evaluation, the solutions / process changes have customer in focus and that
banking organizations do not end up investing in technology which hampers customer
interests. The second aspect relating to IT risks is a very critical issue. With the increased
use of IT, there are attendant risks posed to the banks as well as their customers in terms of
monetary loss, data theft, breach of privacy and banks need to be extremely cognizant of
such risks.
Another significant aspect of banking business is regulatory and supervisory compliance.
With the growth and globalization of markets in general and in the aftermath of recent crisis
in particular, number of such compliance requirements is increasing. Basel II & III
implementation brings in huge challenges. It requires enormous amount of continuous data
capturing for analysis, risk measurement and provisioning, as also validation of models and
processes deployed for such assessments. All this has to be essentially carried out using
technology based applications. However, these requirements will entail some costs and
banks will have to see as to how appropriate technology usage can help them reduce the
costs of compliance process, at least in terms of operational efficiency. At the same time, IT
risk itself shall form a large part of the operational risk and shall require focused attention.
Within the boundaries of permissible action, some banks may find innovative solutions to
shore up asset or liability management efficiency to counterbalance some of the costs. But,
again, Governance mechanism shall have to be alert and appropriate to ensure that cost
considerations do not lead to "shortcuts" in compliance. IDRBT has collated and published
some useful information on their website regarding IT Governance, which is appreciable.
Conclusion
Technology has revolutionized the way banking is looked at and the way it is conducted in
our country. It is growing in stature from a business enabler to becoming a part of the
business process itself. It has opened new avenues for the industry in terms of business
opportunities as well as their role in supporting inclusive growth for the Indian economy.
Here I am inspired by a quotation by Carly Fiorina, former CEO of Hewlett Packard (HP) and
I quote:
"I believe we are now entering the Renaissance phase of the Information Age,
where creativity and ideas are the new currency, and innovation is a primary virtue,
where technology truly has the power to transform lives, not just businesses, where
technology can help us solve fundamental problems."
I complement all the participants for their sincere efforts to fruitfully deploy technology,
congratulate the winners of awards for the year and hope that this journey towards
excellence shall continue, with IDRBT continuing the good work it's doing and each one of
the banks chipping in with their best.
Thank you.