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Workshop on The Future of Banking organized by HMA & ISB (October 30, 2004) Vepa Kamesam Former Deputy Governor, RBI Currently Chairman, IDRBT/BRBNML Technology and Banking Tasks Common to Both Information Storage Processing Transmission Technology Banking

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workshop on the future of banking organized by hma isb october 30 2004

Workshop on The Future of Bankingorganized byHMA & ISB(October 30, 2004)

Vepa Kamesam

Former Deputy Governor, RBI

Currently Chairman, IDRBT/BRBNML

slide2

Technology and Banking

Tasks Common to Both

Information Storage

Processing

Transmission

Technology

Banking

The Quintessence Nature of Banking harmonizes

closely with Technology –

slide3

Banking and Technology

Innovative Risk

Management

Complex Credit

Calculations

Global Operations

Pervasive Branch

Network

Mass Transaction

& Items Processing

many benefits of technology
Many Benefits of Technology
  • Increased operational efficiency, profitability & productivity
  • Superior customer service
  • Multi-channel, real-time transaction processing
  • Better cross-selling ability
  • Improved management and accountability
  • Efficient NPA and risk management
  • Minimal transaction costs
  • Improved financial analyses capabilities
slide5

Focus aspects of Commercial Banking now are:

BANK’S BUSINESS

LOANS & MISC. SERVICES

Core

Banking (CBS)

MIS & Intranet

ATMs

RAISING DEPOSITS

POS Terminals and Cash dispenser

Electronic

Banking

Corporate

Network

Card

Management

Any Branch Banking

Document

Management

CRM

Risk

Management

Resource

Management

BANK’S BUSINESS

slide6

Financial Technology Infrastructure

  • Data Center to host servers for:
    • CBS
    • ATM/Financial Switch
    • Internet Banking
    • DW/DM/CRM/MIS etc.
    • Back-office Application
    • E-mail Servers, Internet Server,
  • Enterprise-wide Network & Networking Equipment
  • Security Systems
  • Systems at Branches/RO/ZO/CO Depts.
  • Supporting Systems
  • Disaster Recovery Site & Business Continuity
technology a differentiator
Technology – A Differentiator

Technology is indeed a differentiator not only in terms of competitive advantage, but also in terms of administrative and back-end processes….

But…due to rapid technology deployment in Indian banking sector, the “haves” and “have-nots” gap is all set to narrow quickly.

how long a differentiator
How Long a Differentiator?
  • Then….can technology be enough of a differentiator?
  • Any new technology or technology-enabled process can act as a differentiator or a competitive edge for some level of time.
  • After that time, the technology still has to be adopted as a “necessity” and as a cost of doing business

Thanks to shortening technology life cycles, it would be short sighted to assume that technology would be a long term differentiator…

slide10

For Long-Term Differentiation

Elements of Technology as a Differentiator

Scalability &

Flexibility

Efficient utilisation, mgmt

Process enabling

Utility to customer

Support

Skills

issues with customers
Issues with Customers

Not only employees, there are problems for customers too when a new technology arrives…

  • The major challenges –
    • Comfort levels
    • Security and trust issues
    • Convenience factor
    • Getting rid of myths
    • Migration from existing to new systems
    • Changing the habits
slide12

POS Terminal and Cash Dispenser

POS Terminal

Connected to Cash dispenser

slide13

ATM

Electronic Banking

Branch Banking

Branch 3

Branch 2

Branch 1

Head Office

Branch 4

Branch n

Branch 5

Branch 6

technology acquisition
Technology Acquisition
  • Inappropriate technology purchases can be the root of all problems…
  • The Bank management has to:
    • Give thought to the utilization rate
    • Avoid “knee-jerk” reactions (“they have done it…I should also do it”)
    • Be impartial in technology decisions (“I like that technology…I want it”)
    • Understand where the solution will fit AND where it won’t!
    • Assess the strengths & weakness of solution
    • And seek answer to “are we ready for it?”
slide15

Goal definition

  • Integrating business & technology goals
  • Solution features
  • Vendor selection
  • Business process re-engineering
  • Change management
  • Efficient utilisation
  • Customer utility
  • Technology Management
  • Support functions
  • Maintenance
  • Back-ups and Disaster Recovery
  • Scalability & flexibility
  • Learning & evolution

Technology

For Sustained Differentiation

Differentiation is attained not achieved just through technology, it is gained in the way the technology is selected, implemented and utilised

slide16

Regulation and Supervision – The Challenge

  • Challenge of Technology:
    • New markets, products, services, delivery channels
    • Opened up a market for “risks” – derivatives
    • Challenge of financing tech firms & IT innovation
    • all have implications for the stability of banks and of the economy
  • The Opportunity
    • Regulators have new tools
    • Focus of all recent financial sector reforms
    • Emergence of non-intrusive, focused supervision
    • …with a view to prevent frauds and disturbances to financial stability
slide17

Technology and Banking Supervision

THE RBI RESPONSE

Offsite Supervision & Monitoring

OSMOS

COSMOS (Non banking Financial Companies / Development Financial Institutions)

UBD Soft

Credit Information Bureau (A joint venture between Housing Development Finance Corporation Ltd., State Bank of India, Trans Union International Inc. & Dun & Bradstreet Information Services India Pvt. Ltd.)

Will be covered in detail by Speaker Dr. T.V. Gopalakrishnan

slide18

Currency Management and Technology – Opportunities Galore

  • Currency Management - a formidable task in India given…
    • the geographical size, the volume and value of notes and coins in circulation, preference for cash and currency handling practices
    • ...but technology offers immense opportunities to improve performance

RBI’s The Clean Note Policy (1999)

Establishment of 2 state of the art currency presses

Technology driven anti counterfeit measures

48 fully automated Currency Verification & Processing Systems

21 Shredding and Briquetting Machines

technology monetary systems
Technology & Monetary Systems

Technology has:

  • Transformed the conduct of the payment and settlement system
  • Set the stage for an unprecedented growth in financial activity across the globe
  • Rendered more vulnerable the domestic payment system and financial stability to international “shocks”
  • … making the conduct of monetary policy more complex and prone to implementation and operational risks
slide20

Technology & Monetary Systems

The Opportunities –

  • The proliferation of IT has also set the stage for improving and managing risks in payment systems
    • Electronic Trading Systems
    • DVP/PVP
    • RTGS
    • Secured Netting Systems
    • The growth of the Central Counterparty (CCP)
    • Continuous Linked Settlement
slide21

Continuous

Linked

Settlement

Central

Counter

party

Secured

Netting

Systems

Payment

Versus

Payment

Real

Time

Gross

Settlement

Electronic

Dealing

Platforms

Delivery

Versus

Payments

Demateria-lisation

Of Securities

IT and Payment and Settlement Systems

slide22

NFS/IBPG

NEFT

CFMS

RTGS

PKI-based

Security

PDO-NDS & SSS

SFMS

INFINET

Compliance with

BIS Core Principles

Clearing Corporation

of India

IDRBT

RBI

INITIATIVES

IN PAYMENT

&

SETTLEMENT

SYSTEMS

slide23

RBI Initiatives in Payment and Settlement Systems (1)

  • The IDRBT
    • Network Externalities
      • The Indian Financial Network (INFINET)
    • Messaging Solutions
      • The Structured Financial Messaging System (SFMS)
    • Security
      • Public Key Infrastructure
      • IDRBT CA
    • National Financial Switch
    • Inter Bank Payment Gateway
slide25

Reuters

Network

SWIFT

Network

NSE

Network

Gateways and Integration with

Other Financial Network Services

G1 - SWIFT Network

G2 - Reuters Network

G3 - Stock Exchange Network

G4 - Inter Banks/FIs

G5 - Shared ATMs

G6 - Clearing Operations Network

G7 - Internet

G2

G3

G3

G2

G1

G1

Corporate Network

G2

G2

G2

G1

G1

G3

G3

G1

G3

Inter Banks/FIs Network

G4

Shared ATMs Network

G5

G4

G4

Clearing Operations

Network

G5

G6

G5

Internet

G7

Financial Networks

INFINET

slide26

Central Server at IDRBT

Bank-1 Gateway

Bank-2 Gateway

Bank-n Gateway

………..…………….….……..

………..…………….…..

…….……

…….……

Branch-1

Branch-2

Branch-n

Branch-1

Branch-2

Branch-n

Branch-1

Branch-2

Branch-n

Structured Financial Messaging System

slide27

CCA

IDRBT CA

IDRBT CA

Repository

RA

RA

RA

Subscriber

Subscriber

Subscriber

Subscriber

Subscriber

Subscriber

PKI Hierarchy

slide28

ISDN

Leased Line

Leased Line

Bank 2

ISDN

INFINET

Leased Line

Leased Line

ISDN

ISDN

Leased Line

ISDN

BANCS & Cashtree

Location: Mumbai

MITR

Location: Chennai

NFS CONNECTIVITY with Existing Consortiums & Individual Banks

National Financial Switch &

E- Payment Gateway

ISDN

Bank 1

Bank N

Broad Band VSAT

CashNet

IP Address:202.138.123.68

Subnet Mask: 255.255.255.254

Location: Mumbai

Primary Link

Backup Link

slide29

RBI Initiatives in Payment and Settlement Systems (2)

  • A Real Time Gross Settlement System
    • Reduction of systemic risk in inter bank payment systems
    • To be implemented by the year end
  • The Centralised Funds Settlement System
    • Facilitating effective liquidity management
  • The Negotiated Dealing System
    • A modern electronic dealing platform for gilts
    • Enabling Straight Through Processing
slide30

Real Time

Gross Settlement

CFMS

IAS

Settlement

Accounts

Intra Day

Liquidity

SSS

IFTP

Strip & Store

Processes

RBI Payments and Actg. Entry Interface

INFINET

NSS

Participant’s

Interface

Participant’s

Interface

Participant’s

Interface

rtgs scenario
RTGS Scenario
  • 90 banks have implemented it
  • 3-4 more to implement in a fortnight
  • Customer transactions have already started
  • Total volumes – Transactions on average Rs.20,000 crores per day settled continuously from the time of opening of markets
  • Guarantee settlement fund
slide32

RBI Initiatives in Payment and Settlement Systems (3)

  • The Securities Settlement System
    • Providing centralized depository and settlement services
    • Seamlessly integrated with the NDS and RTGS Systems
  • The Clearing Corporation of India
    • Secured netting services with central counterparty arrangements
    • G-Sec and Forex segments
    • Elimination of settlement risks with liquidity saving elements
smart cards the future
Smart Cards – The Future
  • Multi-application Smart Card
  • Channel of the future
  • Pilot project started
  • Pilot Project funded by MCIT, Govt. of India
  • The project is in progress in partnership with IDRBT, IIT Bombay, and Banks in India
slide34

RBI and Customer Service…(1)

  • Dissemination of information
    • The RBI website
  • Multiple Delivery Channels
    • Coin & Note Dispensing Machines
      • For the general public
    • Interactive Voice Response System
      • For banks and financial institutions
    • Web server
      • For government customers
    • On the anvil….
      • A secured web server
      • SFMS/email based communication with customers
slide35

RBI and Customer Service...(2)

  • Improvements in payment and settlement systems
    • MICR Clearing
      • Enabling faster clearing of cheques
    • Cheque Truncation & E-Cheques
      • On the drawing board
    • ECS/EFT
      • Enabling T+2 settlement of our equities market
      • National EFT
      • Enabling T+0 settlement of all customer funds transfer transactions
slide36

Technology Vision of the RBI

Desk Top Decision Making Capability

Centralised Database

Management System

Enterprise Knowledge

Management System

Desk Top Analytical Capability

Offsite Supervisory

Systems

Integrated Forex

Management System

Human Resource

Information System

Desk Top Transactional Capability

Integrated Accounting

System

Integrated Government

Accounting System

Currency Operations

System

Securities Settlement

System

Integrated Establishment

System

slide37

Issues in Implementation

“Less than 10% of failures are due to technical snags – most are due to poor management and implementation”

  • Resistance to change
  • Overlooking process reengineering
  • Project management
  • Dedicated project teams
  • Change management
  • Policies
  • People Skills & Training
  • Basic Infrastructure – telecom, power
  • Security
  • Privacy & confidentiality
  • Legal and regulatory issues
slide38

Planning for

Disasters

Business Process

Re-engineering

Human Resource

Empowerment

Pre-requisites for Technology

slide39

The pre-requisites for Technology

  • Planning for disasters
    • Increased operational risk
    • Business Continuity Planning
  • Business Process Re-engineering
  • Human Resource Empowerment
slide40

Getting Personal with Personnel

  • People represent the most precious asset
  • Large employee base – largely untrained. Training scope & methodology?
  • VRS to balance costs. Break even? Down sizing?
  • Bring in young blood
  • Campus recruitment
  • Re-defining & designing jobs. Career paths?
  • Specialist Vs. Generalist
  • Attrition of trained employees to IT industry / other banks. Competitive incentives?
  • Re-location of personnel. Union issues?
  • Retrained personnel. Morale of employees?
need for training
Need for Training
  • All these developments call for extensive, continuous training
  • Current and future technology implementations call for at least 20% of officers specialise in IT
  • Hence need for specially skilled people – a mix of:
    • System administrators
    • Application managers (knowledgeable about both banking and technology)
    • Technology managers (who form the core team of technology professionals).
slide42

Security Risk Management

  • Security is about…cementing the weak link
  • Strong security measures (physical & data security) plus disaster recovery are essential
  • Authentication of e-banking customers and accountability for e-banking transactions
  • Segregation of duties, proper authorization controls etc.
  • Physical security measures
      • Graded access control, Iris & X-ray scanners, CCTV & detection systems, hotline and wireless links, fingerprint readers, concealed cameras, various sensors, bollards, boom barriers etc.
  • Disaster Management and Disaster Recovery sites
slide45

How to Ensure Security??-A Framework

Assess

Respond

Protect

Detect

slide46

IDRBT’s Solutions for Security Risk Management (SRM)

RiskAssessment

GapAnalysis

IS Audit

SRMfor

Banks

Policy &ProceduresDevelopment

Awareness byTraining

INFINET

PKI

Implementation

slide47

At a Glance…….

  • Technology Related Issues
  • People Related Issues – Reskilling
  • Monetary systems, Efficient Telecommunication & Infrastructure to Drive Banking on Real-time Basis
  • Risk Management & Physical Security
slide48

The future will be not be more of the same…

… we need to be ready..

Thank You