1. Vepa Kamesam Former Deputy Governor, RBI Chairman, IDRBT/BRBNML
Technology – The Core Service Differentiator for The Cochin Roundtable on Technology for Banks
Vepa Kamesam
Former Deputy Governor, RBI
Chairman, IDRBT/BRBNML

2. Technology and Banking
The Quintessence Nature of Banking harmonizes
closely with Technology –
Banking
Technology
Information Storage
Processing
Transmission
Tasks Common to Both

3. Banking and Technology
Innovative Risk
Management
Complex Credit
Calculations
Banking and Technology
Global Operations
Pervasive Branch
Network
Mass Transaction
& Items Processing

4. 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

5. Focus aspects of Commercial Banking now are:
Core
Banking (CBS)
MIS & Intranet
ATMs
Electronic
Banking
Card
Management
Corporate
Network
Any Branch Banking
Document
Management
CRM
Risk
Management
Resource
Management

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

7. 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.

8. Technology Differentiation Fades Gradually….

9. 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…

10. Elements of Technology as a Differentiator
For Long-Term Differentiation
Elements of Technology as a Differentiator
Scalability &
Flexibility
Efficient utilisation, mgmt
Process enabling
Utility to customer
Support
Skills

11. The Human Interface Technology means changes in skills and culture…
This means extensive changes for the employees…
The Implication –
Train existing people
Get new people
Technology change
Processes
change
Skills required change
People & culture
change

12. But Change is not easy…
Organisational structure and culture not dynamic
Extensive job redesign & redeployment is tough….as bank machinery is slow
Staff has 2 critical jobs to learn–
How to operate new technology
How to undertake the new tasks
This is not easy, as average employee age is nearly 45

13. Elements in People Issues
Choosing the suitable people for the task
Career emergence instead of career planning
Recognising and rewarding the achievers
Managers taking on the role of trainers
Encouraging new ideas and concepts
Adopting a multi-disciplinary, multi-functional approach
Shift from individual to business unit
Balancing – creativity & routine, change
Inculcating business discipline
Understanding the need and extent of continuous education
Getting rid of myths

14. 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

15. 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?”

16. For Sustained Differentiation
Differentiation is attained not achieved just through technology, it is gained in the way the technology is selected, implemented and utilised
Technology
For Sustained Differentiation
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

17. Why Central Banks are interested?
Technology and Central Banks
The potential
Technology
offers
to improve
internal
processes
Technology has
Affected every
Core
Central
Banking
Function
Why Central Banks are interested?

18. Why Central Banks are Interested?
The widespread adoption of technology by the banking industry
The impact of technology on every single core central banking function
Supervision and Regulation
Currency Management
Monetary & Financial Stability
The potential technology offers to central banks for rendering more effective its internal processes and functions

19. 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

20. 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.)

21. 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

22. 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

23. 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

24. IT and Payment and Settlement Systems
Demateria-lisation
Of Securities
Delivery
Versus
Payments
Payment
Continuous
Linked
Settlement
Electronic
Dealing
Platforms
Real
Time
Gross
Central
Counter
party
Secured
Netting
Systems

25. RBI INITIATIVES IN PAYMENT & SETTLEMENT SYSTEMS
NFS/IBPG
CFMS
NEFT
RTGS
PKI-based
Security
RBI
INITIATIVES
IN PAYMENT
&
SETTLEMENT
SYSTEMS
SFMS
PDO-NDS & SSS
Compliance with
BIS Core Principles
INFINET
Clearing Corporation
of India
IDRBT

26. 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

28. Financial Networks SWIFT Reuters NSE 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
Corporate Network
Inter Banks/FIs Network
Shared ATMs Network
Clearing Operations
Network
SWIFT
Reuters
NSE G1 G2 G3 G4 G5 G6 G7
Internet
INFINET

29. Structured Financial Messaging System
Bank-1 Gateway
Bank-2 Gateway
Bank-n Gateway
Branch-2
Branch-n
Branch-1
Central Server at IDRBT
………..…………….…..
………..…………….….…….. …
…….……
Branch-1

30. PKI Hierarchy CCA IDRBT CA RA RA RA Subscriber Subscriber Subscriber
Repository
IDRBT CA RA RA RA
Subscriber
Subscriber
Subscriber
Subscriber
Subscriber
Subscriber

31. IDRBT CA Physical Infrastructure
Iron gate with Biometric Access
Access through Swipe Card
Network
Strong Room
Key Ceremony Room
Operational Room
Tier 1
Tier 2
Tier 3
Tier 4
Tier 5
UPS
Administration Room
Media proof CA Private Key Storage
Biometric Access

32. NFS CONNECTIVITY with Existing Consortiums & Individual Banks
ISDN
National Financial Switch &
E- Payment Gateway
ISDN
MITR
Location: Chennai
BANCS & Cashtree
Location: Mumbai
Leased Line
Bank 2
INFINET
Bank 1
Broad Band VSAT
Bank N
CashNet
IP Address:
Subnet Mask:
Location: Mumbai
Primary Link
Backup Link

33. 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

34. IAS Real Time Gross Settlement CFMS 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

35. RTGS Scenario 87 banks have implemented it
6 more to implement in a fortnight
Customer transactions have already started
Total volumes – Transactions on average Rs.20,000 crores per day

36. Centralised Funds Management System
Gateway for the
participating banks
DAD-1
Bank 1
DAD-2
Bank 2
CFMS
Server
Bank 3
DAD-16
Balance checks & funds transfer messages
Bank n
DAD-17

37. Centralised Funds Management System – Countrywide Spread

38. Negotiated Dealing System & the Securities Settlement System
Electronic dealing platform in government securities and money market instruments- Primary and Secondary markets
Quicker Price Discovery
Straight Through Processing- Settlement of transactions
Delivery versus Payments
Efficient Servicing
Centralised Depository and Debt Servicing
Wide Area Based Dealing
System

39. 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

40. The Clearing Corporation of India
Promoted by large banks & financial institutions
Central Counterparty to trades in
Government Securities
Forex markets
Secure netting system

41. 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

42. Goal of Payment and Settlement Systems
Establishment of a secure, efficient, modern payment and settlement system in the country
Ensuring full compliance with the Core Principles for Systemically Important Payment Systems of the Bank for International Settlements

43. RBI itself uses Technology for differentiation
An integrated solution for each functional area
Online analytical capabilities – The Integrated Foreign Exchange Management Solution, The Human Resource Information System, Integrated Monetary Policy Solution
Online Decision Making – The Centralized Database Management System , The Enterprise Knowledge Management System
Customer Service – RBI website, coin & note dispensing machines for public, Interactive voice response for banks & FIs, ECS/EFT, cheque truncation
This is apart from technologies used for central banking functions

44. 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/ based communication with customers

45. 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

46. Technology Vision of the RBI
Centralised Database
Management System
Enterprise Knowledge
Integrated Accounting
System
Integrated Government
Accounting System
Currency Operations
Desk Top Decision Making Capability
Desk Top Analytical Capability
Desk Top Transactional Capability
Securities Settlement
Integrated Establishment
Offsite Supervisory
Systems
Integrated Forex
Human Resource
Information System

47. 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

48. Pre-requisites for Technology
Business Process
Re-engineering
Human Resource
Empowerment
Planning for
Disasters

49. The pre-requisites for Technology
Planning for disasters
Increased operational risk
Business Continuity Planning
Business Process Re-engineering
Human Resource Empowerment

50. People represent the most precious asset
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?

51. 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).

52. Success is a journey not a destination.
- Arthur Ashe
Thank You

53. Monetary Policy – The Challenge (1)
The proliferation of IT has…
redefined the toolkit of economic indicators used in implementing monetary policy
rendered more complex, the task of compiling statistical information
rendered difficult the task of capturing the impact of IT on price levels
raised issues in respect of the possible proliferation of digital money

54. Monetary Policy – The Challenge (2)
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

55. Monetary Policy – The Opportunity
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