The efficacy of core banking solutions under question.

S. Venkitaramanan

The RBI’s credit policy has come and gone, leaving bankers and borrowers none the wiser on matters of importance. Bankers are left to deal with issues of governance and credit disbursements. In this context, my attention was drawn to an article in the Bank Quest, a publication of the Indian Institute of Banking and Finance. The latest issue of Bank Quest has produced a special feature, which collects together the reflections of t he various CEOs of Indian banks on issues of importance. Two years ago, a similar discussion had been published in an issue of the same magazine and I had commented on it in these columns (Business Line dated August 7, 2006).

It seems appropriate to revisit some of the issues that have arisen in the banking system. The CEOs’ reactions on various topics of importance present a world view, which is different from the broader picture given by the macroeconomic reports of the RBI. But, these views are important because they reflect the challenges faced by the banking system.

One of the important issues presented to the CEOs for discussion is regarding the efficacy of what is called “core banking solutions” (CBS), which have been implemented in the Indian banking system over the last few years at the instance of the RBI.

Core banking solutions have been implemented in most banks in India although some CEOs expressed the view that their full implementation has presented teething troubles. When the CBS are fully operationalised, it confirms the advantage of enabling transactions to be processed smoothly and quickly and also enable a common data base in the Indian banks that adopt CBS.

Core banking solutions have the following features:

represent an information technology transition;

enable banks to introduce “any time anywhere banking”;

incorporate sophisticated IT solutions with appropriate advice/assistance from international technology majors/local IT giants;

enable innovations, such as RTGS (real time settlements) — a bank customer can embark on paperless settlement processes through the Internet and without use of cheque/draft;

a bank customer can also use Internet banking with banks availing of CBS implementation; and

enable banks to produce timely balance-sheets and integrated operations between various branches of the banks.

One advantage of CBS is centralisation. My personal experience, however, shows that centralisation can sometimes be a cause of inconvenience to the customer. A recent interaction with a private sector bank, which is highly technology-oriented and efficient, is that even for issue of a fresh cheque book, the local branch had to refer to headquarters for approval.

Further, the whole mechanics of computerisation and centralisation makes the core banking solution a ‘phony’ device, in the sense that it is too dependent on the use of telephonic information. It is all right for a sophisticated customer of a bank to access phone-based banking facilities. It is not possible for customers located in rural areas, who are unfamiliar with the sophisticated system and who do not have familiarity with modern devices, to use such facility to obtain simple information, such as balance in one’s account.

There must, in my view, be an option to over-ride the instrumentation and to switch on to the manual mode where a customer prefers direct information. The disappearance of the branch manager as an important person in the banking chain and substitution by a computer is a high price we have paid for the technical reforms implicit in the core banking solutions. The reformers of the banking system have to consider whether it is consistent with the aims of financial inclusion, which targets the mass of rural India for attention by the banking system.

One of the other important issues, which the Institute of Banking and Finance has referred to in the CEOs’ meeting, is that of universal banking. Opinion was divided among the CEOs, some of whom preferred a model in which different functions, such as insurance and mutual funds, were discharged by a bank’s subsidiaries or joint ventures rather than by adopting the universal banking model, in which a single bank provides all the services.

The debate on this subject has gathered significance in recent days because of the recent collapse of the Citibank in the US. Citibank, till its recent fall, carried on a number of businesses under one umbrella. It was a universal bank in the full sense of the term and it provided all services ranging from investment banking to insurance. Citibank’s collapse has been blamed on many causes, but one of the casualties has been the pre-eminence of the universal banking model.

While it is true that some of the commercial banks in India today have proceeded on the universal banking model, by and large, the trend has been to concentrate on the core banking functions per se. Risks of an all-embracing model, such as evidenced by the Citibank, are thereby reduced.

There is a reference in the discussion to the recommendations of the Raghuram Rajan Financial Reforms Panel for a single regulator to cover such models. Whether a super-regulator will avoid risks inherent in multi-regulators is not clear. The UK had a single regulator in FSA and it still experienced a fiasco, such as the failure of Northern Rock.

The discussion of the CEOs has also covered the subject of introduction of Basel-II norms. The CEOs seem to be fairly complacent about the problems that are embedded in Basel-II norms, such as rating of risks by rating agencies. Whether the country has adequate number of rating agencies to discharge the functions in a Basel-II compliant banking system is a question for consideration. Further, to what extent the rating agencies can be relied upon was also a matter of debate, in the light of the recent US experience.

The discussion also turned on subjects such as mis-selling. The CEOs remarked that there was not much mis-selling in the Indian banking system. This seems to be true except in respect of credit cards when over-enthusiastic sales agents advertise the easy virtues of credit cards without stressing the costs, which may be high. This, of course, is a remediable problem.

The CEOs’ discussion, by and large, represents a useful platform for assisting in the formulation of policies by the central bank and the Government of India. Adequate priority has to be given to issues that have come up in the discussion summarised by Bank Quest. It will be useful if the Institute of Banking and Finance makes this conference an annual feature with an RBI representative attending to react to the various points of views.

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