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
The Quintessence Nature of Banking harmonizes
closely with Technology –

Tasks Common to
Both

Information
Banking Storage Technology
Processing
Transmission

INSTITUTE FOR DEVELOPMENT AND

RESEARCH IN BANKING TECHNOLOGY October 30, 2004 Vepa Kamesam, Chairman IDRBT
 Innovative Risk
Management
Complex Credit
Calculations

Global Operations

Pervasive Branch
Network

Mass Transaction
& Items Processing

INSTITUTE FOR DEVELOPMENT AND

RESEARCH IN BANKING TECHNOLOGY October 30, 2004 Vepa Kamesam, Chairman IDRBT
 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
INSTITUTE FOR DEVELOPMENT AND
RESEARCH IN BANKING TECHNOLOGY October 30, 2004 Vepa Kamesam, Chairman IDRBT
 Focus aspects of Commercial Banking
now are:
BANK’S BUSINESS

LOANS & MISC. SERVICES

Core MIS & ATMs
RAISING DEPOSITS

Banking (CBS) Intranet POS Terminals

and Cash
dispenser
Electronic
Banking Card
Corporate Management
Network
Any Branch Document
Banking Management

Risk Resource
CRM
Management Management

BANK’S BUSINESS
INSTITUTE FOR DEVELOPMENT AND
RESEARCH IN BANKING TECHNOLOGY October 30, 2004 Vepa Kamesam, Chairman IDRBT
 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
INSTITUTE FOR DEVELOPMENT AND
RESEARCH IN BANKING TECHNOLOGY October 30, 2004 Vepa Kamesam, Chairman IDRBT
 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.

INSTITUTE FOR DEVELOPMENT AND

RESEARCH IN BANKING TECHNOLOGY October 30, 2004 Vepa Kamesam, Chairman IDRBT
Technology Differentiation Fades Gradually….

INSTITUTE FOR DEVELOPMENT AND

RESEARCH IN BANKING TECHNOLOGY October 30, 2004 Vepa Kamesam, Chairman IDRBT
 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…

INSTITUTE FOR DEVELOPMENT AND

RESEARCH IN BANKING TECHNOLOGY October 30, 2004 Vepa Kamesam, Chairman IDRBT
 For Long-Term Differentiation

Elements of Technology as a
Differentiator

Scalability Efficient
Process Utility to Support
& utilisation,
enabling customer Skills
Flexibility mgmt

INSTITUTE FOR DEVELOPMENT AND

RESEARCH IN BANKING TECHNOLOGY October 30, 2004 Vepa Kamesam, Chairman IDRBT
 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

INSTITUTE FOR DEVELOPMENT AND

RESEARCH IN BANKING TECHNOLOGY October 30, 2004 Vepa Kamesam, Chairman IDRBT
 POS Terminal and Cash Dispenser

POS Terminal
Connected to
Cash dispenser

INSTITUTE FOR DEVELOPMENT AND

RESEARCH IN BANKING TECHNOLOGY October 30, 2004 Vepa Kamesam, Chairman IDRBT
 ATM
Electronic
Banking

Branch
Banking
Branch 3
Branch 2

Branch 1
Head Office
Branch 4

Branch n Branch 5

Branch 6

INSTITUTE FOR DEVELOPMENT AND

RESEARCH IN BANKING TECHNOLOGY October 30, 2004 Vepa Kamesam, Chairman IDRBT
 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?”

INSTITUTE FOR DEVELOPMENT AND

RESEARCH IN BANKING TECHNOLOGY October 30, 2004 Vepa Kamesam, Chairman IDRBT
 Differentiation is attained not achieved just through
technology, it is gained in the way the technology is selected,
implemented and utilised
Goal definition Efficient utilisation
Integrating Customer utility
business & Technology
technology goals Technology Management
Solution features For Sustained Support functions
Vendor selection Differentiation Maintenance
Business process Back-ups and
re-engineering Disaster Recovery
Change Scalability &
management flexibility
Learning &
evolution

INSTITUTE FOR DEVELOPMENT AND

RESEARCH IN BANKING TECHNOLOGY October 30, 2004 Vepa Kamesam, Chairman IDRBT
 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
INSTITUTE FOR DEVELOPMENT AND
RESEARCH IN BANKING TECHNOLOGY October 30, 2004 Vepa Kamesam, Chairman IDRBT
 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
INSTITUTE FORbe covered in AND
DEVELOPMENT detail by Speaker Dr. T.V. Gopalakrishnan
RESEARCH IN BANKING TECHNOLOGY October 30, 2004 Vepa Kamesam, Chairman IDRBT
 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

INSTITUTE FOR DEVELOPMENT AND

RESEARCH IN BANKING TECHNOLOGY October 30, 2004 Vepa Kamesam, Chairman IDRBT
 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

INSTITUTE FOR DEVELOPMENT AND

RESEARCH IN BANKING TECHNOLOGY October 30, 2004 Vepa Kamesam, Chairman IDRBT
 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
INSTITUTE FOR DEVELOPMENT AND
RESEARCH IN BANKING TECHNOLOGY October 30, 2004 Vepa Kamesam, Chairman IDRBT
 IT and Payment and
Settlement Systems

Real
Time
Electronic Gross
Dealing Settlement
Platforms
Delivery
Versus
Payments

INSTITUTE FOR DEVELOPMENT AND

RESEARCH IN BANKING TECHNOLOGY October 30, 2004 Vepa Kamesam, Chairman IDRBT
 NFS/IBPG
CFMS
NEFT

PKI-based RTGS
Security

RBI
INITIATIVES PDO-NDS & SSS
SFMS
IN PAYMENT
&
SETTLEMENT Compliance with
SYSTEMS BIS Core Principles
INFINE
T
Clearing
IDRBT Corporation
of India
INSTITUTE FOR DEVELOPMENT AND
RESEARCH IN BANKING TECHNOLOGY October 30, 2004 Vepa Kamesam, Chairman IDRBT
 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
INSTITUTE FOR DEVELOPMENT AND
RESEARCH IN BANKING TECHNOLOGY October 30, 2004 Vepa Kamesam, Chairman IDRBT
 INSTITUTE FOR DEVELOPMENT AND
RESEARCH IN BANKING TECHNOLOGY October 30, 2004 Vepa Kamesam, Chairman IDRBT
 Financial Networks
SWIFT Reuters NSE Gateways and Integration with
Network Network Network 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

G1 G1 G2 G2 G3 G3

Corporate Network

G2 G2 G2 INFINET
G1 G3 G1 G3 G1 G3
Inter Banks/FIs Network
G4
Shared ATMs Network

G4 G4 G5

Clearing Operations
G5 G5 G6 Network

Internet
G7

INSTITUTE FOR DEVELOPMENT AND

RESEARCH IN BANKING TECHNOLOGY October 30, 2004 Vepa Kamesam, Chairman IDRBT
 Structured Financial Messaging System
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

INSTITUTE FOR DEVELOPMENT AND
RESEARCH IN BANKING TECHNOLOGY October 30, 2004 Vepa Kamesam, Chairman IDRBT
 PKI Hierarchy
CCA

IDRBT CA
IDRBT CA
Repository

RA RA RA

Subscriber Subscriber Subscriber Subscriber

Subscriber Subscriber

INSTITUTE FOR DEVELOPMENT AND

RESEARCH IN BANKING TECHNOLOGY October 30, 2004 Vepa Kamesam, Chairman IDRBT
 NFS CONNECTIVITY with Existing Consortiums & Individual Banks
ISDN National Financial Switch &
E- Payment Gateway ISDN

Leased Line
Leased Line

Bank 1 Bank 2

ISDN

INFINET Leased Line

Broad Band VSAT Bank N

Leased Line
ISDN ISDN
Leased Line

ISDN

CashNet

IP Address:202.138.123.68 BANCS & Cashtree

Subnet Mask: 255.255.255.254 MITR Location: Mumbai
Location: Chennai
Location: Mumbai Primary Link

Backup Link
INSTITUTE FOR DEVELOPMENT AND
RESEARCH IN BANKING TECHNOLOGY October 30, 2004 Vepa Kamesam, Chairman IDRBT
 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
INSTITUTE FOR DEVELOPMENT AND
RESEARCH IN BANKING TECHNOLOGY October 30, 2004 Vepa Kamesam, Chairman IDRBT
 Real Time
Gross
CFMS Settlement

Settlement
Intra Day Accounts
Liquidity
SSS
StripIFTP
& Store RBI Payments and
Processes Actg. Entry
Interface

INFINET NSS

Participant’s Participant’s Participant’s

Interface AND
INSTITUTE FOR DEVELOPMENT Interface Interface
RESEARCH IN BANKING TECHNOLOGY October 30, 2004 Vepa Kamesam, Chairman IDRBT
 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
INSTITUTE FOR DEVELOPMENT AND
RESEARCH IN BANKING TECHNOLOGY October 30, 2004 Vepa Kamesam, Chairman IDRBT
 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
INSTITUTE FOR DEVELOPMENT AND
RESEARCH IN BANKING TECHNOLOGY October 30, 2004 Vepa Kamesam, Chairman IDRBT
 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
INSTITUTE FOR DEVELOPMENT AND
RESEARCH IN BANKING TECHNOLOGY October 30, 2004 Vepa Kamesam, Chairman IDRBT
 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

INSTITUTE FOR DEVELOPMENT AND

RESEARCH IN BANKING TECHNOLOGY October 30, 2004 Vepa Kamesam, Chairman IDRBT
 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

INSTITUTE FOR DEVELOPMENT AND

RESEARCH IN BANKING TECHNOLOGY October 30, 2004 Vepa Kamesam, Chairman IDRBT
 Technology Vision of the RBI
Desk Top Decision Making Capability

Centralised Database Enterprise Knowledge

Management System Management System

Desk Top Analytical Capability

Offsite Supervisory Integrated Forex Human Resource

Systems Management System Information System

Desk Top Transactional Capability

Integrated Accounting Integrated Government Currency Operations

System Accounting System System

Securities Settlement Integrated Establishment

System System
INSTITUTE FOR DEVELOPMENT AND
RESEARCH IN BANKING TECHNOLOGY October 30, 2004 Vepa Kamesam, Chairman IDRBT
 Issues in Implementation
“Less than 10% of failures are due to technical snags – most are due to
poor management and implementation”

INSTITUTE FOR DEVELOPMENT AND
RESEARCH IN BANKING TECHNOLOGY
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
October 30, 2004 Vepa Kamesam, Chairman IDRBT
 Pre-requisites for Technology

Human Resource Business Process

Empowerment Re-engineering

Planning for
Disasters

INSTITUTE FOR DEVELOPMENT AND

RESEARCH IN BANKING TECHNOLOGY October 30, 2004 Vepa Kamesam, Chairman IDRBT
 The pre-requisites for
Technology
Planning for disasters
 Increased operational risk
 Business Continuity Planning

Business Process Re-engineering

Human Resource Empowerment

INSTITUTE FOR DEVELOPMENT AND
RESEARCH IN BANKING TECHNOLOGY October 30, 2004 Vepa Kamesam, Chairman IDRBT
 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?

INSTITUTE FOR DEVELOPMENT AND

RESEARCH IN BANKING TECHNOLOGY October 30, 2004 Vepa Kamesam, Chairman IDRBT
 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).
INSTITUTE FOR DEVELOPMENT AND
RESEARCH IN BANKING TECHNOLOGY October 30, 2004 Vepa Kamesam, Chairman IDRBT
 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

INSTITUTE FOR DEVELOPMENT AND

RESEARCH IN BANKING TECHNOLOGY October 30, 2004 Vepa Kamesam, Chairman IDRBT
 INSTITUTE FOR DEVELOPMENT AND
RESEARCH IN BANKING TECHNOLOGY October 30, 2004 Vepa Kamesam, Chairman IDRBT
 INSTITUTE FOR DEVELOPMENT AND
RESEARCH IN BANKING TECHNOLOGY October 30, 2004 Vepa Kamesam, Chairman IDRBT
 How to Ensure Security??-A Framework

INSTITUTE FOR DEVELOPMENT AND

RESEARCH IN BANKING TECHNOLOGY October 30, 2004 Vepa Kamesam, Chairman IDRBT
 IDRBT’s Solutions for Security Risk
Management (SRM)

Risk
Assessment

Gap
IS Audit Analysis
SRM
for
Awareness by Banks Policy &
Procedures
Training
Development

INFINET
PKI Implementation

INSTITUTE FOR DEVELOPMENT AND

RESEARCH IN BANKING TECHNOLOGY October 30, 2004 Vepa Kamesam, Chairman IDRBT
 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
INSTITUTE FOR DEVELOPMENT AND
RESEARCH IN BANKING TECHNOLOGY October 30, 2004 Vepa Kamesam, Chairman IDRBT
 The future will be not be more of
the same…

… we need to be ready..

INSTITUTE FOR DEVELOPMENT AND

RESEARCH IN BANKING TECHNOLOGY October 30, 2004 Vepa Kamesam, Chairman IDRBT