MR. Chaudhar V.M. Workshop on The Future of Banking organized by HMA & ISB (October 30, 2004)

1. MR. Chaudhar V.M.Workshop on The Future of Bankingorganized byHMA & ISB(October 30, 2004) VepaKamesam Former Deputy Governor, RBI Currently Chairman, IDRBT/BRBNML

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

3. Banking and Technology Innovative Risk Management Complex Credit Calculations 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: 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

6. 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

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

11. 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

12. POS Terminal and Cash Dispenser POS Terminal Connected to Cash dispenser

13. ATM Electronic Banking Branch Banking Branch 3 Branch 2 Branch 1 Head Office Branch 4 Branch n Branch 5 Branch 6

14. 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?”

15. 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

16. 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

17. 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

18. 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

19. 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

20. 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

21. 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

22. 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

23. 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

25. 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

26. 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

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

28. 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

29. 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

30. 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

31. 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

32. 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

33. 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

34. 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

35. 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

36. 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

37. 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

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

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

40. 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?

41. 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).

42. 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

45. How to Ensure Security??-A Framework Assess Respond Protect Detect

46. IDRBT’s Solutions for Security Risk Management (SRM) RiskAssessment GapAnalysis IS Audit SRMfor Banks Policy &ProceduresDevelopment Awareness byTraining INFINET PKI Implementation

47. 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

48. The future will be not be more of the same… … we need to be ready.. Thank You