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CHAPTER 2
CBS IMPLEMENTATION AND
PERFORMANCE OF BANK
2.1 Core Banking System (CBS)
2.1.1 History [1]
The first Core Banking Solution appeared in the 1970’s in United States. Most of
the software available at that time worked on mainframe computers and were
designed by the banks themselves or by third parties in collaboration with large US
Banks.
Packaged solutions were introduced in 1980’s from other parts of the world,
primarily Europe, Asia and Australia. Software Vendors with a different but
comparable background also entered the arena, for example the private banking
solutions developed in countries such as Switzerland and Luxembourg. These
systems were more customer focused than the transaction oriented, transaction
crunching engines available before. However, ability to handle large volumes was
the main limitation of these systems.
New players emerged in India during 1990’s, benefiting from the opening up of the
Indian economy, availability of English language skills and the huge pool of highly
skilled engineers. I-flex solutions can be considered as the first successful software
product company from India that managed to sell outside Indian subcontinent.
Since 2005, a lot of concentration has taken place, by means of mergers,
acquisitions, strategic alliances and cooperation agreements.
In recent time Core Banking System area is becoming more and more mature, with
packaged solutions increasingly attaining a functional richness that was previously
available only from in-house legacy solutions. They are also attaining a technical
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and organizational level that meets the business expectations in terms of agility,
time to market and operational support.
On functionality side many core banking system vendors have been able to bridge
the functionality gap between them and leading platforms. Some vendors have
been able to improve volume processing capabilities of their functionally broader
and more advanced systems.
On technical side there has been move away from dependencies on hardware
platforms and operating systems.
Due to these factors, banks can operate core banking systems on their platform of
preference. Today a bank can buy the services that are available on the market
from vendors, service enable existing legacy systems or create its own services in
areas where it feels this gives them an advantage in the market. It can even
outsource when it feels that a service is not its core competence.
2.1.2 Options to introduce CBS
Core Banking System (CBS) is set of inter-related components working together to
provide functionality of centralized operations to the banks. The schematic
diagram of CBS implementation is shown in Figure 2.1 and Figure 2.2
Figure 2.1: CBS (Schematic Diagram)-I
30
Figure 2.2: CBS (Schematic Diagram)-II
Major components of CBS are Information and Communication Technology
(ICT), Manpower and Processes.
ICT Components
Part-A
a) Data Centre (DC) – It is heart of CBS project. Data centre is a secured
place. Layout of which is normally divided in to three sub parts viz.
Server Centre, Network operations centre and Help Desk area. All the
servers such as Production (database), Application, Test &
Development, MIS, Web server, DNS, Mail, Anti-virus etc are placed
in Server Centre. Networking equipments such as Routers, Switches,
Modems and Information security equipments such as Firewall, IPS,
IDS, HSM and other equipments are placed in Network operations
centre.
b) Disaster Recovery Site (DRS) – This is also a secured place and
normally replica of Data Centre, primarily meant for providing back-up
support in the event of disaster situation.
Part-B
a) Hardware (Servers, Desktops, Printers, Scanners, etc)
b) Networking equipments (Routers, Switches)
c) Connectivity from branches to DC (Leased line, ISDN, MPLS-VPN,
Wi-MAX, RF, V-SAT link)
1. Security Desk
2. IT Manager’s Cabin
3. Entrance to Data Centre with Card
based Access Control System
4. IT Staff Cabins
5. Help Desk Staff Table
6. Entrance to Network & Server Room
with Biometric Access Control System
7. Server Centre
8. Network Centre
9. Air Conditioner 1 for Server Room
10. Air Conditioner 2 for Server Room
11. Windows Air Conditioners
12. Full Glass Walls
13. Visitor’s Lounge/Sofa
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d) System software (Operating System, Relational Database Management
System etc)
e) Core Banking System (CBS) application software
Manpower
Bank requires set of expert manpower to handle CBS operations. It is necessary to
have Database administrator, Network administrator, System administrator,
Programmers, Help Desk and experts to look after electronic delivery channels.
Processes
Banks need to have standard and well documented set of systems and procedures
with respect to banking operations being handled.
Banks need to have all these three components in place while implementing CBS.
Depending upon their capacity to invest, banks can opt for any of the following
suitable option
Option-I - own all the ICT components indicated at Part-A and B
Option-II - sharing of components at Part-A from other banks or service
provider and own components indicated in Part-B above
Option-III - avail usage of components indicated as Part-A and Part-B
from Application Service Provider (ASP) by paying monthly, quarterly,
bi-yearly or yearly basis.
Option-IV - there are few companies which offer an option of providing
hardware, networking equipments on rental / lease basis. Bank can
therefore have its own DC and DRS (Part-A) and components mentioned at
Part-B can be availed on rental / lease basis.
Option-V - few banks of similar type or same area can come together to
set-up common DC and DRS (Part-A) and components under Part-B can be
owned by bank.
32
2.1.3 Approaches to implement CBS
There are two approaches from which bank can opt for suitable approach in order
to introduce CBS in their organization.
a) Distributed centralized approach
b) Purely centralized approach
Networking of branches with Data Centre is absolutely must while adopting any of
these two approaches. Branches are connected to DC by means of
telecommunication link such as Leased line, MPLS-VPN, Wi-MAX, V-SAT as
primary link. Few banks, which can afford investment in leased line as a back-up
option go for such link from different service provider to minimize risk of both
links failing together. Banks which are cost conscious opt for ISDN as a back-up
link. Besides communication link, other equipments such as Router and Modem
are required at both the ends i.e. branch and Data Centre, in order to get both these
locations getting connected seamlessly. Data Centre and Disaster Recovery Site are
typically connected by means of high speed leased line connectivity. All the
transactions getting updated on central server at DC are updated on server at DR
site also in real time i.e. instantly.
Distributed centralized approach
The distributed centralized approach of implementing Core Banking System is
depicted in Figure 2.3
Figure 2.3: Distributed centralized approach
33
As seen from Figure 2.3 there will be server at branch as well as at DC. While
recording transaction, it gets updated first on the local server and at the same time
on main server at the Data Centre through networking infrastructure.
Advantages
a) In case of a failure of central server or that of telecommunication link,
branch can continue limited set of operations through branch level server.
Disadvantages
a) Cost involved is more due to investment in hardware and software
b) Recurring cost is more due to maintenance cost of hardware, software and
cost on manpower to maintain the same
c) Software updation is time consuming
d) Difficulty in maintaining version control of system as well as application
software
Purely centralized approach
The purely centralized approach of implementing Core Banking System is depicted
in Figure 2.4
Figure 2.4: Purely centralized approach
As seen from Figure 2.4 there will be no server at branch. While recording
transaction, it gets updated directly on server at the Data Centre through
networking infrastructure.
34
In case the bank opts for Purely Centralized approach then it is necessary that
Disaster recovery site of the bank is operational from first day itself to ensure
back-up arrangement, in case of failure of main server or some major problem to
Data Centre due to natural calamity.
Advantages
a) Cost involved is almost same as that of Distributed Centralized due to
investment in high capacity hardware at Data Centre and investment in
Disaster Recovery infrastructure.
b) Complete centralized control is possible.
c) Recurring cost is less on account of maintenance cost of hardware, software
and cost on manpower to maintain the same
d) Software updation is possible quickly, enabling introduction of new
banking services
e) Easy to maintain version control of system as well as application software
Disadvantages
a) If redundancy is not ensured by the banks in terms of connectivity, servers,
storage etc. then there is risk of banking operations coming to halt in the
event of failure of any of these components.
Taking into consideration advantages and disadvantages of both the approaches
explained in preceding paragraphs, banks have to decide approach which suits best
to them. It has however been noticed that most of the banks choose purely
centralized approach as it is easy to manage and saves cost of the bank in longer
run.
One of the options available for banks to introduce CBS is adopting Application
Service Provider model. Vendor providing such services makes available
components indicated at Part-A and Part-B to the bank. For availing such services
bank needs to pay to the ASP vendor on monthly, quarterly, bi-yearly or yearly
basis. National Federation of Urban Cooperative Banks and Credit Societies
(NAFCUB) in May 2010[2] has accredited four vendors to provide CBS on ASP
models to UCBs. The monthly charges agreed are ` 12,900/- per branch by all the
35
vendors only for services relating to Core Banking Software. The highlight of the
scheme is that there will be a comprehensive tripartite agreement between UCB,
vendor and NAFCUB. The NAFCUB will also play the role of ombudsman to
arbitrate on any references from the banks on deficiencies in services provided by
vendor to them.
While opting for ASP model to introduce CBS, banks have to take in to
consideration following advantages and disadvantages[3]
Advantages
a) Software integration issues are taken care by vendor
b) Cost of the software gets spread over number of clients
c) User organization can get benefit of advanced features introduced by the
vendor based on his experience in the market
d) Management of software and performance issues are taken care by vendor
e) Application reliability, availability, scalability and security can be
controlled by having proper Service Level Agreement (SLA)
f) Predictable monthly fees, so there is no need to worry about additional
costs
Disadvantages
a) User needs to accept application as it is available with the vendor
b) Complete dependency of business on outside agency
c) Changes in ASP market may result in changes in the type or level of
service available to clients
d) Integration with additional application by user organization such as ALM,
AML, Treasury etc will be an area of concern
From various options described in previous paragraphs, majority of the financially
sound and well managed banks prefer to invest on their own for implementing
CBS project, as they are entitled to avail depreciation of 33.33 per cent in straight
line method as per the RBI circular No. UBD. BPD.PCB.Cir.7/09.50.00/2003-04
dated August 5, 2003. If the bank is earning sufficient profit then investment
made by them can be recovered in 3 years time from the profits earned by the
banks.
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2.1.4 Elements of CBS[4]
Typical and traditional Core Banking System is composed of five components
1. Customer Information File (CIF)
2. General Ledger system
3. Transaction processing
4. Loans and Deposits system
5. Basic MIS
Systems available in the market can be classified into five levels on the basis of
functionality offered.
Level 1 is most traditional system offering basic functionality to Level 5 with latest
State of the Art systems with advanced features. Most systems from Level 3
onwards can be classified as mature systems, which offer a moderate spread of
functionality required to run medium sized bank efficiently. Level 4 and beyond
can be classified as more advanced systems primarily aimed at large banks
operating in multiple business lines and offering large gamut of products and
services to their customers.
Figure 2.5: Elements of CBS
Source: http://www.infosys.com
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2.1.5 Choice of solution
There is a wide variety of choices available in the market with respect to Core
Banking Software. There are few companies who believe in concentrating on core
functionalities of banking business and do not have supplementary modules such
as ALM, AML, Treasury, CRM etc. All these additional software being complex
in nature, companies prefer to concentrate on their core competency.
There are few companies on other hand which try to offer CBS along with
supplementary modules mentioned earlier to their customers in an integrated form.
Choice for banks is therefore to go for integrated solution or to choose the best
option available in the market and integrate with best of class CBS procured by the
bank.
In case, the bank chooses to go for separate solutions then they must have
necessary interface to integrate the software and also expertise to handle technical
issues emerging out of the same. It also involves dealing with multiple vendors as
well. If bank chooses integrated solution then it is likely that quality of system may
have to be compromised.
2.1.6 CBS software market
Most of the commercial banks in India are using Finacle from Infosys whereas SBI
and its associate banks are using B@NCS 24 software from TCS. Cooperative
sector is dominated by OMNI from InfraSofttech. List of some major CBS vendors
is provided at Annexure III
There is a wide variation with regard to cost of CBS software as well, ranging from
few lakhs to few crores due to different licensing policy of companies, while
offering CBS. Few companies provide software based upon the branch licensing
approach, whereas few offer software based upon per user licensing cost. Banks
can negotiate for the price affordable to them based on their existing size in terms
of branches and expansion plans.
38
2.1.7 Risks associated in introducing CBS[5]
There are various kinds of risks associated while implementing the CBS project.
Proper understanding of such risks and strategies to mitigate those risks need to be
in place well before venturing into it, as the cost involved in such projects is
substantially high.
Some of the major risks involved are
1. Vendor or Partner risk
2. Technology risk
3. Implementation and Support risks
4. Operational risks during the implementation
Vendor or Partner risks
While selecting a vendor, banks need to check and ensure that short listed vendor
is financially strong and committed to banking business. It is equally important to
check whether vendor is having necessary technical competence, development
capability, necessary infrastructure, quality practices etc. It is necessary to ensure
that the vendor is equally interested in success of the project and should not look at
it purely from commercial perspective. Vendor is therefore considered as partner
rather than vendor in such projects. Risks posed on account of not ensuring these
aspects are indicated in the following manner
Vendor quality Risk posed Financially strong Winding up of business by vendor due to financial loss
may seriously affect the business of bank as dependency gets developed by that time
Commitment to banking business
Bank may not get benefit of upgradation in quality and features of software in case of Vendor concentrating on other software products
Technical competence In absence of this, existing software may not be in position to take benefit of modern technology
Quality practices ISO & CMM kind of certification indicates quality standards followed for management of projects and quality of software products. In absence of such certifications bank may have to end up in buying substandard software.
39
Banks may have to face serious difficulties during and post CBS implementation
period in case of not ensuring these vendor qualities.
Technology risk
Technology used by vendor should be future proof. The technology has to be
platform independent. This ensures scalability in terms of handling number of
transactions as well as incorporating future advancements in technology. Choosing
a solution which is based on slightly old and outdated technology may initially
sound beneficial. However, in longer run, it will restrict bank to adopt latest
developments happening in the field.
Implementation and support risks
Typical problem with Urban Cooperative Banks is lack of technical expertise.
Vendor as a partner needs to make use of best practices followed by the software
industry and most importantly to enlighten bank about such practices for smooth
implementation of the project. Absence of such input from vendor may pose risk of
project implementation getting delayed beyond acceptable limits and in turn lead to
financial loss for the bank.
Post implementation support mechanism available with the vendor is also equally
important. Bank needs to check types and levels of support services available with
the vendor and associated costs. Absence of appropriate and timely support may
lead to operational issues in day to day functions of the bank.
Operational risks
There is scientific way of implementing Core Banking System Project. Not
following such systematic process my lead to various problems during
implementation
a) Lack of ownership
b) High level of expectations
c) Incorrect decisions
d) Resistance from employees
e) Poor quality of data
f) Changes in scope
40
g) Lack of top level management involvement
h) Increase in budget
2.2 Procedure for implementation of CBS
Awareness training to BOD, Senior Executives, Middle management and Staff
Technology adoption has changed the face of banking in India. Banks now need to
provide services in most professional, user's friendly way and at the convenience of
the customers, in order to survive in competitive business scenario. Reporting
requirements of regulatory agency have also become more time bound and
demanding. RBI has got a plan to introduce Automated Data Flow system wherein
data will seamlessly flow from transaction server of the bank to management
information system (MIS) server and automatically generate all returns from the
MIS server, without any manual intervention. Introduction of CBS and technology
based delivery channels have therefore become necessity in present context.
Employees working at different levels along with the management of the bank
needs to be appraised about these developments.
Boards of Directors (BOD), Senior Executives, Middle management and Staff
have different roles to play during CBS implementation and their wholehearted
support is absolutely must for successful introduction of CBS. These groups need
to be addressed separately to explain them about basics of CBS, necessity to
introduce CBS, benefits of CBS to the bank, plans of the bank to introduce CBS
and role of each of these groups during the implementation. Such training needs to
be imparted by professional agency such as VAMNICOM, CAB, NABARD,
BIRD etc. having experience in this field.
In absence of such training there is possibility of facing resistance from groups
mentioned above affecting process of CBS implementation. Training as mentioned
shall help effectively managing change while implementing CBS.
Committee formation (Core committee and Implementation committee)
Core Banking System implementation is project of the Bank and not a project of IT
Department of the Bank. In order to ensure that all the necessary functionality
41
exists in the software, it is necessary to have representation of domain experts in
implementation of such project. Banks must therefore constitute two separate
committees viz. Core Committee and Implementation Committee. Size of Core
committee should be limited to 5 or 6 members. Implementation committee can be
slightly larger in size and should consist of representation from various
departments of the bank at HO as well as Branch. Implementation committee
should be headed by Project Manager and Core committee by Project Sponsor.
Project Manager should be drawn from the banking domain, having some
background of IT. CEO / GM of the bank is usually designated as Project sponsor
who owns the overall responsibility of the project.
Formation of committees shall bring in accountability amongst the committee
members and help building sense of ownership with regard to responsibility
assigned to each individual with regard to implementation of Core Banking
System.
Appointment of consultants[6]
Banks may need support of both technical and functional consultant. The necessary
technical expertise to handle project such as CBS is normally not available in
majority of the banks. Technical consultant can help bank to choose appropriate
hardware, networking and other technology based solutions, keeping in view latest
trends in the market and scalability of the equipments being purchased. Functional
consultants are experts in banking domain. Even though necessary expertise in
terms of banking would be available with the bank, sometimes it will be limited to
the bank or developments in the area where bank is operating. Functional
consultant can help bank to provide broader perspective with respect to
developments happening not only in the field of cooperatives but also in
commercial banking domain. Both Technical and Functional consultants can be of
great help in an important exercise of Business process re-engineering.
In case of not availing services of Technical consultants, banks are likely to get
carried away with suggestions of software vendor regarding the hardware
specifications for server, storage and other necessary equipments, which not
necessarily will be in the interest of the bank. Similarly, not engaging services of
42
functional consultant will deprive banks from adopting the modern practices
prevalent in the banking industry.
System requirement specifications[7]
It is necessary to have comprehensive written documentation detailing
requirements of various functionalities of various departments of the bank,
including operations at branches. Functions and procedures of various departments
/ sections need to be clearly drafted. Document should also describe bank’s
existing business practices, accounting principles, audit and control needs,
reporting requirements (internal and statutory), user expectations, country’s central
bank regulations etc. Implementation committee in consultation with external
consultant can finalize system requirement specification document. On finalizing
the same it should be placed before the Core committee for its approval.
Availability of system requirements document shall help vendor to define scope of
the system, as the cost of software depends upon requirements specified by the
bank and amount of customization required. If scope is not clearly defined and
signed off then there is a chance of new requirements creeping in during the
process of implementation and affecting the implementation timeline. SRS
document is essential for performing gap analysis also.
Request for information[8]
Normally through newspaper advertisement, bank lays down its intent of seeking a
core banking software, approximate timelines when the project is expected to go
live etc. and request is formally made seeking information from the reputed
vendors.
Request for information (RFI) helps to gather basic information about company
(address, ownership, contact names and numbers, employee count etc.) products
and services offered, existing client list, contact details of reference person, annual
reports for last three years indicating financial position.
Selection of vendor who is and would remain financially viable in the long run and
is not dependent on few customers for survival is crucial. Based on the credential
43
details collected through RFI, first level of short listing can be made. Short listed
vendors are then called for business presentation.
Business presentation by vendors
Presentation by the short listed vendors should briefly cover all the information
submitted by the vendors through RFI. Major part of presentation needs to be
devoted to product offering by the company and features of the product proposed
for the bank. This presentation needs to be attended by Core committee as well as
Implementation committee. Vendor ranking needs to be made based on weightage
to various aspects of solution offering, such as suitability of the product, financial
position, client list, core business, manpower available etc. Details received
through RFI and information presented during the vendor presentation needs to be
used while ranking the vendors. Based on the scores, second level of short listing
can be made.
Request for proposal[8]
Request for proposal (RFP) document clearly specifies the requirements of the
bank in terms of desired functionality of the software, expected timeline for
completion, payment schedule, detailed terms and conditions, support mechanism,
warranty period. Vendors are expected to respond stating compliance with the
terms and conditions, provide implementation plan, escalation matrix for support
mechanism, brochures / leaflets of the product being offered etc.
Vendor presentation
This is a detailed presentation covering functionality of the software. In order to
make this presentation more meaningful and relevant, vendors are provided with
scripted scenario and sample data of the bank. Members of the Core Committee
and Implementation Committee need to attend this presentation.
During such presentation following aspects need to be specifically looked into
a) Suitability
b) User interface
c) Parameterization
d) Level of customization required
44
e) Reporting requirements
f) Product development tools
g) Scalability
h) Flexibility to adopt best practices
i) Proven technology
j) Compatibility with add on software
k) Straight through processing
l) Quality certifications such as ISO, CMM
m) Similar installations
Second level of vendor ranking needs to be done based on above criterion.
Vendors who score above 80% are short listed for commercial negotiations.
Commercial negotiations typically occur with the selected few vendors who have
scored above 80% and not generally more than two or three in number.
Management of the bank needs to finalize vendor for supply of Core Banking
Software based on vendor ranking and affordability of the cost.
Purchase order to selected vendor
Prior to releasing purchase order, it is essential that customer visits of short listed
vendors are arranged to have insights into the product capabilities when deployed
in live environment. Reference sites selected should be of more or less the same
size / nature of operations. The bank at this stage can relate to what was
demonstrated during the product demonstration and see it in production
environment. Visits should be well planned, preferably in teams of 2-3 with each
team having a clear agenda of issues it needs to explore. A detailed report of such
visits needs to be placed before the core committee and management of the bank
for the purpose of final approval.
Based on approval of the management, purchase order may be released to the
selected vendor. Purchase order must clearly specify the deliverables, support
services agreed, general terms and conditions, payment terms, mutually agreed
implementation plan, dispute settlement mechanism etc.
45
Product walkthrough and gap analysis
Vendor must be asked for providing detailed product walk through. Representative
of the vendor needs to explain functionality of each module thoroughly. Members
of implementation committee need to note down functionality available in the
software vis-à-vis functionality required by the bank, based on the system
requirement specification document prepared. A detailed document needs to be
prepared by the implementation committee clearly indicating possibility of
bringing changes in existing functions and procedures of the bank and areas where
functionality in software needs to be changed in accordance with the requirement
of the bank.
Business process re-engineering[9][10]
Business Process Re-engineering (BPR) seeks to help organizations radically
restructure their business functions by focusing on the ground-up design of their
business processes. Business Process Re-engineering (BPR) is aimed at helping
organizations to fundamentally rethink how they do their work in order to
dramatically improve customer service, cut operational costs, and become world-
class competitors.
New set of procedures are finalized based upon input received from functional
consultants, current industry standards and the discrepancies observed in existing
procedures through gap analysis. A detailed plan is chalked out for the purpose of
BPR.
Business Process Re-engineering and implementation plan needs to be approved
by the management.
Data Centre and Disaster Recovery Site
In case the bank decides to have its own Data Centre and Disaster recovery site
then necessary technical details may be worked out along with the technical
consultant and steps from "Requirement specifications" to "Purchase order to
selected vendor" mentioned earlier may be followed for finalizing the vendor for
setting-up the Data Centre and Disaster Recovery Site.
46
If management decides to hire Data centre and Disaster recovery site of other bank
or outsource it to external agency then bank needs to enter into necessary
agreement with the concerned bank or outsourcing agency.
Procurement of technology infrastructure
Preliminary level of requirements with respect to technology infrastructure such as
servers, clients, storage, relational database management system, switches, routers,
firewall, intrusion prevention, intrusion detection, speed of communication link
etc. can be collected from the vendor selected to provide core banking solution.
The requirements need to be thoroughly discussed by implementation committee
members with the technical consultants. While finalizing the specifications
important aspects such as scalability, redundancy etc. needs to be taken into
consideration.
On obtaining approval from the management and proper assessment of technology
infrastructure requirement, steps from “Request for information” to “Purchase
order to selected vendor” may be followed for finalizing the vendor for supply of
various items. Effort needs to be made to keep number of vendors to minimum for
supplying various items. It would be ideal to have single vendor supplying all the
necessary equipments. If that is not feasible, then in RFP itself such intent of the
bank can be made clear so that multiple vendors can come together to form
consortium and quote collectively to provide single point of contact.
Work relating to setting-up Data centre, Disaster recovery site and procurement of
technology infrastructure must start at the same time to ensure timely availability
of the same.
Data conversion[11]
This is the most critical step in implementation of CBS as success or failure of the
data conversion / migration can make difference between the success and failure of
entire implementation. Data conversion is applicable when bank is moving from
branch automation mode to CBS. Usually the expertise required for data
conversion is available with the CBS vendor. In case it is not available or the data
structure of existing software is not made available by the previous vendor then
47
help of few agencies which are expert in this field can be availed. If the bank is
migrating from manual operating environment to CBS then master data entry needs
to be done according to requirement of new software.
Exercise of data conversion, if applicable can be carried out for one or two
branches first. Data cleansing, purification and validity check also needs to be
carried out. These steps are required especially when automated tools are used for
data conversion.
Migration audit[10]
Data migration involves migrating from database of one vendor to database of
another vendor, from one version of a database to another version of the same
database, or consolidation of different databases into one database.
Scripts are used in database migrations and application migrations. These scripts
convert the old database structure to a different structure that fits the parameters of
the new application or database and may also assist in populating the data into the
new databases.
Data is then cleansed for duplication, deterioration, errors and missing fields. Data
integrity checks are conducted by the migration team to check for completeness
and accuracy of data. Information systems auditors are involved in migration audit.
The auditor performs the following audit checks to confirm that the migration has
been successfully accomplished.
Data integrity checks
Log Analysis for errors and mitigation
Performance review
System integration, connectivity from branches to DC
Equipments placed in Data Centre such as servers, storage, network equipments
such as routers, modem, security equipments such as firewall, IPS, IDS, HSM are
usually supplied by different vendors. It is difficult to identify single company
supplying all these equipments. Expertise required for integrating all these
equipments for cohesive functioning is not easily available with single vendor. It is
48
necessary therefore to identify single agency having expertise in integrating all
these equipments and who can coordinate well with telecommunication link
provider. Such agency is called as system integrator (SI). Bank needs to outsource
system integration services from external agency in case the same is not available
internally.
User acceptance test[11]
User acceptance test (UAT) is functionality test to validate the software product
against the requirement specifications by testing the entire system. It tries to show
discrepancies between a product’s attributes and requirements. Generally
implementation committee of the bank undertakes UAT. Migrated data is used for
UAT. UAT is one of the final stages of a project and often occurs before a bank
accepts the new system.
Switch over to Core Banking System
Before switching over to Core Banking System, it is advisable to have pilot run of
new system with two to three branches. Difficulties faced during pilot run needs to
be addressed urgently by the vendor. The solution then needs to be replicated at all
the branches. Cut off date needs to be decided well in advance and complete
operations should be shifted to new system from the cut off date.
2.3 Role of CBS in improving operational performance
Banks are at the core of financial system in an economy. Banks help in settling
financial transactions by issuing and paying cheques issued on behalf of their
customers. Further, in modern banking, the payment system also involves
electronic banking, wire transfers, settlement of credit card transactions etc.
Primary function of banks in India is to act as a financial intermediary. As a
financial intermediary, bank accepts different types of deposits from customers and
lends these funds to borrowers. Another important role of bank is to provide access
to payment system and also provide various financial services. While functioning
as a financial intermediary, banks need to pay interest on the deposits accepted by
them at competitive rates, which forms major part of expenditure of bank. Money
49
accepted by the banks in form of deposits is deployed by them by way of lending
and investments to meet the interest expenditure and operational expenditure.
Core Banking System implementation is considered as an important strategy these
days to bring improvement in overall business performance. Due to the substantial
amount of investment involved in implementation of CBS and setting up necessary
infrastructure, management of banks expects performance improvement of the
bank in terms of efficient operations, productivity and profitability of the bank.
However, CBS alone cannot bring this performance improvement and the bank
needs to adopt other technology based solutions and relevant software. In
following paragraphs, an attempt has been made to explain major functionalities of
the bank and role that CBS along with other technology based solutions can play in
improving the same.
Accepting deposits
Business of the bank constitutes deposits plus loans and advances. In order to
improve business of the bank there has to be growth in deposits and proportionate
growth in loans and advances. Growth in deposits of the bank mainly depends
upon
• Goodwill of the bank
• Location of the branches
• Interest rate offered
• Effective, Efficient and Customer friendly services
• Innovative products
• Availability of technology based delivery channels
Activities involved while handling transactions related to deposits are
• Receipt of cash
• Payment of cash
• Issue / Renewal of deposit
• Passbook updation
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• Providing statement of account
• Intimation of maturity of deposit
• Ability to provide information to customers
Note counting machine can be used while accepting and payment of cash. This
shall reduce considerable time of cashier as well as customer. Use of fake note
detectors shall minimize the risk of accepting fake currency and help in preventing
fraudulent transactions. CBS then helps in recording the transaction, signature
verification, posting to general ledger accounts, printing of deposit receipt etc.
Thus, saves substantial amount of time of the concerned staff. Passbook printers
are used these days for updating the passbooks, improving readability of the entries
made in the passbook as well as saves time of staff in manually entering the details
on the passbook. Preparing statement of account for the period desired by the
customers used to be time consuming prior to computerization and customers were
even required to submit an application for providing the statement. However, due
to CBS it has become very easy and statement of account can be provided instantly
to the customer. Most of the Commercial banks have started providing statement of
account to customers either through email or through Internet banking services.
Customers willing to have statement of account can visit Internet banking web site
of the bank, specify period and directly download the statement on their computer
in electronic form. Customers are often interested to know about date of maturity
of their deposits, TDS liability, maturity amount etc. Such information can be
provided instantly by the staff due to CBS, from any branch of the bank. Many
banks have provided Telephone Banking through a toll free number. Customers
can dial a toll free number to get necessary information. Such information is
available even through Internet banking facility of the bank. Customers can also
avail such information while visiting a branch as staff members engaged in front
office operations have access to the desired information and the same can be
provided by them instantly. Many banks are using SMS alerts technology to keep
their customers informed about transactions in their respective accounts beyond
limits specified by themselves. The process of sending SMS alerts is completely
technology driven and no manual intervention is involved, saving time of staff.
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Disbursement of loans and advances
Amount collected through deposits and other sources is deployed by the banks for
productive purposes to generate income. Banks need to consider regulatory
guidelines, loan policy framed by the bank and most importantly maturity pattern
of deposits available with the bank. Assets and Liability management system
software with the help of data captured from CBS can help bank keeping close
watch on maturity pattern of deposits and take care of loan portfolio accordingly.
Banks need to maintain Credit to Deposit ratio (C/D Ratio) between 60 to 65 per
cent. Too high or too low C/D ratio of a bank is not healthy position from bank’s
view point. Higher C/D ratio indicates additional risk whereas lower C/D ratio
indicates non utilization of resources by the bank for productive purpose. Growth
in loan portfolio of the bank depends upon
• Location of the branches
• Quick approval
• Lower interest rates
• Other benefits such as Insurance cover, no penalty for early prepayment etc
Activities involved while handling transactions related to loans are
• Appraisal of loan
• Check creditworthiness of the borrower
• Quick approval of loan
• Intimation about sanction of loan
• Quick disbursal
• Generation of recovery statements
• Generation of demand notices
• Prompt and proactive recovery
• Ensuring zero or minimum level of NPA
• Cross selling or up-selling of the products
• Issuing statement of account
• Ability to provide information to customer
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Appraisal of loan proposals is normally out of scope of CBS. Staff can use either
specially designed software for the same or can make use of spread sheet
program for preparing appraisal of loan. One of the important activities while
preparing loan proposal is to verify creditworthiness of a borrower. CBS can help
concerned official to check repayment history of the borrower interested to avail
loan, provided he has earlier borrowed from the same bank. Through CBS it can
also be checked that whether the interested borrower is a guarantor for any loan
which is NPA account in the bank. Many banks have become member of Credit
Information Bureau Limited (CIBL) where repayment history of an individual is
available irrespective of the bank from where he has availed the loan, provided that
the concerned bank is member of CIBL. Responsibility of according approval to
the loan proposal, especially in cooperative banks, lies with Loan Sub Committee
of the bank. This committee needs to meet more frequently to ensure speedy
approvals and take decision purely based on merit of the case. The decision of the
committee needs to be communicated to branch. Corporate mail services or
Intranet kind of system can help to quickly inform the branch for further
informing the same to interested borrower. Such arrangement helps to quickly
inform borrower regarding approval and also saves cost involved in
courier/postage/fax. Disbursal of loan can be quickly made these days through
directly transferring the amount to account of the customer or through
ECS/NEFT/RTGS to the concerned party. This kind of arrangement saves
postage/courier charges and most importantly enables quick credit to the party.
CBS can help the bank to a great extent for timely recovery of the installments as
per the loan agreement. System generates recovery statements periodically and can
be sent to branches through email. System can also generate demand notices in
standard format in case the account is overdue. Bank then just need to send such
demand notices by registered post and email. Close watch can also be maintained
by the bank staff on other accounts of the same borrower in the same bank and if
required operations can be freezed. Such efforts ensure timely recovery of loans
and in turn better income for the bank. Few CBS vendors even provide facility to
generate report of probable NPA accounts which enables banks to initiate action
proactively to ensure such accounts not becoming NPA. Customers often require
statement of account on completion of the financial year. Such statements can
either be generated or downloaded from Internet banking site of the bank or branch
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can generate the same and provide to customer. CBS also enables front office staff
to provide information to prospective customers regarding details of various loan
schemes available with the bank instantly. Bank can make use of Customer
Relationship Management software for recommending new loan schemes
launched by bank to prospective customers (Cross selling of products). Such
systems use data available with CBS. Few banks have started offering insurance
cover to the loans availed by the borrower either by charging nominal fees or as a
built-in feature of the loan scheme. This is possible for the bank if it has got tie-up
arrangement with some insurance company.
Product designing (Deposit / Loan)
It is important for the bank to offer innovative products to attract more business
based on the requirements of the customers and in accordance with market trend.
While offering a new product bank needs to consider following
• Tenure of the scheme
• Interest to be offered
• Response to previous similar schemes
• Group to be targeted
• Rates offered by the competitors
• Requirements of customers
Majority of the Core Banking Systems provide a feature called product
configuration which lets bank to work out different combinations with respect to
tenure, interest rate to be offered etc. However, the bank needs to have ALM
system to provide input relating to tenure and best possible interest rate which
bank can offer. As a part of KYC compliance banks have data relating to
customers such as profession, details of family members, annual income etc.
System also has got transaction details of the same customers. These details can be
exported to a specialized system called Customer Relationship Management
software which can analyze the trends or patterns of particular type of customers
and suggest which group of customers should be targeted for the newly introduced
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scheme. Such system also provides details regarding response to earlier such
schemes from its customers in summarized form.
Optimization of earnings
Main earning sources of the bank are interest on loans and through investments.
Income through Non-banking financial services has gained tremendous importance
in recent time as margins for the banks have been reduced drastically. Banks are
therefore, concentrating upon increasing business volume with the help of delivery
channels and utilize time saved by the staff due to CBS for generating higher
income through non-banking financial services. Sources of income for the bank are
as follows
• Interest on loans
• Interest on investments
• Sale of securities
• Other income
o Commission (DD/PAY ORDER/NEFT/RTGS)
o Service charges
o Income through Non-banking financial services (PAN, General
Insurance, Life Insurance)
• Trade Finance
o Bank guarantee
o Discounting of bill
o Hundi
o Bills purchased
o Bills discounted
o Letter of credit
Interest on Loans is single largest component of earnings of the bank. The bank
can yield better through this component, provided it has innovative schemes and
best recovery practices. CBS helps bank in managing both these aspects. Bank can
not lend beyond certain limit as it may give rise to business risks. Thus, the balance
resources are deployed by the bank in Government securities, Call money market
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and other securities as per the guidelines of regulator. Bank needs to have
Treasury Management Software, which with the help of data imported from
CBS can provide exact position of current CRR and SLR investments and funds
available for investment purpose. This will help management to make optimal use
of funds available with the bank and yield maximum possible returns. Since banks
have started providing multi-city cheque book these days, the commission which
banks used to earn by providing Demand Drafts has been reduced substantially.
RBI has introduced various electronic payment systems such as ECS/NEFT/RTGS.
Banks on becoming member of such services can provide these facilities to
customers and earn commission. Such services are expected to reduce burden on
clearing mechanism at the level of banks as well as at clearing house. Time saved
due to automation of various manual procedures can be utilized by the banks to
concentrate upon generating higher non-interest income through commission and
service charges. Banks can have tie-up arrangement with Life and General
Insurance companies to offer insurance products directly or through referral
schemes. Such insurance schemes can even be integrated with loan products of the
bank to take care of risk arising out of unforeseen eventuality with the borrower.
Banks can even earn better through traditional trade finance activities. It is
necessary to have add-on module for Trade Finance with the bank to take care of
such services. Services such as PAN card, Franking, online payment of Tax etc.
provided by the banks are well received by the customers as they are happy to avail
all these services under the single roof. Commission through such services also can
help banks to increase non-interest income.
Control of expenditure
Deposits accepted by the bank are repayable on maturity or on demand by the
customer. Bank acts as custodian of the deposits and at the same time needs to pay
interest on deposit to the customers. Bank therefore needs to earn more than what it
is required to pay in form of interest to the depositors. Bank therefore needs to
deploy resources generated through deposits and other means through lending and
investing as per the regulatory guidelines. Bank therefore has to incur expenses on
following accounts
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• Interest on deposits
• Interest on borrowings
• Establishment expenses
• Rent, taxes, electricity, insurance, fuel charges
• Postage, Telephone, courier
• Printing, Stationary, Advertisement
• Provisions, Depreciation, Repairs and Maintenance
• Income Tax
Earning profit is important for survival as well as growth of the bank. Profit can be
maximized through increasing earning as well as reducing expenditure.
Introduction of CBS and other technology based service delivery channels help the
bank indirectly to increase low cost deposits as customers tend to maintain more
balance in their saving and current accounts, provided all the necessary financial
services are provided by the bank. CBS helps in effective management of cash
resulting into effective funds management with the help of Treasury management
software and also ensures minimum borrowings, saving interest paid on
borrowings. Banks can make use of corporate mail services for internal as well as
for communication with external world. Statements of accounts, demand notices,
business promotion letters etc can be sent through email to save cost on postage /
Courier charges.
With the help of VoIP technology, existing leased line can be used for voice
communication with the branches to reduce expenditure on Telephone. Printing,
stationary cost can be saved as there is no need to maintain ledgers due to complete
automation of front office operations. Cost of printing product brochures can be
saved by displaying the necessary information on website of the bank.
Business through delivery channels
Convenience to customer and customer satisfaction has gained paramount
importance in banking industry. In today’s fiercely competitive business
environment banks can not survive without technology. IT initiatives such as
ATM, Tele banking, Internet banking, Mobile banking help banks to
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• Increase business
• Increase low cost deposits
• Saves cost of transaction
• Generates transaction fees
• Retain existing customers
Introduction of technology based delivery channels help bank to increase its
business as the transactions happening at delivery channels are in addition to those
at branch. Most importantly such initiatives provide convenience to the customer
of the bank to transact at any time from convenient location. Such transactions
occur at lesser transaction cost to the bank as well. ATM transaction will cost half
the transaction cost at branch, Internet banking transaction will cost ten times less
than cost at branch. Banks which are member of ATM networks such as BANCS
and NFS can earn transaction charges on account of ATM usage by customers of
other banks. Technology based initiatives by the bank therefore help to retain
existing customer and also eliminate the cost of customer acquisition.
Management Information System
It is important to have quick and timely access to decision making information by
the management. Information requirement by regulatory agency have also become
more demanding and of dynamic in nature. Availability of data at central location
provide superior control to the bank management over its operations through
branches or delivery channels. Earlier system of reporting to Head Office (H.O.)
from branches, consolidation and compilation of data at H.O. and then generating
various types of reports has almost vanished. This has been possible due to
capability of CBS to record each and every transaction taking place at any branch
to central server in real time mode (instantly) with technology called straight
through processing (STP).
Though majority of the Core Banking Systems available in the market are capable
of taking care of standard in-house and regulatory reporting requirements,
functionalities such as Assets and Liability management system, Anti-money
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laundering etc. are out of the scope of any CBS. Usually it is misconception that
implementation of CBS will take care of all such functionalities. However, banks
are required to purchase these add-on modules separately, which can work
seamlessly with existing CBS.
To summarize, in order to survive in competitive business environment it is
inevitable for banks to adopt CBS and related technology based solutions.
Implementation of CBS should not be an ultimate aim. CBS forms a foundation on
which other important systems need to be integrated to professionally manage a
bank and take the full benefit of CBS.
Add-on modules required
• Customer relationship management software with market intelligence
• Assets and Liability Management software
• Anti-money laundering software
• Treasury management
• Trade finance
• Internet banking
• Mobile banking / SMS alerts
• Financial switch
• Intranet
• Membership of INFINET
• Membership of RTGS, ECS, NEFT
• Membership of BANCS, NFS
• Payment gateway tie-up
• D-mat module
• Interactive website of the bank with facility for customer feedback
mechanism
• Loan originating system
• Tie-up with insurance company for providing Life Insurance and General
Insurance products
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Additional technology required
• Note counting machine
• Fake note detectors
• Depository module on ATMs
• VoIP
• Video conferencing
• Passbook printers
• Corporate mail server
2.4 Benefits of CBS implementation
Cost savings from a project of this magnitude are typically visible over a period of
couple of years. Returns on investment are expected to compound as banks enter
into new lines of business, expand their business operations. However, there are
few performance related benefits which are immediately visible, such as
a) Improved customer service
b) Customer retention
c) Enables bank to face competition successfully
d) Higher level of accuracy
e) Relief from monotonous and routine work for staff
f) Improved employee productivity
g) Improvement in recovery
h) Increase in business
i) Strong Management Information System leading to proactive decision
making
j) Better regulatory compliance
k) Cost control
*****
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REFERENCES
1. “Core Banking Systems Survey”, Capgemini, Survey results 2008 2. COOP BANKING TABLOID, Vol. XIX, Number 18, NAFCUB, New Delhi,
02-08 May 2010
3. http://en.wikipedia.org/wiki/Application_service_provider
4. Dr. S. S. Satchidananda, Sanat Rao, Rahul Wadhavkar, “Core Banking Solutions: An Assessment”, CBIT-IIITB Working Paper WP-2006-8
5. Sanat Rao, “Managing Risks in Core Banking Replacements”, Infosys
Technologies Ltd.
6. http://www.daniweb.com/community-center/threads/82668/difference-between-functional-and-technical-consulting
7. http://searchsoftwarequality.techtarget.com/definition/software-requirements-
specification
8. http://www.linkedin.com/answers/marketing-sales/writing-editing/MAR_WED/546213-42174721
9. http://uis.georgetown.edu/departments/eets/dw/GLOSSARY0816.html
10. “Technology guide on IT Migration Audit”, Committee on Information
Technology, ICAI, New Delhi, January 2010
11. http://en.wikipedia.org
12. http://www.infosys.com/finacle/solutions/Documents/Universal-Banking-Solution.pdf
*****
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