Core Banking&

Electronic Clearance and Settlement System

• Gartner defines a core banking system as a back-end system that processes daily banking transactions, and posts updates to accounts and other financial records.

• A few decades ago it used to take at least a day for a transaction to reflect in the account because each branch had their local servers, and the data from the server in each branch was sent in a batch to the servers in the data centre only at the end of the day (EoD)

• Nowadays, most banks use core banking applications to support their operations where CORE stands for "centralized online real-time environment". This basically means that all the bank's branches access applications from centralized data centres. This means that the deposits made are reflected immediately on the bank's servers and the customer can withdraw the deposited money from any of the bank's branches throughout the world. These applications now also have the capability to address the needs of corporate customers, providing a comprehensive banking solution.

Core Banking

• In simple way, it is doing all banking operations of branches and head office by connecting to a central computer kept at data centre

• With technology advancement particularly in “Tele Communication” and “Wireless Communication” it became possible to send data from one computer to another computer.

• Taking advantage of this it was thought fit to connect branch computers to a single computer at data centre and have all transactions of all branches recorded live at one place. This concept is “CORE BANKING”

1. Decision Making

• All the transactions of the bank directly impact the General Ledger and Profit and Loss Account. This provides a real time total picture about the financial position and situation of the bank.

• This helps for timely effective decision making for financial management, a very critical and dynamic function in today’s banking.

2. Centralized Product Control & Monitoring

• Centralization helps in better product analysis, monitoring and rollout.

• Aspects like interest rate modifications, product modification and interest application can be done centrally from one place for all the branches.

• Bank can quickly respond to market scenario and customer needs. This gives competitive edge to the bank.

3. Introduction of Technology Based Services

• Service channels such as ATM, either on-site or off-site, can be started.

• Cheque Deposit Machines (CDM) can be installed. Such machine in WAN connectivity can allow any customer to deposit the cheque for collection at any branch.

• Cheque book printing machine can be installed at central location to give personalized cheque books. Such machine in WAN connectivity can receive command from any branch.

4. Centralized Customer Account Management

• Any customer becomes the customer of the bank rather than of a branch.

• With unique ID / Account Number the accounts of the customers can be viewed centrally by the bank. As such, customer profile, details of products and services availed by him and customer behaviour about business of the bank can be well understood.

• Such customer view gives the bank opportunity to decide directions for business development and marketing strategies.

5. Centralized Reporting

• Presence of centralized data constantly live up-dated at any time ensures comprehensive report / statement generation.

• This tremendously helps in decision making as well as submission to various authorities.

• Operational efficiency of the bank gets increased due to quick report generation for bank as a whole.

6. Centralized System Administration

• Centralized system / I. T. administration enhances system security and user management.

• In TBA mode man-power for I. T. administration is required at each branch. But in core banking it is required only at one place. Thus reduction in man-power need and cost.

• Due to single point resource available I. T. manpower is utilized properly.

Advantages to Head Office

1. Consolidation of MIS / statements / reporting at one place reducing duplication of tasks at branches and it is of real time.

2. Supervision of branches on risk perceptions possible as on going process.

3. Frequent audits and timely control measures can be initiated.

4. Quick informal decisions on real time MIS.

5. Faster and practically real time reconciliation of accounts.

6. Centralized marking and movement monitoring of NPA accounts.

7. Centralized follow-up and co-ordination of overdue and NPA accounts.

8. For statutory reporting and compliance no need to wait for branch compliance

9. Better ALM, especially for short term assets and liabilities possible.

10. Product-wise, customer-wise, customer profile based analysis and decision making possible.

11. Analysis of data on any aspect of banking business and control issues gives scope for keeping the bank professionally healthy.

12. Clearing function is centralized reducing man power requirement at each branch for the purpose.

13. Audit on operational aspects of the accounts can be done at a single location as entire data is available at one place.

14. User access to the computer system in the bank can be restricted to his/her needs and authority only that achieves safety.

15. Printing of several matters such as follow-up notices, statement of accounts etc. can be done centrally on “line printer” that reduces the printing time, printer and man-power need at each branch. Such printer can be activated by any branch on WAN command.

16. Account opening and scanning of signatures can be done at central location.

17. By installing mailing solution on the intra net of the bank, written communication in the form of letters, between H. O. and branches and vice versa, can be eliminated.

18. Mailing solution can set parameters for decision timing and if not decided in time the mail can be escalated to next higher authority. This enhances the decision making procedure and delay at any level gets known to higher authority.

Advantages to Credit Department

1. Reduced credit processing time for existing loan accounts as the Credit Department gets information handy.

2. For processing of new loan accounts the information on product is available that facilitates proper decision.

3. Real time credit tracking by setting alerts about delays, deviations, penalties etc.

4. Corrective measures in credit portfolio can be quickly taken due to credit portfolio analysis.

Advantages to Accounts Department1. Centralized real time General Ledger and Profit and Loss

Account almost eliminates accounting work.

2. Greatly reduces paper work, inward communication needs and work of tallying.

3. Deadlines of statutory compliance and submissions are met in time.

4. Balance sheet of the bank available at any day, any hour, any moment.

5. Accounts Department can concentrate on policy, compliance and reporting issues.

Advantages to I. T. Department

1. I. T. Department becomes the focused entity and back-bone of the operations of the bank.

2. Central data management and application reduces logistical problems and reaction time for system changes and/or troubleshooting.

3. Parameter settings, interest application and such other works being done at one place avoid chances of otherwise repetitive mistakes at different branches and then load on I. T. Dept. for rectification work.

Advantages to Customers

1. Customer can operate his account from any of the branch of the bank.

2. More service channels can be made available to the customer.

3. Customer gets immediate credit if the transaction is between the branches of the bank.

4. Even extension counters can provide all services to the customer

Advantages to Customers

• Customer gets full attention and service satisfaction at the branches as the branches are freed from all back office functions, clearing functions and almost all accounting functions.

• Customer can get SMS alerts on his mobile or e-mail alerts through net for transaction taking place in his account. This gives him comfort and security.

Components

• Software

• Hardware

• Data Centre / Disaster Recovery Centre

• Connectivity devices

• Connectivity service providers

• Security equipments

• Uninterrupted power supply arrangements

• Anti-virus / Fire-walls

Threats and Risks of Core Banking

• Total dependency on technology

• Any failure on technical ground can halt the working with uncertainty about restoring normalcy

• Stoppage of work has adverse effect on bank’s image and reputation

• Technical person/s leaving the bank poses serious problem

• If not mitigated by generating profit out of benefits of core banking the recurring costs are heavy

Core banking Software'sPackage ProviderCoreSofttSuVikas VSoft CorporationTEMENOS T24 Temenos GroupSystematics Fidelity National Information Services Systematics,

Inc/Alltel)Signature (software) FiservSFB / SCB UNISYSSAB / SAMIC SABProfile (software) (formerly Sanchez Profile) Fidelity National Information Services (FIS)ICBA Infopro Sdn BhdBankFusion Universal Banking MisysCSB NatechMisys Equation MisysMisys Midas Plus MisysFinacle InfosysCFT-Bank Center of Financial Technologies (CFT)Alnova Financial Solutions Accenture / AlnovaTCS BaNCS Tata Consultancy Services (TCS)Bankway Fidelity National Information Services (FIS)Corebank Fidelity National Information Services (FIS)SAP Banking Services SAP AGFLEXCUBE Oracle Financial Services SoftwareDIGIBANK Oracle Financial Services SoftwareHogan Computer Sciences CorporationInsite Banking System Automated Systems, Inc.

Electronic Clearance and Settlement System

• The electronic settlement system came about largely as a result of Clearance and Settlement Systems in the World's Securities Markets, a major report in 1989.

• This report made nine recommendations with a view to achieving more efficient settlement.

• In an electronic settlement system, electronic settlement takes place between participants. If a non-participant wishes to settle its interests, it must do so through a participant acting as a custodian. The interests of participants are recorded by credit entries in securities accounts maintained in their names by the operator of the system.

• It permits both quick and efficient settlement by removing the need for paperwork, and the simultaneous delivery of securities with the payment of a corresponding cash sum in the agreed upon currency

Clearing Systems

1. End of Day Net Settlement Systems (NSS)

2. Real Time Gross Settlement Systems (RTGS)

3. Intra Day Net Settlement (Hybrid) Systems

4. Continuous Linked Settlement

End of Day Net Settlement Systems (NSS)

• Traditional Approach

• Amounts are netted and one amount is paid or received across settlement accounts with CB at end of day/period

• Creates intra-day exposures

• Finality at end of ‘period’

• Risk – position built up with a member during the day will not be settled

• So – Collateral, Guarantees, Bilateral debit/credit caps

• Helps preserve participants liquidity

• Usually used for low value payments and paper based instruments

• Lower cost

• Examples:

UK cheque clearing, BACS, ACH in USA

Cheque and Credit Clearing Company process

Real Time Gross Settlement Systems (RTGS)

• Each payment settles singly and bilaterally across accounts at the settlement bank, usually the Central Bank e.g. Bank of England

• Eliminates settlement risk

• Designed to eliminate Herstatt risk

• Payments should arrive with value, availability and finality

• Used for high value/urgent payments

• More expensive than NSS

• Examples:

UK CHAPS, Fedwire in the USA, CHATS in Hong Kong

Intra Day Net Settlement (Hybrid) Systems

• Intra-day settlement at pre-defined periods

• Intra-day finality

• Most located in Europe and handle clearing of euro payments

• Examples

CHIPS (USA)

CLS

Some Domestic Payment Methods

1. Paper-based

a. Cash

b. Cheques

c. Bank transfers

d. Bills of exchange

e. Promissory notes

f. Banker’s drafts

2. Electronic

a. Funds transferI. Urgent wiresII. Standard EFT

b. Standing orderc. Direct debitd. Electronic bills of exchangee. Plastic (credit, charge, cheque guarantee, cash dispenser,

debit)f. Financial EDI

Electronic ClearingMAKER (DRAWER) DATE CHEQUE

NUMBER

AMOUNT

CURRENCY

AUTHORIZEDSIGNATURE OF

MAKER’S AGENT

DRAWEEBANK

PAYEE

DRAWERACCOUNTNUMBER

DRAWEE BANKNUMBER

The paper cheque is justa carrier of information.

Electronic transmission isbetter.

We dematerialize the cheque(remove the paper).

0 6 1 3 0 0 1 8 1 8 4 3 1 0 1 4 3 7 0 0 0 0 0 0 0 0 0 1 0 0 0 0 U S D 0 6 5 2 0 0 3 5 6 4 2 5 0 2 0 0 1 0 1 3 0 DRAWER

ACCOUNTNUMBER

DRAWEEBANK

NUMBER

CHEQUENUMBER

AMOUNT CURRENCY PAYEEBANK

NUMBER

PAYEEACCOUNTNUMBER

DATE

Only the information is sent to the clearing house

Thank You.