The Hindu Business Line : Banking on information systems

In the context of the need to achieve average annual growth rates of 8-10 per cent, the Reserve Bank of India would do well to review investments by banks in information technology. It should constitute a group that evaluates the technologies in use in individual banks and makes suggestions on the required investments for upgrading them within a set period, says A. Vasudevan.

Improved efficiency, better customer service and global competence are a few reasons why public sector banks must step up investments in Information Technology. — K. K. Mustafah

MUCH OF the data about information technology (IT) in the banking sector in India emanates from the Reserve Bank of India partly because most commercial banks do not have good enough Web sites for disseminating information and do not communicate what their targets for IT are and the actions they have taken to realise them. The RBI does not provide information about IT investments by the commercial banks and in the banking sector as a whole.

From the balance-sheets, however, one can get some idea of the expenditure incurred on computerisation and information technology including those relating to network associations but such spending often includes investments as well as operational expenditure. It is not easy to check whether the investment outlays, where they can be identified, are in line with the targets for the periods.

There is, however, no doubt that the expenditure of the banking sector on IT has increased in the last eight-nine years, in particular after the scare about the year 2000. A number of banks used the opportunity afforded by the Y2K scare to update their computerisation systems, procure new Y2K-compliant computers and, in general, extend computerisation to cover some front- and back-office operations.

The `technology gap'

Even at the risk of being labelled as gross generalisations, it is useful to appreciate at the outset, that in the last five years, a number of commercial banks have opened ATM branches thereby economising on the costs that devolve in opening of branch offices in cities and major towns. Almost all bank branches in cities and major towns have computerised the savings bank and current accounts.

They also have computerised major loan accounts. The investment operations of banks and clearing systems have also been computerised at the head office levels. Still there are gaps in technology upgradation in the commercial banking system. This is best reflected in the yawning chasm between the technology adaptations of public sector banks as a group and the new private banks. For convenience, let us term this situation as a technology gap; even among public sector banks, this is quite high. There is, however, no such gap that is worth noticing between the new private banks and foreign banks in India. Technology use in old Indian private sector banks is not in the same league as that in their modern counterparts.

Computerisation attracts customers

The technology gap raises many questions. How is it that a country that is considered the world's IT hub does not have technologically advanced commercial banks? Is it because the predominant number of bank customers is used to, and content with, paper-based systems?

Even if it is true that a large majority of bank customers are not comfortable with computers, there is no reason why technologically laggard banks should impose on their customers high transaction costs in terms of the time and money spent on visits to branch offices and in terms of the delays in completing their transactions.

Such banks rarely have Net banking facilities for their customers. They generally offer to make payments on behalf of their customers to utilities and the Life Insurance Corporation of India if the customers agree in writing for debiting their accounts amounts equivalent to what is to be paid to the utilities/LIC.

The offer of this service is not enough because the technologically laggard banks should realise that the economic class and age composition of their customers is already not favourable. Most young professionals, irrespective of their economic class, prefer to do business with technologically advanced banks. The relatively well-to-do as well as those who find their career graphs are on the rise also bank with such banks. It would obviously be difficult for laggard banks to attract new young customers if they do not increase their investments on IT.

The policy-makers have unwittingly allowed asymmetric treatment of bank customers in that those who bank with the laggards have to pay larger transaction costs than those who transact with technologically advanced facilities.

Besides, the policy-makers, in the given context of the considerable inflows of foreign exchange, would have to ensure that all Indian banks are technologically modern and internationally competitive. They have to work out a definitive time frame for technological advancement of all commercial banks for a variety of reasons. It is said that IT investment in banking would help improve the productivity of many enterprises especially those in engineering, commerce, finance and pharmaceuticals as well as the organisational capabilities and management strategies within the banks.

Besides, there is evidence of IT capital increasing employment, job growth being a function of the increase in utilisation of IT. A large IT presence also improves the value of the equity share of a bank that accesses the capital market.

What should be the range of technological upgradation that should be aimed at? It is difficult to speculate on the advances that will happen in IT in the near to medium term. But one needs to make sure that the known technologies are used. For example, all banks would have to go beyond operating on intrabank or interbank networking systems.

The open global network

To be a major player in the financial world at home and abroad with capabilities to deliver all customer services, it is necessary to cover the interactions among the various players under an open global network. Banks would have to also ensure that technologies are continuously updated to achieve a high degree of risk management capability.

This would require strategies that involve asset and liability management, and take care of exchange, interest rate, liquidity and operational risks; these must be comparable with the international best. In addition, banks would need to take measures to have secure information and safe and quick retrieval.

The RBI has done well in recent years to give the lead in payment and settlement systems and computerising the government securities, money market and foreign exchange operations in the banking sector as a whole.

It encouraged the use of electronic debits and credits and electronic fund transfers; set up the Indian financial network covering all banks; and had a committee to examine issues relating to technology upgradation in banks. In the current context of the need to achieve average annual growth rates of 8-10 per cent to reduce unemployment, the RBI would do well to review IT investments in banks. It should constitute a group that evaluates the technologies in use in individual banks and makes suggestions on the required investments for upgrading them within a set period for reasons explained above.

Banks should be encouraged to educate their customers about the use and benefits of new technologies. Incentives/disincentives could be set for complying with the time-frame for technology upgradation. For example, the non-complaint banks may be denied access to the capital market and may be pressured to consider offers of merger from other banks.

(The author, a former Executive Director of the RBI in charge of economic research and information technology, can be accessed on asurivasudevan@hotmail.com)

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