The Hindu Business Line : Money in the rules

Following rules saves you trouble. Banks too see the wisdom of following norms such as those specified under Basel-II and Sarbanes Oxley, though it means massive investments in IT. eWorld sounds out tech companies on the `compliance' opportun ity.

COMPLIANCE. That single word must scare most bankers these days. But it rings like music in the ears of IT companies that are in the business of helping the global banking industry get on the right side of the new rules of the game.

As countries try to plug financial frauds and flow of money to global terrorist organisations, a plethora of norms have been created for banks to comply with.

Compliance is no longer a choice for many companies, it has become a necessity due to rules such as the Securities and Exchange Board of India's (SEBI) Clause 49 and Sarbanes Oxley (SOX). The good news, however, is that it can be a two-way street - one that boosts investor confidence while fostering leaner, more agile business processes, and more profitable operations.

While the banking industry was always governed by strict norms, global integration of the banking industry and the need for real-time information to check frauds and ensure regulatory compliance has become actually impossible without a robust IT infrastructure in place.

At the same time, with capital flowing across boundaries, being able to retain their competitiveness is an uphill task for banks sitting on legacy systems and outdated practices.

It is in this space that IT companies have stepped in with a plethora of products designed for the banks to not only comply with the regulations, but also increase their efficiency and effectiveness of operations.

The importance of the sector can be gauged from the fact that traditionally the Banking, Financial Services and Insurance (BFSI) vertical has always been the most significant contributor to the country's domestic IT consumption.

For fiscal 2004-05, the space clocked spends of Rs 10,543 crore - a 46 per centjump over last year's IT spend at Rs 7,231 crore, according to Data Quest figures.

"When polled on the challenges they face, banks' number one priority is compliance. The other two are retail reach and other technology initiatives such as Real Time Gross Settlement.

Within banks, know your customer (KYC) and other mandatory compliance issues such as SOX and Basel II norms necessitate that they create the networks to address the upsurge of data warehousing requirements. This is where Cisco's expertise comes into play to help banks build robust, resilient and scalable networks that can handle the information overload," says Cisco's Senior Vice-President-Enterprise (India and Saarc), Jangoo Dalal.

Given that compliance norms demand safeguards to ensure the security and confidentiality of customer records and information, security becomes a key concern for banks today, he says, adding that Cisco's Secure Desktop, a feature found in the company's Web VPN solutions, can help banks respond to government regulations for data protection by safeguarding the privacy and security of confidential information.

The software side is an even greater opportunity.

Infosys, which earns a third of its revenues from the BFSI vertical, offers solutions to banks around its universal banking solution, Finacle.

Finacle addresses the core banking, e-Banking, treasury, wealth management, CRM and Web-based cash management requirements of retail and universal banks. In addition, it addresses the Basel-II requirements of credit risk, interest risk and analysis, liquidity risk and data capture to reduce operational risks, says Infosys' Vice-President and Business Head (Finacle), Merwin Fernandes.

Another Indian company, i-flex Solutions, focuses exclusively on the financial services vertical.

"We are well-positioned to guide banks through all the stages of compliance with their regulatory requirements. i-flex has deep expertise in risk and compliance areas and offers consulting, pre-packaged products and implementation services to banks world-wide," says I-flex's Chief Financial Officer, Deepak Ghaisas.

As part of operational risk management, fraud detection and anti money laundering are major areas of concern for financial institutions. i-flex provides consulting services in defining policies, processes and procedures, and implementing systems.

It has also partnered with technology solution providers to offer Anti-Money Laundering (AML) and fraud-detection solutions to financial institutions worldwide, Ghaisas says.

Even multi-national giants such as Oracle and SAP are pushing their products and services in the Indian market.

For example, Oracle Financial Services Applications (OFSA) is the global data giant's integrated suite of financial, accounting and risk-management applications for banking and financial services companies.

Oracle Financial Services Applications enable financial institutions to automate processes to reduce finance and accounting costs, cut IT costs, manage by fact, and improve operational efficiency, says Oracle India's Senior Director (FSI), Suraj Pai.

Many Indian banks are also using the Oracle E-Business Suite, which encompasses fully-integrated applications across the enterprise for financial accounting, management accounting, human resources management, and procurement and asset management. Banks such as Kotak Mahindra Bank, HDFC Bank, State Bank of India, ICICI Bank and IDBI Bank have deployed the Oracle E-Business Suite, says Pai.

Costs of having weak systems

Today, banking cannot survive without a robust IT infrastructure - no longer is IT an enabler of business in this space - it has become a driver, says Dalal of Cisco.

"The reason for this is simple. Customers have become more demanding - they expect their banks to offer them services such as ATMs, Internet banking, etc. And for these services to perform efficiently, a robust IT infrastructure becomes the need of the hour," he says.

Deepak Ghaisas of I-flex goes further in saying that if a bank does not have a robust IT infrastructure in place, it can even face closure.

"Not having a robust database leads to inefficiency, increases cost, loss of business, increase in losses, and in case of non-compliance, could even lead to closure of the bank. The banking industry has enough instances of spectacular losses resulting from lack of adequate controls," he says.

State of preparedness of Indian banks

Experts feel that while all banks will have to make fresh IT investments in developing new solutions and enhancing existing solutions on the road to Basel II compliance, most Public Sector Banks have a larger task at hand in computerising their operations to begin with.

"Banks will need to implement a high level of integration between various applications such as application processing, credit decision, risk rating, transaction systems, and collateral management to be able to meet the Basel II requirements," says Deepak Ghaisas of i-flex.

Most banks in India lack historical data, which is a key factor for a successful Basel II implementation.

These banks will have to make large-scale IT investments in order to capture, analyse and manage data across the organisation. Basel II brings a certain degree of complexity in computations required for arriving at regulatory capital and this will require appropriate IT solutions, he says.

Cisco's Dalal says that having worked with a majority of the national public sector banks in the country such as State Bank of India, Bank of India, and Punjab National Bank, the company finds them to be as progressive as the private sector banks.

"Each of these public-sector banks has deployed a core banking solution to facilitate city-wise connectivity of computerised branches, where Cisco's solutions have helped deliver the promise of `anytime anywhere' banking. With the first phase of branch automation successfully complete, today's public sector banks, like their private sector counterparts, are gearing up to face the new challenges of compliance," Dalalsays.

Clearly, the moolah for the IT companies will continue flowing.

Common points

THE number of compliance norms may sound overwhelming.

But there are fundamental similarities between these laws:

All of them require managements to be accountable to stakeholders.

All require companies to establish a reliable information system that allows them to report the organisation's financial health using international standards and comply with local legislation and good corporate governance practices.

And all require company management to articulate internal controls and manage the risks of financial reporting, error and loss.

eworld@thehindu.co.in

Picture by C. Ratheesh Kumar

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