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

29

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

31

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.

36

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

37

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

50

• 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.

51

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

52

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

53

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

54

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

55

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

56

• 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

57

• 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

58

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

59

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

*****

60

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

*****

61