I would like to enumerate for record
a few technology-related initiatives of the RBI. First, the establishment of
the mechanised cheque processing systems using the Magnetic Ink Character Recognition
(MICR) technology in India. These have been acknowledged the world over as systems
which have stabilised well with overall reject rates of around 1% while, I understand,
that the international rates are around 2%. Those who operate these systems,
therefore, deserve to be complimented.
Second, the technological infrastructure
created by the IDRBT since the establishment of the INFINET in 1999. This was
aimed at sharing expensive IT resources so as to achieve the economies of scale.
One of the notable achievements of the IDRBT has been the implementation of
Public Key Infrastructure (PKI)-based electronic data transfer with very high
security levels.
Third, the introduction of the
Real Time Gross Settlement (RTGS) System. It has not only resulted in compliance
with the Core Principles for Systemically Important Payment Systems of the Bank
for International Settlements (BIS), Basle but has also paved the way for risk-free,
credit push-based fund transfers settled on a real time basis and in the central
bank money. We had an occasion to compare our RTGS system with other RTGS systems
for placing before our Board for Payment and Settlement Systems. It emerged
that the Indian RTGS system, which has the ‘Y’ topology, is considered to be
the optimal choice and this topology has also been adopted by several central
banks, which have implemented RTGS. Our approach towards intra-day liquidity
and potential gridlock resolution follow international patterns. An evaluation
of the various components of the RTGS system vis-à-vis the critical evaluation
parameters set by the Bank for International Settlements, Basle indicates that
we are close to the best on most of the parameters.
The facility for inter-bank funds
settlement through RTGS is available today across more than 23,700 branches
of banks spanning more than 500 centres in the country. While it is reassuring
to note that transactions with large aggregate value are being settled through
the RTGS system, with average daily settlement amounting to more than Rs. 60,000
crore, there is still scope for routing many more systemically important payments
through the RTGS. For the purpose, enhancing the customer awareness at the user
level would be an urgent imperative. It is essential that the RBI, banks and
large players in the market make concerted efforts in this regard so as to ensure
that all large-value customer payments across financial markets, which have
systemic implications, flow into the RTGS, such as payments in the equity and
debt markets. Once the system achieves a critical mass of usage by the participants,
a tipping point would be reached and it should be possible for the financial
regulators to consider making the RTGS as the preferred mode for specified large-value
transactions in the financial markets.
Fourth, creation of electronic
fund transfer systems. It is not necessary that all the fund transactions are
settled on a real time basis. It is, therefore, important to expand the reach
of other electronic payment mechanisms for small-value customer transactions
across the country. Towards this end, the Reserve Bank implemented the Electronic
Funds Transfer (EFT) System in the mid nineties, which was later upgraded as
the Special Electronic Funds Transfer (SEFT) System in 2003 and has now been
further enhanced as the National Electronic Funds Transfer (NEFT) System since
November 2005.
Over the years, the role of
the Reserve Bank is changing in tune with the increased levels of maturity of
the markets and the financial system as a whole. The role of the Reserve Bank
in future would be of a catalyst of change as detailed in the Financial Sector
Technology Vision Document published in 2005. In realising this vision, the
need for shared efforts towards setting up of world class IT systems will gain
greater significance. As a first step, the Reserve Bank has, through the IDRBT,
facilitated the setting up the National Financial Switch, which provides such
an opportunity to the financial sector. I would urge the banks to make extensive
use of this facility. IDRBT is also revamping the entire INFINET structure in
consultation with the users to make it more efficient in tune with the international
practices. Perhaps, a formal benchmarking of the functioning of our system with
the global standards and practices may have to be done and the outcome placed
in the public domain.
Technology Challenges for the Banking
Sector
The entire approach towards technology-based
banking has shown significant improvement since the initiation of reforms in
the 1990s. The number of public sector banks which has migrated (or are in the
process of migration) to Core Banking Systems (CBS), is an indication of the
progress in this regard. The unique feature of the CBS is that the concept of
branch-based banking gives way to the bank-based banking treating the constituent
as the customer not of a particular branch but of the bank as a whole. Today,
21 public sector banks have embarked on the use of such systems and the number
of CBS-enabled branches exceeds 14,000 as against 14 banks with about 5000 CBS-branches
a year ago. Some of the banks are reportedly facing teething troubles in this
area but I trust every effort would be made to stabilise the system to the satisfaction
of all customers. I would urge that an assessment of the efficiency of functioning
of CBS in all the banks be attempted to facilitate necessary improvements.
The commercial banks have to address
various emerging challenges including those arising from large-scale IT deployment.
These include the impact of CBS, more scientific risk management, better asset-liability
management, ensuring effective anti money laundering measures, and the security
concerns relating to implementation of IT in banks.
One issue, which often gets raised
in any discussion on technology implementation, is the cost it entails. Products
such as smart cards, which may not require significant initial capital costs
and which can be easily implemented for a large customer base, hold the promise
for the future.
Let me highlight some of the critical
factors, which need to be adequately addressed while dealing with IT. Prime
amongst them is the need to ensure appropriate security and integrity of the
system. Security in IT systems is only as effective as the weakest link and
as financial intermediaries, the banks have to ensure that security features
incorporated in IT systems are the best of the breed. With ever-evolving information
technology, the security concerns do not remain static and a system of an ongoing
critical review of the efficacy of security features and measures needs to be
instituted. Integrity of the data processed and stored in IT systems has to
be ensured by the banks at all times and adequate back up, including real time
replication, to the extent possible, provided for.
Another major requirement relates
to disaster recovery management and the fail-safe business continuity plans.
In today’s world, customer expectations are high and ensuring uninterrupted
availability of the IT resources, even in the event of a rather extreme contingency,
assumes significance. The banking community, therefore, needs to put in place
appropriate contingency plans and test their adequacy at regular intervals.
While the Reserve Bank is providing
a common system-wide communications infrastructure, the ultimate objective should
be for each bank to develop its own communications network so that the movement
of funds within the banks is entirely managed through their own networks.
This will avoid excessive dependence on INFINET and improve the overall systemic
efficiency. Though a few banks have already done so, there is scope for
further progress in this regard by others.
There are several co-operative
banks too in the system which extend banking services and some of them also
have relatively large-scale operations. Perhaps, it is essential that
the use of technology in the co-operative banking sector too is enhanced, as
appropriate, to bring them closer to the level of the commercial banks.
Technology and Financial Inclusion
We have been highlighting the need
for financial inclusion which involves the provision of banking services to
the vast multitude of population so far excluded from such services. As far
as increasing the scope and coverage of financial inclusion is concerned, some
of the challenges which need to be effectively addressed include lack of adequate
infrastructure in rural areas, relatively low volumes of transactions, comparatively
higher transaction costs, and other factors such as the literacy levels of target
customers.
Technology offers an excellent
tool to effectively address the above challenges. Lack of infrastructure is
being addressed in a variety of innovative ways, leveraging technology. Some
of these include use of computer systems which do not require uninterrupted
electric power supply, networking using radio frequency and other non-conventional
methods, centralisation of processing systems leading to lower processing costs,
provision of home-grown customised systems such as the low cost, multi-lingual
ATM developed by the IIT, Chennai - all of which provide an impetus towards
greater financial inclusion.
In South Africa, technology has
been deployed to widen the financial inclusion with the introduction of MZANSI
account, which is a card-based, limited-service, affordable savings account
integrated with the merchant point-of-sale outlets, ATMs and even Post Office
outlets. In Philippines, the card-based retail money movement system has won
great acclaim. In India, the Reserve Bank, along with the IDRBT, is working
on the use of multi-application smart-card systems which can serve as a bank
account and also function as a store of electronic cash, as a data repository
for essential information relating to the card holder, with built-in security
features such as biometric identification, and which can also double up as an
entitlement identifier or as a social security card.
It is gratifying to note from a
NABARD report that a pilot project on smart cards has already been launched
with Sri Visakha Grameena Bank in Andhra Pradesh, which has been one of the
front-runner banks in financing Self Help Groups (SHGs). It is expected that
with enhanced use of rural-oriented technology, the bank would be able to provide
value addition to services offered to the rural clients and further expand its
outreach in a sustainable manner. Banks could consider the feasibility of using
smart cards for the ‘No Frills Accounts’ so as to help expand the coverage of
the banking services and facilitate the garnering of the much-needed low-cost
deposits. Here again, the approach of sharing of IT resources would have much
to commend itself.
Technology and the Government Sector
It would be appropriate to
also outline certain aspects of application of technology to the Government
business since RBI is the banker to the Central and State Governments. If we
scan the technology initiatives of the States, we find a large divergence in
technology absorption across the States. While States like Andhra Pradesh, Maharashtra,
and Karnataka are generally ahead of others in e-Governance, this is just beginning
to happen in the States like Madhya Pradesh, Uttar Pradesh, Bihar and the North
East. As far as Central Government receipts are concerned, the Government's
tax collection processes underwent a metamorphosis with the introduction of
Online Tax Accounting System (OLTAS) for direct taxes. Enthused by the success
of OLTAS, the Central Board of Excise and Customs, in consultation with the
Reserve Bank, has introduced the EASIEST (Electronic Accounting System in Excise
and Service Tax) project which envisages a comprehensive e-payment module that
can be utilised by the banks’ corporate customers. The pilot project for this
is in an advanced stage of completion. Acceptance by the Government of electronic
challans, based on formats to be available on their web sites, would make the
process tax-payer friendly. It would also substantially reduce paper usage,
provide for Straight Through Processing and obviate errors arising from the
reconciliation process, wrong data entry, etc.
Another significant initiative
taken in this sector by the Reserve Bank was the computerisation of State treasuries
throughout the country. After detailed examination of the various aspects, steps
are now underway for the establishment of electronic linkage amongst the State
Treasuries numbering 3022, agency banks, Finance Departments of the State Governments,
Office of the Accountant General and the Reserve Bank of India. This will help
in speedier accounting of receipts and payments of the State Government departments,
apart from serving as a road map for achieving end-to-end connectivity amongst
various accounting agencies involved.
It needs to be noted in this
context that while use of the state-of-the-art technology within the banking
system is an asset, it also poses a challenge to the conventional banker and
government accountants due to increase in the speed and complexity of transaction
processing. The banks have to ensure that all transactions conducted as agents
of Government are secure from end-to-end and are retrievable at any point of
time. A successful example of this is the electronic import-licensing system
of the Directorate General of Foreign Trade which has an electronic payment
facility integrated with the IT systems of the banks.
I would like to take this opportunity
to mention that at a recent conference of the State Finance Secretaries, the
Finance Secretaries of several State governments expressed the view that the
technological base and efficiency of services rendered by some of the banks
handling Government business needed to be improved significantly. Relationship
banking encompassing both, lending with a social focus and operating as a banker
to the Government, is valuable but if the quality of service in handling Governments’
transactions is not of high standards, some of the banks may not be able to
retain their Government business at the current levels. Concerted efforts are,
therefore, required by the States and their respective bankers in this regard.
Technology and Markets
Technology has played a significant
role in improving the efficiency of the financial markets. The Negotiated Dealing
System (NDS) has been functioning well. The introduction of Order Matching NDS
(NDS-OM), has helped further in securing better price discovery, transparency
in trading, reporting and electronic bidding at auctions. The NDS, implemented
since February 2002, provides a platform for screen-based trading in government
securities to the member banks and primary dealers with a facility to strike
on-line deals anonymously and, thus, experience more efficient price discovery.
The process involves the reporting of deals to the Clearing Corporation of India
(CCIL) Ltd. which generates the settlement – gross for the securities and net
for the funds leg. At the end of the day, the settlement information is transmitted
to the RBI for effecting the same in its books. The CCIL also acts as the central
counterparty for the trades by guaranteeing the delivery of securities as well
as funds.
We are in the process of fully
integrating the NDS settlements with the RTGS. In order to improve the functioning
of the corporate bond market, a High Level Expert Committee on Corporate Bonds
and Securitisation (Chairman: Dr. R.H. Patil) has suggested various measures
to revitalise the corporate bond market through setting up of trade reporting
systems, trading platforms, auction platforms and clearing & settlement
systems. The trade reporting systems suggested for corporate bonds is on the
lines of Trade Reporting and Compliance Engine (TRACE) of National Association
of Security Dealers (NASD) in the US. Such on-line real-time data dissemination
will help the participants in making efficient trading decisions and at the
same time, enable the regulators to obtain and monitor information on the market
trends. These recommendations are under examination by the agencies concerned.
Concluding Remarks
The basic objective of deployment
of technology in the financial sector should be to progressively move away from
paper-based transactions, which include use of currency notes, cheques or challans,
and to the extent possible, switch over to electronic means using RTGS or NEFT
or any other electronic mode.
It is opportune that we are today
recognising the valuable contributions of the path breakers in the field of
banking technology. The identification of technology leaders and their recognition
in the form of Technology Awards is a pointer that we are capable of excelling
in our respective fields. The awards of today are not a destination but only
mark a good beginning – of a more exciting and challenging era ahead of us in
our march towards a technologically advanced and efficient, effective, progressive
and inclusive financial system.
I wish you all success in your
future endeavours.
Thank you.
* Address by Dr. Y.V. Reddy,
Governor, Reserve Bank of India at the Banking Technology Awards Function, 2006
at the Institute for Development and Research in Banking Technology, Hyderabad
on September 2, 2006