The State Bank of India is the oldest and largest bank in India, with more than 250 billion in assets. It is the second-largest bank in the world in number of branches; it opened its 10,000th branch in 2008. The bank has 84 international branches located in 32 countries and approximately 8,500 ATMs. Additionally, SBI has controlling or complete interest in a number of affiliate banks, resulting in the availability of banking services at more than 14,600 branches and nearly 10,000 ATMs.
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While SBI was among the first bank in India to computerize some of its operations, during the 1990s, SBI started losing market share to private banks who implemented more modern computer systems and were able to provide customers with a wide range of banking services. To remain competitive with its private-sector counterparts, in 2002, SBI began the largest implementation of a centralized core system ever undertaken in the banking industry.
The State Bank of India selected Tata Consultancy Services to customize the software, implement the new core system, and provide ongoing operational support for its centralized information technology.
The report discusses the features of Core Banking that SBI was looking for, the solution provided by TCS, the implementation of the said solution and its impact on SBI and its customers.
CORE BANKING IN INDIA
In India major efforts towards computerization in the banking industry started almost two decades ago. The stages of computerization in the banking industry may be classified as below:
ALPM (Automated ledger posting machines) branches
Partially computerized branches
Fully computerized branches
Centrally Computerized and Fully Networked Banks
Banks offering Internet Banking,
Off-shore data processing
In the early 80s banks introduced Automated Ledger Posting Machines which was the genesis for introducing automation in banks. During the mid 1980s, banks computerized their operations on stand-alone computers for catering to the needs of the customers and at the same time improve the efficiency in the functioning of the branch. Through introduction of such a system, banks could render a particular service only at specified counters in the branch. For example, transactions relating to savings bank account or term deposits can be put through only at specific computers. Even though this marked the beginning of automation, it did not meet the expectations of the demands of the customers. However the branch functioning improved noticeably and the employees were exposed to the use of computers.
In order to improve the customer service further, banks adopted the concept of ‘single window’, which meant that the branches move over to a ‘client-server’ environment. This led to networking with in the branch and the branches were classified as ‘Totally Automated branch’ (TBA) or ‘Partially Automated Branch’ depending upon the extent of computerization of the various business areas of a branch functioning. A major thrust to networked computing came about with the entry of new private sector banks in the later part of 1990s, which were mandated by the RBI to be totally computerized and networked banks right from day one of their existence. These banks were able to offer anywhere / anytime banking and also offered multiple delivery channels in the form of ATM, Internet banking, Mobile banking etc thereby weaning away the clientele from the PSBs. Today, if banks want to survive in their business they need to cater to the demands of the customers who dictate to a great extent the service that banks are required to offer. Core Banking offers an ideal platform to meet the challenges in the financial industry
Core banking solution refers to a common IT solution wherein a central shared database support the entire banking application. Business processes in all the branches of a bank update a common database in a central server located at Data centre, which gives a consolidated view of the bank’s operations. Branches function as delivery channels providing services to the customers of the bank. Core Banking Solution is an integrated application that supports real time, multi-banking and multi-channel strategies.
This central shared database will provide functionality such as:
CIF: Customer information file with all the non-dynamic information about the customer, business entity or group and relationships
All bank liability accounts; savings; fixed deposits; current accounts etc.
All Bank asset accounts; loans; mortgages; credit facilities
Bank General Ledger, Manage Information; Bank Financials
Payment systems; Real Time Gross Settlement;
Card systems; Electronic Funds Transfer at the Point of Sale; Automated Teller Machines; and other electronic payments and transaction handling systems
Highest standards of security accepted by Central Banks with clear audit trail
Reporting and compliance with regulatory requirements
The single biggest achievement of implementing the Core Banking Solution is that each customer is truly the customer of the Bank and not just the customer of the Branch, where his/her account is maintained. He/she can go to a branch anywhere in the country and perform a transaction. This is possible as the entire Customer Database is centrally located at the Central Data Centre (CDC) and can be accessed throughout the network of branches.
Also Core Banking systems are necessary for a bank to remain competitive in an increasingly competitive market. Various advantages that a bank has on implementation of core banking solution are:-
BENEFITS TO CUSTOMERS
This means that customer can access his/her account at anytime of the day and during any week of the day irrespective of the fact that the bank branch in which he holds the account is closed or working. The transactions are performed using multiple channels such as ATMs, Internet Banking, Phone Banking and Mobile Banking. Further, the transactions using these delivery channels are updated in the CDC in real time
Customers can avail of banking services across the branch and Channel network irrespective of location where their account is maintained. Mobile/Internet Banking allow customer to access his/her account from any geographical location.
Integration with strategic sectors
Core Banking integrates all strategic sectors of Banking such as Trade Finance, Treasury, Asset-Liability Management and Corporate Balance Sheet. As a result, the information related to these areas is centrally available for use or reference
Strengthening MIS, DSS and EIS
Core Banking Solution is more than just a transaction processing system. It provides updated data for generating various reports for Management Information System (MIS), and will facilitate Decision Support System (DSS) and Executive Information System (EIS). As data is located on CDC, branches and administrative offices can concurrently avail updated data when required.
Business Process Re-engineering (BPR) – enabler
Core Banking would enable implementation of BPR initiatives of a Bank and facilitate centralized handling of various processes. Branches would do less and less back office work and would be able to focus on marketing, customer relationship management and cross selling.
BENEFITS TO THE BRANCH
As the back office work is done at a centralized location, more time is available to the branch officials for activities like product promotion, marketing, business expansion and cross selling of products.
Single window service for the varied needs of the customers is made available at the branches. This enhances customer service at the branch
There is a uniform approach to the branch rules / operations
Branches can concentrate on developing business.
Standardization of IT infrastructure at the branches.
No End of Day (EOD) / Beginning of Day (BOD) process at the branch
No local server and hence no local backup and other administrative chores
BENEFITS TO BANK
Instant availability of consistent and accurate data
MIS at a central location enhancing the decision support for the top management
There will be effective control and monitoring by the top management.
Data base and processing are centralized leading to better monitoring of the business and reduction in data cost and transaction cost
Faster introduction of customer centric products from the central location ensuring uniformity in implementation
Roll out of new products / Business changes can be implemented immediately
New delivery channels can be integrated easily
The need for reconciliation among the branches is eliminated thereby improving better house keeping and better operational risk management
Ease of system administration and thereby reduction in support costs. Information system security is ensured as the Information processing facility is centralized.
Since the transactional as well as master data of all the branches is available at a centralized location, it is easy to set up Data-warehousing which will provide a decision support system
Critical nation wide payment system products introduced by the regulator such as RTGS, NDS, CFMS, and SFMS etc can be implemented and integrated with the core banking at the data centre
RISKS ASSOCIATED WITH CORE BANKING
All eggs are in a single basket and hence the effect of centralized failure will be colossal resulting in reputation risk for the bank
The dependence on vendors and service providers increases
Data Integrity and data security have to be ensured all the time as the centralized location will be the target of all evil eyes. To be able to provide a reasonable level of comfort in this aspect, the security program of the banks will have to be dynamic and alive to the imponderables
Acceptance by the staff and changing their mind set to accept technology and a role shift will be a very big challenge for managements
CORE BANKING ARCHITECTURE
CORE BANKING FOR SBI
SBI has a dual role of earning a profit and the social mandate of extending banking services to the population throughout India. Therefore, the bank built an extensive branch network in India that included many branches in low-income rural areas that were unprofitable to the bank.
A lack of reliable telecommunication and electricity infrastructure and availability hindered the implementation of computerization at Indian banks throughout the 1970s and 1980s. During this period, account information was typically maintained at the local branches with either semi automated or manual ledger card processing. During the 1990s, the Indian economy began a period of rapid growth as the country’s low labor costs, intellectual capital, and improving telecommunications technology allowed India to offer its commercial services on a global basis. This growth was also aided by the government’s decision to allow the creation of private-sector banks (they had been nationalized in the 1960s). The private-sector banks, such as ICICI Bank and HDFC Bank, altered the banking landscape in India. They implemented modern centralized core banking systems and electronic delivery channels that allowed them to introduce new products and provide greater convenience to customers. As a result, the private-sector banks attracted middle and upper-class customers at the expense of the public-sector banks. Additionally, foreign banks such as Standard Chartered Bank and Citigroup used their advanced automation capabilities to gain market share in the corporate and high-net-worth markets.
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The advantages in products and efficiency of the private-sector banks became increasing evident in the late 1990s as SBI (and India’s other public-sector banks) lost existing customers and could not attract the rapidly growing middle market in India. In fact, this technology-savvy market segment viewed the public-sector banks as technology laggards that could not meet their banking needs. As a result, the Indian government sought to have the public-sector banks modernize their core banking systems. In response to the competitive threats and entreaties from the government, SBI engaged KPMG Peat Marwick (KPMG) in 2000 to develop a technology strategy and a modernization road map for the bank. In 2002, bank management approved the KPMG-recommended strategy for a new IT environment that included the implementation of a new centralized core banking system. This effort would encompass the largest 3,300 branches of the bank that were located in city and suburban areas.
The Objectives and Challenges for SBI in the project
The State Bank of India’s objectives for its project to modernize core systems included:
â€¢ The delivery of new product capabilities to all customers, including those in rural areas
â€¢ The unification of processes across the bank to realize operational efficiencies and improve
â€¢ Provision of a single customer view of all accounts
â€¢ The ability to merge the affiliate banks into SBI
â€¢ Support for all SBI existing products
â€¢ Reduced customer wait times in branches
â€¢ Reversal of the customer attrition trend
SBI had to overcome many challenges in implementing a centralized core processing system. The foremost of these challenges was finding a system that could process over 75 million accounts daily, this number is the highest for any bank in the world using a centralized processing system. Also, SBI’s own team had no experience in implementing a centralized system. Another problem for SBI was getting buy in from local branch staff, many of whom took great pride in executing complex transactions manually or using local in-branch systems. The new centralized core banking solution will make their skills redundant leading to a loss of criticality and job prestige for these employees, This led to fears that employees will be unwilling to adopt the new system and might try to sabotage the entire project.
Another challenge for the bank was the unique requirements of the bank, which would mean that any software solution had to be customized heavily to bring it in line with the bank’s business processes. New modifications have to added to include taking deposits in form of gold (by weight), having saving accounts with overdraft privileges and a large number of passbook saving accounts.
Vendor Selection Process
Recognizing the fact that their own IT was not ready for such a massive undertaking, SBI sought proposals from a number of vendors, most of them headed by the world’s leading system integrators. The finalists for the contract were vendor consortiums headed by IBM and TCS. TCS’s vendor group included HP, FNS (Financial Network Services) and China Systems.
Although SBI favored the real-time processing architecture of FNS’s BaNCS system over that of the IBM consortium’s memo post/batch update architecture, the bank had several concerns about the TCS consortium proposal. They included the small size and relatively weak financial strength of FNS (TCS would eventually purchase FNS in 2005) and the ability of the UNIX-based system to meet the scalability requirements of the bank. Therefore, it was agreed that TCS would be responsible for the required systems modifications and ongoing software maintenance for SBI. Additionally, scalability tests were performed at HP’s lab in Germany to verify that the system was capable of meeting the bank’s scalability requirements. These tests demonstrated the capability of TCS BaNCS to support the processing requirements of 75 million accounts and 19 million daily transactions.
Implementation of TCS Bancs in SBI
The contract for the initial project was completed in May 2002; 3,300 branches were to be converted by mid-2007. TCS immediately began a six-month gap analysis effort to determine the required software changes to the BaNCS system. The changes included installing required
interfaces with more than 50 other systems as well as making enhancements to support the bank’s product requirements. These product requirements were separated by customer segment to allow the vendor and bank to begin conversions before all the needed modifications were implemented. They placed a priority on the needed changes that would allow branches with high-net-worth individuals and then corporate accounts to be converted as soon as possible. Before the first conversion in August 2003, TCS and HP created the data processing environment for SBI. The primary data center was established on the outskirts of Mumbai and a backup center was established approximately 1,000 miles to the east in Chennai. The centers were equipped with HP Superdome servers and XP storage systems in a failover configuration utilizing HP’s UNIX operating platform.
The conversion effort began in August 2003, when SBI converted three pilot branches to the
BaNCS system. The successful conversion and operation of the pilot branches was followed by the conversion of 350 retail branches with high-net-worth customers between August 2003 and September 2004. At this point, the bank intentionally halted the conversions to analyze and resolve reported problems. They analyzed, categorized, and prioritized these problems by type of resolution (e.g., software, procedural, training) and severity. TCS managed software revisions for the critical software changes while the branch personnel managed the needed training and procedural changes. After the software and procedural changes were implemented, SBI converted an additional 800 branches between December 2004 and March 2005. Unlike in the previous conversions, this group of branches included predominantly commercially oriented offices. The conversion effort then refocused on retail branches until November 2005, when the bank paused again to resolve problems that came up during this second group of conversions.
After the second round of changes, the system and processes were functioning smoothly, and
management believed the branch conversion could be accelerated. An assembly line approach
was then employed in April 2006 to speed the branch conversion process:
Branch personnel were responsible for data scrubbing and cleaning of their customer information on the existing system.
Branches were notified three months prior to their conversion date to begin “mock,” or test, conversions using a specially created test version of the BaNCS system.
Branches performed several test conversions to ensure the actual conversion went smoothly.
As the new core banking system was rolled out across the SBI branches nationwide, a special
process was introduced in the nightly batch window to add the new branches. The process
increased batch processing time approximately 20 minutes and typically included adding branches in groups of 50. This additional process, of course, was unnecessary upon completion of the rollout and has since been removed from the nightly batch window. TCS and local area branch managers oversaw the conversions, and the bank’s circle (regional) heads formally reported the status to the chairman’s office. By employing the assembly line approach for branch conversions, SBI was able to convert 1,200 branches in April and May 2006, completing the initial 3,300-branch conversion two months ahead of the original schedule.
The success of the initial 3,300-branch conversion for SBI demonstrated that
TCS had the technical capabilities to support the bank’s IT initiative and scale of operations.
Bank personnel had the skills to adopt new processes and support the conversions.
The Indian customer base would react to new technology by adopting new electronic services and demanding new, more sophisticated banking products.
An assembly line approach could be used effectively to support large-scale branch conversions.
Based on the successful scalability test, SBI decided to convert the approximately 6,700 remaining SBI branches to the BaNCS system. The conversion of the remaining branches began in June 2006, with the stated goal of completing the conversion by year-end 2008. Utilizing the assembly line conversion approach established in the initial phase, the bank converted 1,400 of these branches by March 2007.
Because the conversion methodology and BaNCS system were thoroughly proven and stable, the assembly line conversion approach allowed the bank to complete the conversion ahead of
schedule. Between April 2007 and March 2008 (the bank’s fiscal year end), SBI converted 4,600 branches to the new system. The remaining branches were converted between April and July 2008.
Implementation at SBI’s Affiliate Banks
As the rollout plans for State Bank of India were being finalized, the bank decided to extend the scope of the core banking implementation to include its (then) eight affiliate banks. TCS created a separate processing environment within the Mumbai data center used to support SBI. The conversion effort for each of the affiliate banks spanned 18 to 24 months; the first six months were used for planning, training, and establishing the processing environment for the banks. The branch conversions overlapped among the banks, allowing all the affiliate banks to be converted in 30 months. The project was begun in July 2003 for the State Bank of Patiala and in 2004 for the other affiliate banks.
Benefits of New Core Systems Implementation to SBI
The new core system has resulted in benefits throughout the bank for both the customers and the employees of SBI. For example, the new core banking system has allowed the bank to redesign processes. It established 400 regional processing centers for all metro and urban branches that have assumed functions previously performed in the individual branches. The bank recently reported that business per employee increased by 250% from 2002-07. The bank has achieved its goal of offering its full range of products and services to its rural branches. It delivers economic growth to the rural areas and offers financial inclusion for all of India’s citizens. Implementation of the TCS BaNCS system has provided the bank with the ability to consolidate the affiliate banks into SBI.
The bank has reversed the trend of customer attrition and is now gaining new market share. Completion of the core conversion project has also allowed the bank to undertake several new initiatives to further improve service and support future growth. These initiatives include the deployment of more than 3,000 rural sales staff, redesign of over 2,200 branches in the last fiscal year, opening of more than 1,000 new branches, establishment of a call center, and an active plan to migrate customers to electronic delivery channels.
Critical Factors for the Successful Implementation of TCS Bancs in SBI
Large-scale core systems implementations are typically the most costly and risky IT projects
undertaken by banks. Failures of core systems projects are not uncommon at large banks and
result in both financial impact and lost business opportunities. Further, failed projects lead other banks to delay needed core systems replacements because they measure the risk of failure against the potential benefits of a new system.
Several critical factors contributed to the success of the project implementation at SBI:
Senior management commitment. The project was driven by the chairman of SBI, who met every month with the information technology (IT) and the business sector heads. The chairman monitored the overall status and ensured that sufficient resources were allocated to the project. TCS senior managers were thoroughly committed to the project as well and periodically met with the SBI chairman to review the project status.
Staffing and empowerment of project team. The core banking team consisted of the bank’s managing director of IT acting as team head and 75 business and IT people selected by the bank. TCS also staffed the project with approximately 300 IT professionals trained on the BaNCS system. Importantly, the SBI business people were viewed not just as contributors to a key project but as future bank leaders. This team reported to the SBI chairman and was empowered with all decision-making authority.
Ownership by business heads. The regional business line heads were responsible for the success of conversion of their respective branches and reported the status to the chairman. Thus, the business heads’ objectives were aligned with those of the project team.
Focus on training. SBI used its network of 58 training centers across India to train employees on the new system. TCS personnel first educated approximately 100 SBI professional trainers, who then trained 100,000 SBI employees at the centers; the remaining employees trained at their respective job sites.
The implementation of the Tata Consultancy Services (TCS) BaNCS system at the State Bank of India (SBI) represents the largest core systems project ever undertaken. The success of this project should encourage other large banks to begin projects to modernize their core systems. The use of a UNIX-based platform to process more than 100 million accounts daily demonstrates that tier 1 banks can use a mainframe alternative for their core processing.
SBI’s achievement demonstrates that attention to critical factors is crucial in implementing new core systems. The bank’s senior management commitment, business line involvement, project team staffing and empowerment, and extensive employee training were all key contributors to the success of the project. Management also recognized the need for a proven systems integrator that possessed in-depth expertise in both business and technology.
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