Counting On Technology

Six months from now, public sector banking operations in India may become synonymous with an uncharacteristic adjective: efficiency! In a major revolution, customers could be able to pay their electricity and telephone bills without having to write out a cheque. Or have dividends and warrants paid directly into their accounts.

All this could be the result of a mega-banking network project, involving 5,000 Very Small Aperture Terminals (VSAT). Originally planned for August this year, the scheme, which is being implemented by the Reserve Bank of India, aims at networking all inter- and intra-banking transactions through satellite-based VSATs to smoothen Indias chronically chaotic clearing and settlement operations and provide a reliable communications system.

 

It would be an understatement to say this would mark a major step forward for Indias behemoth government-owned banking system. It is also long overdue. The base for reform in banking technology was first provided by the Committee on Computerisation in Banks (Rangarajan Committee) as far back as 1988 followed by the Committee on Technology Issues (Saraf Committee) in 1994. This second committee addressed a wide gamut of issues concerning customer service. It is this committees recommendations that have partially been accepted.

The spur, however, has been the growing competition in customer services. Customer requirements have been changing fast and so has technology, says Pradip Pain, executive director, Times Bank. For instance, technology like ATM and telebanking has altered the concept of limited-time banking so radically that public sector banks are being forced to reform.

But reforming customer services means tackling the settlement system, the heart of banking operations. It is here that most payment delays occur. And though the RBI has introduced additional computerised clearing capacity in Mumbai and four other metro cities, the pressure of volumes has been mounting and capacities have been inadequate, says an RBI source.

The basic proposal is to establish VSATS to allow for an electronic funds transfer system or EFT that will eliminate time-consuming and cumbersome paperwork. Currently, the major fund transfer facilities available to bank customers are demand drafts, telegraphic transfer (TT) and mail transfer. Except for TT, the other two facilities are paper based. The whole system is intra-bank oriented and does not meet the standards of quick service. It also involves avoidable manual work on document processing with all the attendant dangers of transcription errors.

In recent years, public sector banks have tried to speed up remittances by computerising their draft issuance desks, introducing bank orders of specified denominations and dispensing with the system of verifying the advice before payment.

But these were essentially procedural changes that did not take advantage of time and labour saving technology like an EFT system. EFT is supposed to imply real time transfer of money. This presupposes that all bank offices are hooked to the network but in reality not all offices have the equipment and capability to undertake such communication based operations, says W S Saraf, former executive director of the RBI who headed the committee on technology issues. But this is necessary because the retail transfer is prohibitively costly to both banks and their customers.

And while the RBI is busy preparing the ground for nationalised banks, the new private sector banks have gone ahead and set up their own EFT lines. The EFT facility is the USP of new private sector banks, says S S Mishra, vice president, information technology at Centurion Bank. Not only are all branches of these banks linked with each others, their charges for the use of this facility too are lower than that of foreign banks, he points out.

The Saraf committee had suggested that institutional funds transfers of over Rs 10 million could be communicated by individual branches that are equipped to handle such communications to the local clearing bank. The clearing bank would batch such requests and transmit them to respective destination centres at hourly intervals. These transfers will be effected only if there is sufficient balance in the current account of the sending bank.

In the scheme conceived by the committee, the system would be partly on paper and partly on electronic media; messages will be transmitted in batches; and the service branch would act as the nodal point for the bank handling the messages.

This is expected to improve securities trading in a major way as well. As Saraf explains, under the existing system of securities trading, buyers and sellers have to present their papers at the RBI counter to record the trades in the statutory general ledger (SGL) and effect the transfers. Following the 1992 securities scam, a decision was taken to introduce delivery versus payment system to minimise the credit risk and to ensure that the buying and the paying party is the same.

Nevertheless, the SGL transfer procedure suffers from some shortcomings even now. It is still basically a paper-based system. The screen-based system that was suggested by the Saraf committee is nowhere in sight. Such a system requires reliable communication systems, says Saraf.

As he explains, the RBI has been working on this issue and is in the process of putting up VSATs for banks and financial institutions. Once that is achieved, communication will be as fast and as good as that of the National Stock Exchange. The system is nearly ready and should be possible to introduce in next three months, says Saraf.

By rights, the VSATs should be greeted with unqualified relief. But bankers and customers are still wary. As far as SGL business is concerned, for instance, some bankers express scepticism regarding the utility of a screen-based trading system. The participants in the secondary market of the government securities are not willing to publicise their quotes, because until now their quotes were inclusive of tax element. Since the RBI did not recognise the tax element in its own yield calculations, banks did not want the central bank to scoff at them for inclusion of this element in their quotes.

But an RBI source points out that this need not be the case any longer after the tax deduction at source has been done away from the securities trade. Earlier, banks were giving quotes including the dirty element, and were afraid of publicising these quotes as the RBI did not recognise the dirty element. With this element gone, there is no reason for banks to fear the screen based trading, says the RBI source.

ETF also has demurrers. Since many customers do not want to reveal their bank account numbers, they do not opt to receive money directly in their accounts through electronic transfer. And they do not trust the utility companies of correctly billing them, so they do not want to make automatic payment through their bank accounts.

The level of confidence necessary for adoption of this technology is missing, says Mishra of Centurion Bank. Technology is ahead of its time, he adds.

Under the VSAT system currently being planned, Hyderabad will be the hub of the system which will comprise 500 VSAT centres all over India. In a year, the RBI expects to be able to raise this number to 5,000. The RBI will bear the initial burden of investing Rs 30 crore for the project but may recover it later when the volume of business picks up. The money may be recovered over a period of ten years, according to Saraf.

Once the VSATs start working, not only will the securities trade be smoother but even the EFT system could take off. The current delays, leading to a large number of customer complaints, in inter-city clearing of cheques, will then become a matter of past, hope some bankers. The major hurdle here is a legal one. The laws in India still do not recognise electronic funds transfer as valid operations.

In fact, an RBI committee, headed by the then legal advisor, Ms Shere, had in 1995, recommended legal changes but these changes have not still come through. The reason is that the technology is still in a nascent stage and may undergo some changes in the near future. The authorities would like to wait till the changes come about and the technology matures, before making statutory changes.

In the meantime, electronic funds transfers have been permitted for banks through changes in RBI rules. The RBI has under its own powers allowed such operations, points out Saraf. And foreign and private sector banks have already introduced these facilities. At Times Bank, for example, all the branches have been linked up through computers and funds transfer has been allowed electronically. Few nationalised banks have entered this area as yet.

An area of technology that is becoming extremely crucial is that of electronic data interchange (EDI). A large number of countries have developed an internationally accepted format for compiling data on trade. The standardised format is expected to totally eliminate paper work. Trade payment and receipt will for example be handled through electronic invoices. The urgency for India to adopt the standard format stems from the fact that some countries like Singapore have announced that they will not deal with any papers on trade after December 1998. So countries that have not adopted the new format will find it difficult to sustain and expand their foreign trade.

Banks will obviously have a major role to play here as medium of receiving and making payments. They will have to computerise their operations, get them linked and also make the system on line.

The smart card technology is another area that take India a step forward towards integration with the rest of the world, says Saraf. It will reduce the economys dependence on cash and bring about a drop in money in circulation, he adds. A smart card carries cash within it, which keeps on reducing at every purchase. While ATM card enables a person to withdraw cash from the ATM machine, smart card enables him to make payment for his transactions. A credit card, in comparison, is a weaker facility because its use requires checking the details with the issuing bank. Smart card, on the other hand, carries monetary limits upto which the user can undertake transactions. Only one bank has so far introduced smart card in the Indian market, but in practice it is only an ATM card because it allows only withdrawal of cash from notified branches of the bank, points out Saraf.

The problem in the use of smart card, and the reason it has not yet caught up in India, is the lack of interoperability. The institute at Hyderabad (see box) has taken up a project with IIT, Mumbai, to develop inter operability facilities. The project is nearing completion and will ultimately facilitate a wider use of smart card, says Saraf.

It has been more than two years since the Saraf committee submitted its report. In the meantime, newer technology has become available which could enable banks to improve their performance. Admitting this, Saraf indicates the use of multi media as one possibility. It could be an extremely useful tool for HRD and training in banks, he says.

Management of risk through better technology is one area that some banks are playing close attention. Risk analysis through collated and analysed data, based on appropriate software, could reduce the industry and interest risk for banks, points out Pain. Banking, he says, is technology, information and risk management.And if that is so, there is little choice for banks - private or nationalised - but to adopt newer technologies or perish.

Abhijit Doshi