Module: 3 - Advent of Technology Usage by Banks in India
(page: 1 of 1

We have been witnessing since about the early Sixties the phenomenon of widespread use of computers and communication technology in most of the industrialised and emerging market economies. This has resulted in faster funds movement across nations and borders. Computerisation became popular in the western countries right from the Sixties. Main Frames were extensively used both by the Public Institutions and Major Private Organizations. In the Seventies Mini Computers became popular and Personal Computers in early Eighties, followed by introduction of several software products in high level languages and simultaneous advancement in networking technology. This enabled the use of personal computers extensively in offices & commercial organisations for processing different kinds of data.

However in India organised Trade Unions in those years were against introduction of computers in Public Offices. In India was restricted to major scientific research organizations and technical institutes and defence organizations. Indian Railways accepted computerisation for operational efficiency (not commercial services for customer benefit).

Globalisation of economies and financial liberalisation within the economies have opened new opportunities of growth for techno-savvy institutions, while for the others these have resulted in shrinkage of revenues. The use of IT in the banking industry in our country has however been limited upto the end of the Nineties and has, as a result, restricted our presence in international operations. Even in critical spheres such as those involving funds transfer, and MIS based decision making, there has been little evidence of proactive movement towards wholesale computerisation.

Rapid development of business and industry brought manual operations of data a saturation point. This acted as overload on the growing banking operations. Government owned banks in general found the "house-keeping" unmanageable. Several heads of accounts, in particular inter-bank clearing and inter-branch reconciliation of accounts went totally out of control.

Low productivity pushed cost of wages high and employees realised that unless they agreed for computerisation further improvement in their wage structure was not possible.

In the year 1993, the Employees' Unions of Banks signed an agreement with Bank Managements under the auspices of Indian Banks' Association (IBA). This agreement was a major break through in the introduction of computerised applications and development of communication networks in Banks. The first initiatives in the area of bank computerisation, however, stemmed out of the landmark report of the two committees headed by the former Governor of the Reserve Bank of India Dr.C.Rangarajan. Both the reports had strongly recommended computerisation of banking operations at various levels and suggested appropriate architecture.

The first of these Committees, viz. the Committee on the Mechanization of the Banking Industry (1984) was set up for the first time to suggest a model for mechanisation of bank branches, regional / controlling offices and Head Office necessitated by the explosive growth in the geographical spread of banking following nationalization of banks in 1969.

In the first phase of computerisation spanning the five years ending 1989, banks in India had installed 4776 ALPMs at the branch level, 233 mini computers at the Regional/Controlling office levels and trained over 2000 programmers/systems personnel and over 12000 Data Entry Terminal Operators. The Reserve Bank too had embarked upon an ambitious program to bring about state-of-the-art technology in the clearing process and had introduced MICR clearing at 4 centres and computerized clearing settlement at 9 centres.

Against this backdrop, the Committee on Computerisation in Banks was set up once again under Dr.Rangarajan's Chairmanship to draw up a perspective plan for computerisation in banks. In its report submitted in 1989, the Committee acknowledged the gains of the initial efforts and sought to move away from the stand-alone dedicated systems to an on-line transaction-processing environment in branch banking. It recommended that the thrust of bank computerisation for the following 5 years should be to fully computerise the operations at both the front and back offices of large branches then numbering around 2500.

The Reserve Bank continued to be involved in shaping the technology vision of the banking system. Following the recommendations of the Committee on Financial Sector Reforms, (which is popularly known as the second Narasimham committee), a Committee on Technology Upgradation was set up by the RBI for the Banking Sector in 1994. This committee has representation from banks, Government, technical institutions and the RBI. Among other things, this committee looked into issues relating to

1. Encryption of Public Switching Telephone Network (PSTN) lines

2. Admission of electronic files as evidence

3. Record keeping

4. Modalities for a satellite based WAN for banks and financial institutions with the necessary security systems by banks and other financial institutions, to ultimately develop a sound and an efficient payments system.

5. Methods by which technological upgradation in banks and financial institutions could be effected and in the context study the feasibility of establishment of standards, designing payments system backbone and standards relating to security levels, messages and smart cards.

By now most of these recommendations have already been implemented. The Committee realised the urgent need for training, research and development activities in the Banking Technology area. Banks and Financial Institutions started setting up Technology based training centres and colleges. However, a need was felt for an apex level Institute, which could be a Think-tank and Brain Trust for Banking Technology. RBI thus established the IT services-cum-training centre at Hyderabad, the IDRBT (Institute for Development & Research in Banking Technology).

The RBI Report on Banking published on 15.11.2001 starts with the opening narration-

"In recent years, the banking industry has been undergoing rapid changes, reflecting a number of underlying developments. The most significant has been advances in communication and information technology, which have accelerated and broadened the dissemination of financial information while lowering the costs of many financial activities. A second key impetus for change has been the increasing competition among a broad range of domestic and foreign institutions in providing banking and related financial services. Third, financial activity has become larger relative to overall economic activity in most economies. This has meant that any disruption of the financial markets or financial infrastructure has broader economic ramifications than might have been the case previously". This explains the all round use of information technology in banking operations and customer service i.e. both backend and front-end. Computerisation brings transparency, improves customer care and customer-service tremendously and reduces substantially scope for corruption or extending undue favour to particular constituents and uneven service to others.

Computerisation is expensive and needs huge investment in hardware and software and subsequent maintenance. The National stock exchange, India's No.1 (first) user in computerised service has spent Rs.180 Crores, when it was set-up in November 1992 to enable investors and brokers across the country to trade securities online. It was considered a huge investment in those days. The rate of obsolescence in respect of both hardware and software is considerable. New and better products are emerging in the market, whose use would enable a rival organization to throw a challenge.

Computer crimes are committed widely in the West. India is no less potentially exposed to this risk, when turnover under Internet banking increases. It is easier to enforce security of information and accountability of performers in a manual system. But it needs elaborate steps to incorporate these features in the electronic system.

The structure of legal system is so far based on manual record keeping. It has to provide for electronic data to be accepted legally as evidence and in contracts.

Indian banking has accepted computerisation since 1993, more out of sheer compulsion and necessity to cope up increasing overload and incompatibility of the manual system to sustain further growth. But it is now realised that computerisation provides not only operational efficiency and speed, but also enables product diversification (like anywhere/anytime banking) and substantial reduction in cost of service. The British developed us as a nation of clerks. Today we are more advanced and computerisation will enable talented and qualified young men/women of our country to secure better careers and better opportunities to exploit fully the potential in them.