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A History of the IT Saga in Indian Banking

This role played by the Reserve Bank has continued ever the years. Some of the major landmarks in this regard are: v The introduction of MICRO based cheese processing – a first for the region, during the years 1986-88; v Compensation of branches of banks – an activity which commenced from the late eighties with the introduction of ledger posting machines (Lamps), advanced ledger posting machines (Alums), followed by stand alone computer systems which metamorphosis’s into network based systems and the latest development pertaining to the installation of Core Banking solutions; v Facilitating compensation of

Government business – from the late nineties which has now resulted in all branches handling Government business perform their functions using technology; v The setting up of the Institute for Development and Research in Banking Technology (DIRT), Hydrated in the mid nineties, as a research and technology centre for the Banking sector; v The commissioning in 1999, of the Indian Financial Network as a Closed User Group based network for the exclusive use of the Banking sector with state-of-the-art safety and security. The network supports applications having features such as Public Key

Infrastructure (PKZIP) which international networks such as S. W. I. F. T. Are now planning to implement ; v Commencement of Certification Authority (CA) functions of the DIRT for ensuring that electronic banking transactions get the requisite legal protection under the Information Technology Act, 2000; 2 v Ensuring Information Systems Audit (IS Audit) in the banks for which detailed guidelines relating to IS Audit were formulated and circulated; v Enabling IT based allover channels wanly enhance customer service at Tanks, In areas sun as cans delivery through shared Automated Teller Machines (Tams), card based transaction talents etc. V Providing Guidelines for Internet Banking, which facilitated the banks to ensure that common minimum requirements relating to Internet Banking offerings were provided for; v Providing detailed specifications to banks on the configuration of systems relating to critical inter-bank payment system applications such as Real Time Gross Settlement (ARTS) System, Negotiated Dealing System (ANDS), Centralized Funds Management System (CFML) etc. V Implementation of the National Financial Switch (NFG) to ensure interconnectivity of shared Tams and to provide for ands settlement across various banks. V Establishment of e-payment gateways for the benefit of customers (such as the gateways for funds transfers and other account related transactions) and for facilitating e-commerce. V Sharing of information through the secured internet website for the Centralized Data Based Management System-Internet (Cadmic) project.

Besides, steps have been initiated for v Providing a platform for transmission of electronic messages across banks using common standards, for facilitating ‘Straight Through Processing’ (STEP) in the form of the Structured Financial Messaging System (SF), which will be similar to the SWIFT messaging pattern; v Setting up connectivity of all clearing houses of the country so as to enable the introduction of the National Settlement System (INS) v Introducing a secured web site for internet based data transfer to Central and State Government.

Government Departments may populate the data from the secured web site to their own systems based on their requirements. 3 All these initiatives have resulted in banks in India utilizing technology to their best advantage leading to improved customer service. The Reserve Bank would continue to provide lead in this regard. Today, the role of IT has become so integrated and pervasive with most banking business world over that it becomes necessary to mitigate the operational risks arising out of failure of IT systems and hence it is engaging the attention of regulators.

Two major areas of concern in this context are the need to ensure Business Continuity in the event of a failure and the need to mitigate the incidence of operational risks. Given these critical requirements and in its endeavourer to sustain the progress and provide direction to the IT initiatives of the uncial sector, the Reserve Bank sets out this Vision document which provides a bird’s eye view of the plans for IT development in the medium term, with the required focus on corporate governance.

The Vision document has been divided into four major focus areas as follows: v IT for regulation and supervision v IT and DIRT v IT for the Financial Sector v IT for Government related functions 4 Chapter II IT for Regulation and Supervision Current Status:one of the important functions of Central Banks world over is to regulate the financial system, ensure financial stability and thus help economic growth of the nation. Different courtesies nave opiate various moments Tort carrying ten work AT Inspection over tenet regulated entities of which two methods adopted by a majority of nations are On-site inspection and Off-site inspection.

In India, a combination of on-site inspection and off-site surveillance with bias towards the former is the current position. Currently there are many IT based application systems such as SAMOS of DB’S, COSMOS of DNS and ASS of JIBE which facilitate banks, NBS and Urban Co-operative Banks (Cubs) respectively to submit their periodical returns or statements to the Reserve Bank. The development of the reporting system is at a rudimentary stage, because its usage for improved decision making has not yet become part of the work culture. The existing offside surveillance systems do not have unauthenticated systems.

Thus, in iodination to forwarding returns through electronic meaner, a hard copy of the same is also forwarded to the Reserve Bank for unauthenticated of the same. Moreover the branches of the regulated entities are not networked which lead to delay in filing the regulatory returns to the bank concerned and thenceforth to the Reserve Bank. Many jugulate entities prefer to send their data in magnetic media such as floppies to the Reserve Bank as there is no mandate or regulatory compulsion about the type of IT support level at their end. Feeling of the regulatory information has not been achieved fully.

Practicing Risk Management using IT is also at preliminary stage. Preparedness for implementation of Anti-Money Laundering and Basel-II norms in terms of IT technology is at its infancy among the regulated entities. The Centralized Data Base Management System (SCADS) was setup for the Banking sector as a Decision Support System but its use has not been widespread. The use of SCADS as a Decision Support System (ADS) at the banks level can improve only when the staff utilize empirical evidence for decision making in a big way 5 or to perform new activities such as Customer Relationship Management (CRM).

International Scenario While several central banks are directly involved in the supervision of the banking and other financial institutions, others have formed regulatory organizations to carry out this function. New Zealand relies pre- dominantly on off-site surveillance in other countries including USA, on-site inspection is an important tool for bank supervision. The Federal Deposit Insurance Corporation (FIDE), the Federal Reserve Board (BRB), and the Office of the Comptroller of the Currency (COCO) are three of the Federal Financial Institutions Examination Council (OFFICE) Agencies.

Under the guidance of the OFFICE Reports Task Force, these three agencies (Call Report Agencies) have formed a steering committee to collectively manage the development and operation of the Central Data Repository (CDR), to be fully implemented by the end of 2005. The CDR is a centralized resource or users and providers of the financial institution data. The CDR facilitates a more- efficient regulatory reporting process by enhancing the methods used to collect, validate, process, and distribute Call Report data. In US the call reports, which are regulatory returns, is used for analysis by the regulator.

Most of the banks furnish call reports through the Internet or by using the services of a service provider, in a safe manner. Emerging Challenges :ё Given that there are varied types of banks in ten country Ana ten reporting requirements AT all categories may not De multiform, ten adoption a generic architecture for all banks as a whole becomes difficult. Implementation of a standardized system or tools for risk measurement all over the financial sector for e-reporting or online transmission of the returns becomes an arduous task. Therefore, standardization of the broad parameters will attain broad objectives. ё For the establishment of I T related infrastructures there will be a cost to be borne by the regulated entities, which will be a worthwhile investment. 6 ё For the successful implementation of the Basel II norms, the foremost requirement s that the Central Bank should have appropriate IT systems to supervise and guide the regulated banks in the right direction. ё Banks may have to develop a Decision Support System on the current Management Information System for the better analysis of the data and risk management on a real time basis, in addition to other fictions such as credit decisions, foreign exchange management, treasury operations etc. ё Creation of a single and consolidated centralized database for reporting of various returns in order to avoid duplication in submission of returns to different offices. ё The prudential returns submitted by ankhs to Reserve Bank are one of the important bases for off-site surveillance of banks by RIB.

This necessitates satisfaction of features like data integrity, authentication and confidentiality in respect of the returns submitted electronically through use of digital signatures. ё The returns submitted by the banks form the basis for conducting risk based supervision which necessitates authenticity of data reported in the returns.. ё Off-site surveillance system should help in monitoring data receipt and also send reminders through emails automatically to the regulated entity concerned. The immediate e-reporting of potentially suspicious financial transactions – with possible links to money laundering and terrorist financing – to the regulator for necessary action. ё Technology pagination at the regulated entities so that the information submitted by them electronically conforms to non-repudiation, authentication and encryption standards. ё The information pertaining to suspicious transactions to be reported by the regulated entities immediately to the appropriate authorities.

Repositioning framework 7 ё As the Bank has adopted the strategy of hiving off its entire operational functions ND retaining only its regulatory and supervisory functions, the use of the technology in its regulatory and supervisory functions plays a pivotal role. ё The real time online transmission of the data via email or FTP server from the regulated entities to the single centralized database of the regulator shall be the objective, and common inter-operable structures such as Extensible Mark-up Language (XML) used for such data transmission. May De necessary Tort all ten regulated entitles to Tallow ten generic standards of the systems for e-reporting and e-filing.

Mission v To envision and foresee financial industry requirements and appropriately Research & Develop the required technologies.. V To develop state-of- the-art IT infrastructure to augment technology absorption. To create a pool of Banking Technology and Information Security Professionals through innovative and quality educational initiatives. V To provide advisory and consultancy services on technology and technology management matters for Banking and Financial sector. V Play a catalytic role, to facilitate strong inter-relationship between academics and industry.

Three Year Practical Vision As a first step towards formal strategic planning process the following practical vision has been arrived at: v Clear understanding of the emerging global technology trends and its implication for the Indian Financial Sector. V Preparing an action plan for technology migration of Indian Banking & Financial Sector. 9 v Evaluating the developmental requirements of the existing common technology infrastructure and roll out common services/applications. V Reorient the Research & Development activities from the above perspectives.

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