Core banking:

Core Banking is normally defined as the business

conducted by a banking institution with its retail and small business customers. Many banks treat the retail customers as their core banking

customers, and have a separate line of business to manage small businesses. Larger businesses are managed via the corporate banking division of the institution. Core banking basically is depositing and lending of money. Nowadays, most banks use core banking

applications to support their operations where CORE stands for "centralized online real-time

exchange". These applications now also have the capability to address the needs of corporate customers,

providing a comprehensive banking solution.

Normal core banking functions will include deposit

accounts, loans, mortgages and payments. Banks

make these services available across multiple channels branches.

The nerve centre of technology in a banks IT dept.

like ATMs, Internet

banking,

and

is the Core Banking System. This paper aims at understanding the role of core systems, the scope of core systems, evaluation methodologies adopted by banks in selecting core systems, typical pitfalls in implementations, and recent and future trends in the core systems.

* Bank customers: Personal banking, corporate banking international banking etc.

* Bank Auditors, internal and external auditors who need to verify systems and procedures.

* Bank Regulators: mandatory reporting to central bank and other financial bodies.

* Bank share holders: providing the desired return to shareholders from banking operations.

For a bank / financial institutions the Core Banking system must address the Core Business of deposits and loans and the same time, address the work place needs of all above entitles at their respective locations.

Key Features of the System

24X7 Banking Anywhere Banking Integration with strategic sectors Strengthening MIS, DSS and EIS Business Process Re-engineering (BPR) -

enabler

b) What is a Core-Banking System?

Core banking systems are basically the heart of all systems running in a bank and it forms the Core of the bank's IT platform. Amongst other

functionalities, it provides the customer information management, central accounting and the

transaction-processing functions, which by far are the most fundamental processes in a bank.

With the advancement in technology and with passage of time, core systems now-days tend to cover more and more functionality giving the bank an integrated solution for most of its operations in different business lines.

Alongside, it also provides a central operational database of customers' assets and liabilities giving facility to generate a 360 degree view of the customers relationship with the bank, which is fundamental for the CRM strategy of the bank.

Core banking systems reside either in the heart of a bank's data centre or in other words can also be termed as the heart of the data-centre itself.

c) History of core banking system in India

The major objectives of bank automation are better customer service, flawless book keeping and

prompt decision-making that leads to improved productivity and profitability. The concept of bank automation started in the year 1981, but it was during the period 1984-1987 banks in India started the branch level automation, making use of the then available MSDOS based stand alone

computers.

This initiative was taken by the banks on the basis of First Rangarajan Committee report on bank computerization submitted in the year 1984. ALPMs (Advanced Ledger Posting Machines)

were the fashion in those days. However, the pace of bank automation was very slow in the banks primarily owing to the lack of trade union

consensus on bank automation.

Another committee was constituted in 1988 under the chairmanship of Dr. C Rangarajan, the then Deputy Governor of RBI to slate down a perspective plan on automation of banks for a five year period. This paved way to the implementation of multiuser Total Branch Automation packages running on a LAN (Local Area Network), either on a Netware or a UNIX operating system.

This was possible for them mainly owing to the fact that they opted for the implementation of a WAN (Wide Area Network) based centralised banking solution rather than a LAN based branch banking solution to network their limited number of branch outlets.

The old generation banks in India hesitated to follow this banking fashion on account of its large network of branches on one hand and the then prevailing exorbitant IT cost on the other hand.

d) When to change core system?

When does a bank really take a decision to change it system?

We feel the five most factors are

Technology proves to be an impediment

to business

 Most of the older systems in place today were built

before open systems and standards were available. Hence they were primarily built in closed

proprietary environment making it very difficult to adopt new technologies, databases, communication protocols between different solutions etc. thereby rendering the entire system very rigid. On many occasions we hear of a novel product offered by competitive banks and then wonder how the same could be handled in our system. At times, banking products which provide the bank with a good opportunity to make a spread are dropped due to lack of support from the existing infrastructure.
By the time a request to enhance the system is

made and the functionality actually enhanced, some other bank has caught on to the idea and grabbed the advantage of being the first mover. Similarly, in a Merger and Acquisition scenario, the acquirer cannot support the business requirement

of the acquired thereby forcing the bank to continue with disparate systems or build complex interfacing solutions. So quite clearly there are signs in a bank where available technology tends to slow down or impede business prospects.

Scalability Issues
The system is unable to provide the same service

levels with the estimated growth in business, which could be either through acquisitions or developed organically.
A slow response time is one of the most common

cause for a drop in customer service in a bank. It is crucial to ensure that the system in use is scalable enough to support the projected growth in business volumes without affecting the response time.

 Cost of Maintaining the system rises,

without any perceptible accruing to the bank

benefit

Cost of maintaining an existing system could raise

because becoming

of

various

reason hungry,

from

the

system of

resource

non-availability

resources especially the human talent with certain skill sets, product gathering a large code-base which is primarily unstructured thereby taking an unreasonably large time even for some simple enhancements etc.

Large

scale

Manual

Handling

of

Transactions resulting in longer turnaround times.

Related to the first point, if the bank does not want to let-go of an opportunity, then the new products

would tend to get processed procedurally in the system leading to over-all inefficiency.
This in most cases also leads in improper MIS on

the customer business; profitability affects the 360 degree view etc.

Increasing the regulatory burden Inability of the system to handle new regulations. Newer regulations like OFAC, Basel 2, Anti money laundering if not adhered to not only put the bank at a risk, but also might attract a higher capital requirement.

Severe Interfacing issues When banks add business lines, quite rarely would they wait for their existing system to scale up to the functionality required for the new area of business.

 The general tendency is to acquire a ready solution catering to the specific line of business. This requires interfacing, on-line interfaces are

complicated to build and batch interfaces do not give a correct picture real time.
As more and more of satellite products add up,

interfacing becomes a nightmare. More time tends to get spent on reconciling information from one system to another rendering the system inefficient.
Old systems using old technologies do not interface

easily with third party applications.

Viability of the Vendor supplying the

Core System
Hard economic times have seen many vendors

either scale down the size of operations, work in a Maintenance Mode or are either eventually taken over by other companies.

 If any of this were to happen, the system is bound

to

suffer

due

to

the

reduced

attention

and

importance it would get from the vendor. Quite clearly, no bank can prosper if the platform on which it is on tends to get shaky.
Though most banks go in for escrow arrangements,

these often tend to be theoretical fall-back as in practice it is extremely difficult for the bank to take over and maintain the code.

e) Ingredients:
There are 5 ingredients that form part of the Core Banking system. These are the essential building blocks for the entire bank / institution. (1) General Ledger:
The absolute Core is the General Ledger of the

bank accordingly, the absolute core of the banking

system is the General Ledger system, every single financial activity that happens at any location within entire bank has to be reflected in the G.L. system that generates the financial statements for the entire bank which provides any entity to monitor the financial health of the bank.
In

short

for

those

who

have

successfully

implemented Core Banking Systems, the concerned entities in the bank know the financial condition of the bank at the beginning of each business day. If one is looking at the financial statements of the whole bank the G.L. System must provide that. If one is in regional office, the G.L. System must provide the financial statements for the region. Each morning all these entities, at the respective workplaces, see these financial statements

reflecting the condition as of close of business yesterday.

In a Core Banking System, this is achieved by

deploying a centralized G.L. System which provides

for thousands of sub legers with. Level's start with individual branch G.L. rolled up to regional G.L. with further rollup of all regional G.L's to bank G.L. financial throughout transactions the bank from update various these sources subsidiary

ledgers and the G.L. system then performs rollups to report at branch, region, zone, country wise head office and any other level that is required by the bank / financial institution.

(2) Customer Information System: The next major ingredient of a Core Banking system is the Customer Information System or CIS. Accordingly in the CIS, a customer is identified by uniquely by his / her CIS number and all information related to that customer (name, address, phones, employment, credit history, relatives, family

members, and demographic data) is stored along

with this unique number. All this is stored in a centralized CIS system allowing the customer to visit any branch to do business with the bank.
In

addition,

CIS

stores

Customer

to

account

relationships. A single unique customer could have a current account a joint saving account with his wife a time deposit, a car loan and a house loan.
The CIS links all these five account to this single

unique customer I.D. whenever the customer visits any branch of the bank, all that he does is give his name (and / or address or phone or CIS number) and the CIS system shows the branch staff the information about this customer as well as all the accounts linked to this customer and the latest balance in each of these account.

(3) Deposit System:

 The third major ingredient is the deposit system.

The ability to process various types of deposits is a must. These include current, savings, time deposit and hundreds of variations in each of these. e.g. Simple current accounts, current accounts with overdraft, cash credit accounts, variable rate overdrafts, simple savings, multi-currency savings, time deposits, CDS, variable rate tim
deposit, recurring deposits, multi-currency, time

deposits, and so on. This is required to handle the liability side of the bank / financial institution's business.
This all is achieved by having deposits system that

are

heavily

deposit

system

that

are

heavily

parameterized i.e. by simply setting a parameter "Fixed Rate" or "Variable Rate" the deposit account will be processed by the deposit system using the appropriate rate from the applicable rates.

 Around the world banks do not open a new deposit

account for a customer directly in the deposit system. When the customer wants to open a new deposit account, the branch staff to go the CIS screen verifies account.
This way, the existing CIS data of the customer

the

customer

details

and

opens

the

remains infect and the CIS information shows that this customer has now increased his relationship with the bank / financial institution.
As a result banks who have implemented such

systems do not need to have an inter branch reconciliation organization / system.

(4) Loan System:

 The fourth major ingredient is the loan system. This system handles the asset side of this business.
In most banks / financial institutions around the

world loans are separated by those to retail customer and those to commercial customers processing requirement of loans to corporate

customers is different form retail customers and hence there are loan systems that cater to retail customers and those that cater to commercial or corporate customers.
The loan process in a bank involves multiple stems.

The

loan

appraisal and

and

sanction step,

step, the

the non-

disbursement

monitoring

performance tracking step the recovery step and the closure. With authorized access, any staff working in any branch around the country should be able to retrieve the customer loan information on his terminal and help the customer do a financial transaction.

(5)

Management

Information

System

(MIS):
Once the core deposit and loan business

transaction for all customers of the bank are captured and appropriate General Ledger accounts are updated, various users of the Core Banking System throughout the bank need to know what is happening within the entire financial institution. As a result, the fifth major ingredient is the management information system. This enables everybody in the bank to obtain the relevant information from the system in order to carry out their business effectively.
Around the world, typical examples of information

that bank staff (each with access rights) retrieves include.

Branch transaction activity for today (list of all

branch transactions) Loan activity for a single customer or a group

of customer. Branch general ledger reports printed at the

branch.

h) Delivery Channels:
All the 5 major ingredients of a Core Banking system can be operated by a bank staff from any location in the country simple by using their terminal at their workplace.
Around the world as banks started focusing on

customer relationship management, they realized that customers interact with the entire bank for banking transactions in many ways.

 Customer can go to the branch, go to an ATM, call on the phone, and log on to the Internet to do their banking transactions. They can use one or more of these delivery channels (Called customer touch paints) to conduct segment and decide on further investment design specific products and services to promote such delivery channels.
The Core Banking Systems are production factories

creating products and services and tracking them and the delivery channels are distributors and retailers who ensure these products and services are available to the customers whenever they are in the country. Hence, the add-on systems for Core Banking System include; Automatic teller machine Real time gross settlement National electronic fund transfer Mobile banking

Electronic fund services Internet banking Any transaction done by the customers in any

of the above systems goes and updates the Core Banking System like deposit or loan at that in turn updates the Bank's G.L. in the Core.