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Core Banking Solutions

(A Banking Term Paper)

Core Banking Solutions

Need of Core Banking Solutions

The need for such a solution does not arise just because of one reason or the other but it requires a combination of driving forces to come into existence. Some of these forces being To meet the intense competition and changing market dynamics in an over banked environment. To meet the regulations and compliance requirements (example in order to meet the Basel ll norms banks must enhance there IT infrastructure). To meet the demands of customers who are better informed, more demanding and less loyal than ever. To enhance efficiency and effectiveness. Increasing customer satisfaction and convenience Freeing up time for branch staff to focus on sales and marketing Simplifying process for employees Enhancing banks competitiveness in the market Improved process efficiency

Shrinking margins... Slow growth. The challenges that confront todays banker are as intense as they are varied. And technology, the bankers trusted friend in the past few decades, has lately become an obstacle in the quest for market leadership. Stakeholders expectations continue to be whetted by their positive experience in other industries like retail and travel, of how technology can make a difference. Satisfying such expectations requires that banks make their vital systems customer-centric, crosschannel capable, multilingual and process-oriented. Not doing so in the near term could prove to be a costly gamble.

Core Banking Solutions

The Business Challenges for the Banks

While most banking organizations in India clearly recognized the advantages of deploying technology, they continued to hesitate before embarking on the process due to a number of pain areas related to the adoption and roll-out of technological platforms:

Long implementation periods

Standard banking technology software solutions were largely inapplicable to individual organizations. As a result, the tailoring of the solution and its roll-out for the organization was a long and often drawn-out period.

Return on investment (ROI)

Making the very significant capital investment required for a technological package was a challenge in the environment of keen competition and slim margins. Senior management and shareholders demanded a clear quantification of the ROI involved, which was difficult to accurately evaluate and compute.

Technology absorption rate at Indias rural branches

Particularly in branches located in Indias rural areas, absorbing technology was a challenge on its own. Ease of training and ease of use was a critical component that determined the success or failure of any solution.

Connectivity
Given the sheer size of the Indian market in geographic terms, it was inevitable that connectivity at broadband levels could not be expected at every branch. The solution needed to be able to work even in areas with poor or intermittent Internet access.

High costs
High upfront investment was in many cases an inhibiting factor for investment.

Legacy systems
A large number of banks were operating on home grown and inefficient, mutually incompatible legacy systems. Migrating the data and investment in some of the legacy equipment needed to play an important role in the plan for any new solution.

Core Banking Solutions

Core Banking Solution

Core Banking Solutions is new jargon frequently used in banking circles. The advancement in technology especially internet and information technology has led to new way of doing business in banking. The technologies have cut down time, working simultaneously on different issues and increased efficiency. The platform where communication technology and information technology are merged to suit core needs of banking is known as Core Banking Solutions. Here computer software is developed to perform core operations of banking like recording of transactions, passbook maintenance, interest calculations on loans and deposits, customer records, balance of payments and withdrawal are done. This software is installed at different branches of bank and then interconnected by means of communication lines like telephones, satellite, internet etc. It allows the user (customers) to operate accounts from any branch if it has installed core banking solutions. This new platform has changed the way banks are working. Now many advanced features like regulatory requirements and other specialized services like share (stock) trading are being provided. Core banking solutions are very helpful to SME industries. Core Banking Solution (CBS) is networking of branches, which enables customers to operate their accounts, and avail banking services from any branch of the Bank on CBS network, regardless of where he maintains his account. The customer is no more the customer of a Branch. He becomes the Banks Customer. Thus CBS is a step towards enhancing customer convenience through Anywhere and Anytime Banking. The advancement in technology especially internet and information technology has led to new way of doing business in banking. The technologies have cut down time, working simultaneously on different issues and increased efficiency. The platform where communication technology and information technology are merged to suit core needs of banking is known as Core Banking Solutions. Here computer software is developed to perform core operations of banking like recording of transactions, passbook maintenance, interest calculations on loans and deposits, customer records, balance of payments and withdrawal are done. This software is installed at different branches of bank and then interconnected by means of communication lines like telephones, satellite, internet etc. It allows the user (customers) to operate accounts from any branch if it has installed core banking solutions. This new platform has changed the way banks are working.

Core Banking Solutions

Concepts Regarding Core Banking Solutions

Is the concept a novel one? No this concept came into existence somewhere in 1980s but till recently it was in its budding ages, but with technological advancements in all fields this concept is also grooming and adding more and more features to itself. Why the inception in INDIA so late? There are many reasons for the late inception of CBS in INDIA, some of them being Indian banks were not interested in going for it. Required technology for adopting CBS was absent. The competition prior globalization was not that of present level. What are the application areas of core banking? Required computer software is developed to perform core operations of banking like Balance of payments and withdrawal are done. Mobile banking Internet banking ATMs Recording of transactions Passbook maintenance Interest calculations on loans and deposits Customer records This software is installed at different branches of bank and then interconnected by means of communication lines like telephones, satellite, internet etc. It allows the user (customers) to operate accounts from any branch if it has installed core banking solutions. This new platform has changed the way banks are working. Now many advanced features like regulatory requirements and other specialised services like share (stock) trading are being provided. Core banking solutions are very helpful to SME industries. What all banks are using it? Most of the nationalized banks in India for example: State Bank of India, Punjab National Bank, Allahabad Bank, HDFC, ICICI Bank today supports core banking. As of 2007, many Cooperative banks in India such as REPCO Bank, Jain Urban Cooperative Bank, Kangra Central Cooperative Bank, Udaipur Urban Cooperative Bank, Kollam District Cooperative Bank, Kerala State Cooperative and Panchsheel Mercantile
Core Banking Solutions

Cooperative Bank have started to use and offer centralized Core Banking too. Some of the Cooperative banks and RRBs are yet not having CBS, but they are on their way to go for CBS and very soon they will also be under the roof of the umbrella of Core Banking Solution. What are the Standard Software tools? Some of the standard software tools that many banks are using these days are Intellect Suite from POLARIS Flexcube from iFlex Solutions Finacle from Infosys B@ncs from TATA Consultancy Services

Core Banking Solutions

Functions of CBS
Core Banking Systems are applications that form the backbone of technical infrastructure. A Core Banking Solution (CBS) typically has a General Ledger (GL) subsystem at its core, with plug-in satellite modules that cater to the various businesses of a bank. The satellite modules (hereafter referred to as modules) cater to the functionalities of various business lines of the bank. A typical example of the modules shall include, but not limited to: (a) Non-Financial Modules Bank structure definition Customer definition and accounts Customer limits definition, lines of credit, central bank reporting structure Messaging and advices End of day processing modules, etc. (b) Financial Modules Loans and deposits Money markets Letters of credit and bills Treasury Foreign exchange Funds transfer Standing instructions Liquidity management Local payments and cross-border payments Teller operations Nostro reconciliations Interest and charge definitions, etc. Each silo or line of business employs one or more of these modules and some of the non-financial modules to run its business. The modules are used to create contracts with customers at the branch level for the various products. For example, a short-term fixed rate loan contract for an account of a large corporate customer: the contract has multiple components associated with it like the contract principal, tax component, interest component, product preference component, charge component, etc. Transactions are generated from the multiple components of a contract on various events of the contract life cycle, like contract initiation, booking, accrual, liquidation, rollover, advice generation, contract cancellations, etc. The components and events are different for each module and product type. Such transactions hit the accounting and GL subsystem of the CBS, which ties together the various silos. Also, the transactions that hit the CBS core include dollar (or any other currency) transactions that reference an
Core Banking Solutions

account, contract and an event. Thus CBS and its modules are used by the bank to manage their customer contracts and life cycles in various lines of business. The income that the CBS and its modules help to manage comes mostly from non fee-based revenue, though they have a charge component associated with this. Ingredients of CBS 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. Throughout the world, almost all banks have all their financial activity reflected in G.L. every night and next morning the G.L. system provides the bank with enterprise wide balance sheet and trial balance report 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. If one is the branch the G.L. System must provide the financial statements at the branch. 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 transactions from various sources throughout the bank update these 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.
Core Banking Solutions

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 time deposit, recurring deposits, multicurrency, 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 the customer details and opens the account. This way, the existing CIS data of the customer 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 sanction step, the disbursement and monitoring step, the non-performance tracking step the recovery step and the closure. Owing to the fact that a multitude of entities and

Core Banking Solutions

processes are involved in the appraisal and sanction step, most banks around the world separate the appraisal and sanction step and implement a system called a loan organization system. The other remaining steps of the loan process are handling by the loan system. 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. These financial transactions are automatically sent to the bank / financial institution's General Ledger and they update the appropriate credits and debits in the subsidiary ledgers in the General Ledger. (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. New Components: Besides the 5 major ingredients, there are optional components (like a car with options like leather seats, flashing light etc) that can be added on to the Core Banking Systems to help the bank staff uses them in a more efficient manner, these include: 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;

Core Banking Solutions

Branch Automation system ATM Switch and connected ATM Call center system Internet Banking System

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.

What ingredients are not included in Core Banking?

Typically these systems are confined to a specific business department within the bank. They are not Core because they do not affect all areas and entities of the bank.

Core Banking Solutions