Core Banking 1
Core Banking 1
college of commerce
CHAPTER 1
1.1 INTRODUCTION
technologies have cut sown 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.
But with the advent of new generation private sector banks in India during
1994-1996, the real era of bank marketing started and these banks started to offer
anywhere and anytime banking facilities to its customers. This was possible for
them mainly owing to the fact that they opted for the implementation of a WAN
(Wide Area Network) based centralized banking solution rather than a LAN based
branch solution to network their limited number of 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. But with the globalization and liberalization
of Indian market and with the enactment of TRAI (with a mission to create and
nurture conditions for growth of telecommunications in the country in a manner
and at a pace which will enable India to play a leading role in emerging global
information society) during the late nineties, there happened a drastic reduction in
IT cost.
Meaning
Core means “Basic”, hence the basic services provided by the inter-
networked branches of bank is called “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.
Definition
Core banking is a general term used to describe the services provided by a
group of networked bank branches. Bank customers may access their funds and
other simple transactions from any of the member branch offices.
Core Banking System or Core Banking Solution is a term that we hear very
often these days. For IT and Banking folks, this doesn’t need any explanation but
for those who want to know a bit, here’s a brief overview of what it means.
Thus, Core Banking System has radically changed the way in which banks
function. The greatest advantage of having a Core Banking System is that new
features and functionalities can be easily added to the system that customers will
have a whole lot of services that they can use. Electronic funds transfer between
banks, online trading in the stock markets etc. are examples of this, which were
unheard of in banks pre Core Banking System era.
Core Banking and Run the Bank are synonymous for most part. Core
Banking is the meeting point of the largest banking services augment namely
Retail and Commercial Banking, cutting edge Information Technology and the
advancing Communication Technology. It is the heart of a modern financial
service organization and is all about providing the banking customers with the
right products at the right time through the right channels 24 hours a day, 7 days a
week through a multi location, multi branch network.
businesses. Larger businesses are managed via the Corporate Banking division of
the institution. Core banking basically is depositing and lending of money.
Core Banking System or Core Banking Solution is a term that we hear very
often these days. For IT and Banking folks, this term doesn’t need any explanation
but for those who to know a bit, here’s a brief overview of what it means.
any branch of the bank and if the bank owns Internet Banking or ATM facilities,
then the customer can operate on his account from virtually anywhere.
Thus, Core Banking System has radically changed the way in which banks
function. The greatest advantage of having a Core Bank System is that new
features and functionalities can be easily added to the system that customers will
have a whole lot of services that they can use. Electronic funds transfer between
banks, online trading in the stock markets etc. are examples of this, which were
unheard of in banks pre Core Banking System era.
CHAPTER 2
Liquidity management
Local payments and cross-border payments
Nostro reconciliation
Interest and charge definitions, etc.
Each silo or line of business employs one or more of these modules to run its
business. The modules are used to create contracts with customers at the branch
level for various products. For example, a short-term, fixed-rate loan contract for
the account of a large corporate customer has multiple components associated with
it, such as the contract-principle component, tax component, interest component,
product-preference component, charge component, etc.
As we have seen, the CBS and its modules are used by the lines of business
to manage customer contracts and their life cycles as well as most income
classified as non-fee income.
transactions during various events. The charges, however, are only basic charges
that could be required at an account-contract level. In practice, there are multiple
other fees and charge components that banks capture using multiple fringe systems
in each silo.
to an increase in the weight of fee-based income. Hence, banks are looking for a
way to view charge income at the enterprise level-i.e., a single-customer view of
all of a bank’s fee-based income. This means there is a need for the ability to
develop enterprise level pricing strategies, charges the customer at the relationship
level, give a bundled fee offering to the customer, etc. A CBS and its modules are
not designed to cater to a need for enterprise-wide pricing and billing.
Conclusion
A core banking solution is mainly used to manage the spread-based income
of a bank. The fact that the fee income of a bank is a key differentiator in terms of
profitability only increases its importance in the current scenario.
silos. A pricing and billing solution, hence, brings to the table a unique value
addition to a bank by helping it maximize its fee income.
CHAPTER 3
All CBS branches are inter-connected with each other. Therefore, Customers
of CBS branches can avail various banking facilities from any other CBS branch
located any where in the world. These services* are:
To make enquires about the balance; debit or credit entries in the account.
To obtain cash payment out of his account by tendering a cheque.
To deposit a cheque for credit into his account.
To deposit cash into account.
To deposit cheques / cash into account of some other person who has
account in a CBS branch.
All these aim provide convenient, efficient, and high quality banking experience to
the customers, comparable to world class standards.
CHAPTER 5
According to PM Network (December 2006, Vol. 20, No. 12), State Bank of
India launched a project in 2002 to network more than 14,000 domestic and 70
foreign offices and branches. The first and the second phases of the project have
already been completed and third phase is still in progress. As of December 2006,
over 10,000 branches have been covered.
A CBS branch is like a Sales & Service Delivery Center. Back office
process/activities are handled through technology at some other site, called Data
Center. Branch, therefore, has more time for serving customers. This improves the
quality and efficiency of the services rendered and the customer is directly
benefited by way of satisfying and happy banking experience.
(*To safeguard the interest of customers, Bank has placed certain restrictions
on the amount of transactions, which are handled through other branches under
CBS. The details can be obtained from the branch).
CHAPTER 6
Customer records
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 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 no their way to go for CBS and very soon they will also be under the roof of
the umbrella of Core Banking Solution.
CBS offers a host of advantages to the banks which in today’s world cannot
be ignored. Some of the benefits are given below:
can amend business rules also for some of the privileged customers and the
solutions allow such customizations.
Standardize the Process across all Businesses Most of the CBS are built
on enterprise architecture which provides for different modules in a particular
solution following the same activity flow and uniform transaction process. So
when a bank chooses a particular solution the process gets standardized across the
organization. This is important because such uniform processes would allow easy
maintenance and up gradation.
Reduce Costs As these solutions cut time and reduce the dependence on
human intervention, the cost is reduced tremendously. At the same time revenue
would increase as the banks can now offer value added services with the existing
staff in lesser tie. These solutions also allow the banks to cross-sell products
thereby reducing the overheads.
Provides Real-time Audit These solutions provide audit trail and signature
capture. They also have the built- in report format feature that allows for
integration with any third party reporting tools in order to generate reports. And
also the General Ledger which is the main account in the CBS contains the
consolidated information of all the transactions. This ledger cannot only give
accounting information but also can be customized to give multi-branch and multi-
profit center accounting.
CHAPTER 7
There are many reasons for the late inception of CBS in INDIA, some of
them being
Some of the standard software tools that many banks are using these days are
CHAPTER 8
The Core Banking Systems have to satisfy the requirements of all the
entities that form part of the eco-system of the Bank.
Bank Customers: Can operate any of their accounts from any branch
or preferred delivery channel and have access to his funds any time 24
hours a day.
Bank Auditors : Ones accounts audited, they operate the same year
on year thus enabling auditors to focus more on systems and
procedures at delivery channels like branches, call center etc.
CHAPTER 9
interest (both due to the customer and due from the customer), processing
customers’ standing orders, providing account statements and interfacing to
outside systems for making and receiving payments are all considered to be part of
the core business of banking and therefore the legitimate functions of a core
banking system.
• Interest calculations
• Processing of cash deposits and withdrawals
• Processing of incoming and outgoing remittances, cheques, etc.
• Customer management
• Customer account management
• Definition of the bank’s products (product management) including such
things as minimum balances, interest rates, number of withdrawals, etc.
• Interest rate definition
• Customer’s standing instructions
• Maintaining records of all financial transactions
A packaged retail core banking system might include functions that are
closely related to core banking activities. So a package may include such functions
as:
Banks can have differences in the type of business that they conduct. They
may for example be in retail banking (the type of banking that is seen in the high
street), or be in wholesale banking (the bank-to-bank market often referred to as
the inter-bank market) or securities trading (the buying and selling of stock, shares
or government debt instruments). As a result their ‘core’ businesses can be
considerably different. Their core banking system will therefore reflect the type of
business of the bank and be either:
• Retail banking
• Commercial banking
• Wholesale banking
• Treasury banking
• Private banking
disadvantage is that it is unlikely that a single vendor is able to offer modules that
are ‘best of breed’ in each function. The alternative approach is to use a core
banking system and augment its functionality by using ‘best of breed’ packages for
the specific functionality needed such as foreign exchange trading or portfolio
management for example.
CHAPTER 10
There are 5 ingredients that form part of the Core Banking system. These are
the essential building blocks for the entire bank / institution.
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.
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.
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, 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 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.
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 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.
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.
MIS is simple terms takes information from the General Ledger, CIS
Deposit, Loan Systems and present them to the bank / financial institution. The
staff all employees including management.
Around the world, typical examples of information that bank staff (each with
access rights) retrieves include.
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
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;
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.
Trade finance
Treasure
Credit Card
Mutual Funds
Stocks, Bonds
External System
Payment gateways
SWIFT
Shared ATM network
World Wide credit card networks, maestro, electron etc
World wide ATM networks plus, Cirrus etc and possibly other
systems that the bank may want to deploy in specific departments
CHAPTER 11
However, the core banking solution itself cannot cater to all the fee-income
needs of a bank. This is attributable to the complex nature of each bank with regard
to its independent departments or business silos and their disparate systems. Over a
period of time, what results is a severe inability to visualize the fee income or
pricing of charges at the enterprise level.
CHAPTER 12
CBS has heralded an all new era in the banking world. It opened up new
channels to transact with the customers. Now the customer can choose the channel
for doing his transactions either through the ATMs, or through Internet and even
through phone. All this is resulting in a complete change in the way the banking is
done. This is the era of anywhere and any time banking, making the branch
banking and limited banking hours a thing of the past.
This is also the time of real-time banking. Transactions get instantly, instead
of waiting to be done in the next couple of days and weeks especially in the case of
cross border money transfers. All this is an integral part of the CBS. At the same
time, CBS is also helping banks to decrease the product development and testing
lead rime enabling the bank to launch new products and become innovative and
agile.
and grasp the opportunities accordingly. Almost all the solutions are Internet-based
and web-enabled based on upon source architecture. These solutions offer ‘just-in-
time’ information for different levels within the organization and also for external
people who are required and authorized to know this information. They also
provide for audit trace and logging information reassuring who has done the
transaction at what time and also giving the transaction details like amount,
location, etc. These solutions also offer historical information reassuring who has
done the transactions and provide for upgrade with every new transaction done.
These solutions also provide an access control point that would enable a unique
point of access, which can be specified by the user.
All the top core banking solutions allow Straight Through Processing (STP),
integration of multiple chapels taking into consideration multilingual,
multicurrency and multi-entity functionality. While focusing on the product, the
solutions also provide customer focus enabling effective customer relationship
management. The core banking solutions are modular and provided for scalability
and easy integration where and consolidations are the norms of the day.
CHAPTER 13
In countries such as India and Hong Kong that were a part of the erstwhile
British empire, It is only recently that core banking has caught on,. This is mainly
due to the restriction by the UK government on free movement of money
throughout the region. Also, the It infrastructure necessary for such services did
not exist in these countries until recently. After liberation from the UK, the
economies of these countries went through a drastic change – thus the demand for
such services increased and the need to meet such demand were met with today’s
technologies. Most of the nationalized banks in India for example: State Bank of
India, Punajab national Bank, Allahabad Bank, HDFC and ICICI Bank today
supports caore banking. As of 2007, many Co-operative banks in India such as Jain
Urban Co-operative Bank, Kangra Central cooperative Bank, Udaipur Urban
Cooperative Bank, Kollam District Cooperative Bank, Kerala State Cooperative
Bank and Panchsheel Mercantile Cooperative Bank have started to use and offer
centralized Core Banking too. The three standard software used anr Flexcube from
Solutions, Finacle from Infosys and B@ncs from TATA Consultancy Services.
In countries such as Japan, core banking is still in its early stages. Although
having autonomous reign over half a century, the consumers themselves do not see
much use for such services low demand, thus less services. It is only within the last
decade that banks started placing ATMs outside the bank premises. Many of the
bank services must be done in person at the account holders registered branch.
Japanese banks rely heavily on paperwork and physical evidence, such as the
personal chop or Inkan – thus rendering core banking impractical
CHAPTER 14
In the public sector banking has first evolved from automating the
accounting processes in a stand alone mode and subsequently graduated into so
called TBM’s which in reality only integrated the these stand alone accounting
applications. Several registers, legers scrolls and other forms of MIS continue to be
generated manually in the branch. Several application packages still function in a
stand alone mode even in a TBM branch like FDR, PPF etc. Such disjointed view
of the branches resulted in a complex unmanageable IT infrastructure within these
banks such distributed data based / applications pose sever administrative
problems. Changing / modifying applications imply that these changes need to be
applied over vast geographically distributed systems, resulting in slow and error
prone updating.
With frequent interest rate changes, product launches regulatory report MIS
needs, it is needed a night mare to carryout these changes across 1500 odd
branches and retrieve the information and consolidate them to yield specific MIS
reports. Added to this is the quality of Data emanating from branches. Most data
entry operations are out sourced and validity of such massive data is questionable.
It is often said, albeit repeatability, integrity and accuracy, became real issues.
Core Banking:
The reason for calling it Core Banking System, after deployment, is the hart
or the Core of the Bank / financial institution. All entities that form part of the eco-
system of the bank / financial institution interact with. The entities are;
Bank employees head office, regional offices, branches etc…
Bank Management: executives / managers at respective locations head
office, regional offices branches etc…
Bank customers: Personal banking, corporate banking international
banking etc.
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.
CHAPTER 15
Established in 1972, the Thane Janata Sahakari Bank Ltd. (TJSB) is the
youngest Cooperative bank to get scheduled status from the RBI. In 1995, TJSB
became the leading cooperative bank in India. Today it has 40 network branches
and two Extension Counters. The bank has an installation base of 40 ATMs and
serves 7.5 lakh customers.
Subodh Nagwekar, CIO, TJSB, said, “Today we have a nice story to tell the
world on how a small cooperative bank can come close in matching the services
with large private banks. We have achieved this with meticulous planning and
vision.”
branch banking approach did not quite work in the current business scenario and so
a contemporary technology-based core banking solution was the need of the hour.
TJSB’s focus was to cut the cost of operations and focus on business development
and market-share enhancement through customer-centric operations at branches.
“We thought a wider service delivery strategy was a must-have to increase the
client base and enhance market share and profitability through organic and
inorganic growth,” said Nagwekar.
Going online:
With the aim of supporting rapid growth through M&A and to achieve its
long-term business targets the bank decided to go online to increase internal
efficiency with an e-mail application and an intranet portal. TJSB needed to
improve its intra-branch and departmental communication by making the whole
process more speedy, efficient and inexpensive. The services to customers also had
to become much prompter thereby contributing to customer delight.
The bank was looking at an intranet portal that would help in distribution,
sharing and assimilation of efforts to a great extent. In addition, going online
would also mean improved decision-making and productivity.
The implementation:
Nagwekar said that performance, scalability, uptime, reliability and
investment protection have been key aspects while deciding on the IT
infrastructure. InfrasoftTech’s had a long-standing relationship with TJSB and
therefore they chose the vendor’s OMNIEnterprise CBS. HP was chosen as a
referred hardware platform for business transformation. The CBS was deployed on
HP servers at TJSB’s data centre. InfrasoftTech implemented the Core Banking
Solution by migrating 24 branches and offices, and then moved on to the process
of migrating the Head Office’s operations on to a single enterprise-wide
centralized banking solution. The bank’s operations spread over four cities have
now been migrated to running from its data centre in Thane.
InfrasoftTech along with the Bank’s IT team completed the task of branch
migration by March 2006. The migration of the Head Office was completed by
September 2006. Since then, HP has been working with TJSB cohesively to put in
place best practices and ensure maximum uptimes for all business operations. The
notable feature of OMNIEnterprise is that it is one of the few solutions in the world
that can offer branch operation continuity for the local customers, should the
connectivity circuits with the host application fail for any reason. The engineering
parameters of OMNIEnterprise have been reviewed by Ernst & Young while its
reliability performance testing has been undertaken jointly with Intel and HP.
For the Core Banking Solution, the Bank used HP RISC base servers, the
RP3440 with a cluster of EVA4000 SAN Storage and Oracle 10g. The merger of
Navjeevan and SJMB in 2007, plus the data sharing with TJSB meant an increase
in new/concurrent users of the CBS application and the database. Since the bank
had limited storage capacity, one more HP UNIX Server, a RP3410 with an
EVA4000 was installed to support the disaster recovery site for CBS.
Nagwekar said, “Training all of our 300 users was a big task. We spent quite
a bit of time explaining why we are implementing CBS and the objectives of the
project. We had to explain each and every process that was undergoing change.”
Post implementation all the changed processes started commercial operation from
day one.
This business transformation and CBS initiatives help TJSB achieve cost
advantages while also enhancing its operational metrics and customer satisfaction
levels to derive significant business benefits in the prevailing competitive banking
environment in India.
Post the CBS implementation, the customer base has increased from 3.75
lakhs prior to CBS to approx 7.5 lakhs, thanks to CBS and also because of the
acquisition of another bank namely Sadguru Janjli Maharaj Sahakari Bank and
Navjeevan Nagrik Sahakari Bank (their branches) the acquired branches of which
were also moved to CBS within a record time of three months. The number of
branches grew from 24 to 42.
IT as revenue model:
Since the IT infrastructure has sufficient capacity, TJSB had started hosting
applications for other small cooperative banks. This strategy will help the bank to
get some additional revenues. For example it has hosted the CBS of Kalyan Janata
Sahakari Bank Ltd., supporting 14 branches. Nagwekar said, “Since we have spare
capacity and the successful hosting of CBS of Kalyan Janata Sahakari Bank Ltd
has given us confidence to sign up two more cooperative banks.”
Future plans:
TJSB has some aggressive growth plans. It plans to open new branches in
Karnataka and Gujarat as the new licenses to open branches has been relaxed by
RBI. The bank is expecting five more licenses from RBI. Other plans
include having a HRMS system so it all HR related and payroll systems can be
consolidated and streamlined. It would be in line with Employee Self Service
wherein any employee can log into the system to access their personal details as
well as apply for leave online.
CHAPTER 16
CONCLUSION
All nationalized banks in India have started to use and offer centralized core
banking solution but some of the cooperative banks are yet not having CBS, but
they are on their way for CBS. Thus CBS is successful in India. Customers are
very satisfied with CBS. A core part of that strategy is deployment of a centralized
core banking system. Today after decades of existence outside India it is now been
talked about only now in our country. This is would be the only way to run a bank.
From business perspectives core banking relates to the basic business of a bank or
financial institution. (That in a nut shell is taking deposits from customers and
lending to customers). While doing so, ensure that profits are generated for the
bank. From a technology perspective core banking is the short name for a
centralized banking system that a bank has to deploy in order to perform its core
banking business in today’s competitive environment
BIBLIOGRAPHY
WEBSITES
Professional banker.com
www.economy watch.com
www.core banking.com