I T IN CENTRAL BANKS : CHALLENGES & PERSPECTIVES

1. I T IN CENTRAL BANKS : CHALLENGES & PERSPECTIVES 4TH SEMINAR ON IT SOLUTIONS FOR CENTRAL BANKING S GANESH KUMAR, GENERAL MANAGER DEPT OF INFORMATION TECHNOLOGY RESERVE BANK OF INDIA, MUMBAI, INDIA

2. Scope of this presentation: A. GENESIS B. TECHNOLOGY IN BANKING C. ISSUES AND PERSPECTIVES

3. GENESIS

4. BANKING IN INDIA GENESIS • FEATURES OF THE BANKING SYSTEM • WIDE GEOGRAPHICAL COVERAGE – No.of States – 26, • Union Territory – 6, Districts – 575, Blocks - 3100 • 430 + BANKS • 80,000 + BRANCHES • LARGEST BANK HAS 8,000 + BRANCHES • VARIED BANKING STRUCTURES • NATIONWIDE BANKS • PRIVATE BANKS • REGIONAL BANKS • CO-OPERATIVE BANKS • FINANCIAL INSTITUTIONS • FINANCIAL INTERMEDIARIES • NON-BANKING FINANCIAL INSTITUTIONS • 1050+ clearing houses

5. BANKING IN INDIA • FEATURES OF THE BANKING SYSTEM • NATIONWIDE BANKING • PUBLIC SECTOR BANKS – state owned (27) • PRIVATE SECTOR BANKS – limited companies(32) • FOREIGN BANKS (43) • OTHER SCHEDULED BANKS (298) • NON-SCHEDULED BANKS (1) • SCHEDULED URBAN CO-OPERATIVE BANKS

6. BANKING IN INDIA • FEATURES OF THE BANKING SYSTEM • REGIONAL BANKING • CO-OPERATIVE BANKS • URBAN CO-OPERATIVE BANKS • STATE LEVEL APEX CO-OPERATIVE BANKS • REGIONAL RURAL BANKS (196) • DISTRICT LEVEL CO-OPERATIVE BANKS

7. BANKING IN INDIA • FEATURES OF THE BANKING SYSTEM • FINANCIAL INSTITUTIONS • TERM LENDING INSTITUTIONS • DEVELOPMENT INSTITUTIONS nabard, dhfi, nhb • REGULATORY INSTITUTIONS sebi, shci • STATE LEVEL FINANCIAL INSTITUTIONS

8. BANKING IN INDIA • FEATURES OF THE BANKING SYSTEM • NON-BANKING FINANCIAL INSTITUTIONS • NON-BANKING FINANCE COMPANIES • LEASING AND HOLDING COMPANIES • INFRASTRUCTURE DEVELOPMENT Cos

9. GENESIS PRESENT STATUS OF COMPUTERISATION • COMPUTERISATION STATUS • DIFFERENT HARDWARE PLATFORMS • VARIED OPERATING SYSTEMS • SOFTWARE DEVELOPED IN HOUSE / OUTSOURCED • DIFFERENT APPLICATION PROGRAM LANGUAGES • SOME ARE INTEGRATED SOLUTIONS BUT MOST ARE NOT TOTAL PROJECTS • IMPLEMENTATION OF CORE BANKING SYSTEMS

10. GENESIS RESERVE BANK OF INDIA • ESTABLISHED IN 1935 • MAJOR FUNCTIONS • MONETARY AUTHORITY • REGULATION & SUPERVISION OF THE FINANCIAL SUPERVISION • MANAGEMENT OF FOREIGN CURRENCY • CURRENCY ISSUE & MANAGEMENT • DEVELOPMENTAL ROLES • RELATED FUNCTIONS • BANKER TO GOVERNMENT • BANKER TO BANKS

11. GENESIS RESERVE BANK OF INDIA • OFFICES • CENTRAL OFFICE – MUMBAI • REGIONAL OFFICES – 22 • TRAINING ESTABLISHMENTS – 6 • OTHER INSTITUTIONS – 3 • NATIONAL INSTITUTE OF BANK MANAGEMENT • INDIRA GANDHI INSTITUTE FOR DEVELOPMENT RESEARCH • INSTITUTE FOR DEVELOPMENT AND RESEARCH IN BANKING TECHNOLOGY • SUBSIDIARIES : NHB, DICGC; BRBNMPL

12. GENESIS • RESERVE BANK OF INDIA – DEPARTMENTS • MONETARY POLICY ORIENTED : 2 • REGULATION AND SUPERVISION : 5 • CURRENCY MANAGEMENT : 1 • SECRETARIAL SERVICES : 1 • MARKETS RELATED : 2 • GOVERNMENT AND BANKS : 1 • PAYMENT & SETTLEMENT : 1 • INFORMATION TECHNOLOGY : 1 • PUBLIC RELATIONS : 1 • ADMINISTRATIVE : 5 • FOREIGN EXCHANGE : 1

13. TECHNOLOGY IN BANKING

14. The Technology Revolution • The impact of technology on the real & financial world around the central banks • E-governance • Choice of Channels , Confidence and Convenience to the end-user • Efficiency • Facilitating growth of products and services

15. Banking and Technology Innovative Risk Management Complex Credit Calculations Global Operations Pervasive Branch Network Mass Transaction & Items Processing

16. Technology and Central Banks The potential Technology offers to improve internal processes Technology has Affected every Core Central Banking Function Why Central Banks are interested?

17. Core Central Banking Functions Currency Management Financial & Monetary Stability Banking Supervision

18. Technology and Banking Supervision THE RBI RESPONSE Offsite Supervision & Monitoring OSMOS COSMOS (Non banking Financial Companies / Development Financial Institutions) UBD Soft Credit Information Bureau (A joint venture between Housing Development Finance Corporation Ltd., State Bank of India, Trans Union International Inc. & Dun & Bradstreet Information Services India Pvt. Ltd.

19. Regulation and Supervision – The Challenge • Technology has … • opened up new markets, products, services, delivery channels • opened up a market for “risks” – derivatives • thrown up the challenge of financing tech firms & IT innovation …and not without implications for the stability of banks and of the economy

20. Regulation and Supervision – The Response • Technology has also… • provided regulators with the wherewithal to meet the challenge • been the cornerstone of all recent financial sector reforms • enabled the emergence of non-intrusive, focused supervision …with a view to prevent frauds and disturbances to financial stability

21. Currency Management and Technology – Opportunities Galore • Currency Management is a formidable task in India given… • the geographical size of the country • the volume and value of notes and coins in circulation • the marked preference for cash • currency handling practices ...but technology offers immense opportunities to improve performance

22. Monetary Policy – The Challenge (1) • The proliferation of IT has… • redefined the toolkit of economic indicators used in implementing monetary policy • rendered more complex, the task of compiling statistical information • rendered difficult the task of capturing the impact of IT on price levels • raised issues in respect of the possible proliferation of digital money

23. Monetary Policy – The Challenge (2) • transformed the conduct of the payment and settlement system • set the stage for an unprecedented growth in financial activity across the globe • Rendered more vulnerable the domestic payment system and financial stability to international “shocks” … making the conduct of monetary policy more complex and prone to implementation and operational risks

24. Monetary Policy – The Opportunity • The proliferation of IT has also set the stage for improving and managing risks in payment systems • Electronic Trading Systems • DVP/PVP • RTGS • Secured Netting Systems • The growth of the Central Counterparty (CCP) • Continuous Linked Settlement

25. Continuous Linked Settlement Central Counter party Secured Netting Systems Payment Versus Payment Real Time Gross Settlement Electronic Dealing Platforms Delivery Versus Payments Demateria-lisation Of Securities IT and Payment and Settlement Systems

26. STRATEGIES – I T 1 : 1 COMPUTING CAPABILITY INTEGRATED APPLICATION SYSTEMS STANDARDISATION HARDWARE OPERATING SYSTEMS SOFTWARE I T FOR EFFICIENCY & EXCELLENCE SAFE SECURE EFFECTIVE COMMUNCTN NETWORKS C D B M S E K M S

27. INFORMATION TECHNOLOGY INITIATIVES STDSTN HARDWARE AT ALL OFFICE R A function R A FUNCTION FOR THE BANK S F M S STRUCTURED FINANCIAL MESSAGING SYSTEM APPLICATIONS SECURITY P K I ECS,EFT, CRRNCY CHST D I T E K M S BLUE PRINT READY BACKUP BACKUP AND DRS SITES; DATA BACKUP AT TWO SITES D R S DATA CTR CENTRALISED DATA PROCESSING CAPABILITY H R HUMAN RESOURCES FOR I T

28. Negotiated Dealing System & the Securities Settlement System • Electronic dealing platform in government securities and money market instruments- Primary and Secondary markets • Quicker Price Discovery • Straight Through Processing- Settlement of transactions • Delivery versus Payments • Efficient Servicing • Centralised Depository and Debt Servicing • Wide Area Based Dealing System

29. RBI Initiatives in Payment and Settlement Systems (3) • The Securities Settlement System • Providing centralized depository and settlement services • Seamlessly integrated with the NDS and RTGS Systems • The Clearing Corporation of India • Secured netting services with central counterparty arrangements • G-Sec and Forex segments • Elimination of settlement risks with liquidity saving elements

30. Technology Vision of the RBI Desk Top Decision Making Capability Centralised Database Management System Enterprise Knowledge Management System Desk Top Analytical Capability Offsite Supervisory Systems Integrated Forex Management System Human Resource Information System Desk Top Transactional Capability Integrated Accounting System Integrated Government Accounting System Currency Operations System Securities Settlement System Integrated Establishment System

31. Summary of Issues:RBI as a user of technology (1) • The Technology Mission in RBI • To enable better and faster transactions, analysis and decisions • To provide State of the art, online transactional, analytical and decision making capabilities at the desktop of each official in a secured environment

32. RBI as a user of technology (2) • The Strategy… On line Transactional Capability • An integrated solution for each functional area • Integrated Accounting Solution • RBI as “Banker to banks” • Integrated Government Accounting Solution • RBI as “Banker to government” • Securities Settlement System • For the management of public debt • Computerised Currency Operations and Management Solution • Integrated Establishment Solution

33. RBI as a user of technology (3) • The Strategy…On line Analytical Capability • The Integrated Foreign Exchange Management Solution • The Human Resource Information System • Integrated Monetary Policy Solution

34. RBI as a user of technology (4) • The Strategy…On line Decision Making Capability • The Centralized Database Management System • A data warehousing and data mining solution • The Enterprise Knowledge Management System • On an advanced stage on the drawing board

35. Planning for Disasters Business Process Re-engineering Human Resource Empowerment Pre-requisites for Technology

36. The pre-requisites for Technology • Planning for disasters • Increased operational risk • Business Continuity Planning • Data Centres • Business Process Re-engineering • Human Resource Empowerment

37. ROLE OF TECHNOLOGY IN NEW DELIVERY CHANNELS • MOBILE TECHNOLOGY • RADIO FREQUENCY BASED • FINANCIAL INCLUSION – CARDS • E-TRANSACTION FACILITATION • VIRTUAL BANKING • HYBRID TECHNOLGIES !

38. Security • Access Control Systems • Physical • CARDS – ACCESS CARDS, SMART CARDS • LARGE SPEED DEVICES – BIOMETRIC, CONTACTLESS CARDS • Logical • Login USERID • PASSWORD LEVELS–DUAL FOR CRITICAL APPLICATIONS

39. Security • Data Security • HASHING – AT RECORD LEVEL • ENCRYPTION – AT FILE LEVEL • Network Security • AntiVirus • Closed User Group • Firewalls, • IDS, Digital Signature, Encryption, PKI

40. DUAL KEY • KEY PAIR FOR SIGNING • KEY PAIR FOR ENCRYPTION • ALGORITHMS • SIGNATURE • R S A • D S A • E C D S A • ENCRYPTION • D E S • TRIPLE D E S • A E S IMPLEMENTATION OF P K I

41. INFINET

42. DESIGN & DEVELOPMENT OF PAYMENT SYSTEMS-INTEGRATION INDIAN FINANCIAL NETWORK A WIDE AREA NETWORK USING SATELLITE BASED ON VSAT TECHNOLOGY, AND TERRESTRIAL MODES OF COMMUNICATION

43. DESIGN & DEVELOPMENT OF PAYMENT SYSTEMS-INTEGRATION • INDIAN FINANCIAL NETWORK • (INFINET) • A WIDE AREA SATELLITE - TERRESTRIAL NETWORK using • - VSAT TECHNOLOGY • - TCP / IP BASED

44. Indian Financial NETwork Establishment of the INFINET * Designed & Developed by the Institute for Development and Research in Banking Technology, Hyderabad * Objective : To provide an efficient, reliable communication network for the Financial sector * Goal : To link all RBI offices To interconnect banks/Financial Institutions To facilitate Electronic Movement of funds -- Retail, DNS and RTGS

45. JAMMU Integration of VSAT network with Terrestrial network at all Offices of the RESERVE BANK CHANDIGARH DELHI LUCKNOW JAIPUR KANPUR GUWAHATI PATNA BHOPAL AHMEDABAD NAGPUR KOLKATA BHUBANESHWAR MUMBAI HYDERABAD NMS at Hyderabad PUNE Back up NMS at Mumbai GOA 2 mbps leased line 64/128 kbps leased line BANGALORE CHENNAI KOCHI THIRUVANANTHAPURAM INFINET (LEASED LINE CONNECTIVITY AND INTEGRATION WITH IDRBT VSAT NETWORK)

46. TECHNOLOGY BASED PROJECTS FOR BANKS AND FINANCIAL INSTITUTIONS IDRBT • COMMUNICATION • BACKBONE • FOR BANKS • FOR F I s • FOR NON- • BANKING F I s • (PDs) • SECURITY • PUBLIC KEY • INFRASTRUCTURE • SMART CARDS • COMMUNICATION • MODES • SATELLITE • TERRESTRIAL • LINES • INTERNET • APPLICATIONS • COMMON • BANKS’ OWN • E-MAIL INFINET

47. DESIGN & DEVELOPMENT OF PAYMENT SYSTEMS-INTEGRATION • WHY INFINET ? • INTERBANK NETWORK • VSAT + TERRESTRIAL LINES • EXCLUSIVE BANK NETWORK • COVERS ALL BANKS & FIS • INTERFACE WITH RBI • STANDARD FORMATS • SAFETY AND SECURITY • INTERFACE WITH CENTRAL A/Cing

48. DESIGN & DEVELOPMENT OF PAYMENT SYSTEMS-INTEGRATION • INFINET CAPABILITIES • MESSAGE TRANSFERS • FILE TRANSFERS • FUNDS MOVEMENT • MIS REPORTING • NETWORK MANAGEMENT • INTERCONNECTIVITY

49. I S SYSTEMS HARDWARE RELATED SOFTWARE SYSTEMS DETECTION SYSTEMS PREVENTION SYSTEMS CERTIFICATION I S POLICY BOARD APPROVAL TOP MGMT COMMITMENT ROLE OF CONSULTANTS IMPLEMENTATION PLANS IS SECURITY DIT I S AUDIT INTERNAL AUDIT INTERNAL INSPECTION EXTERNAL AUDIT SYSTEMS STUDY & EVALUATION REGULATORY REPORTING REPORTING TO RBI RISK CONTROL & MITIGATION MEASURES

50. TECHNOLOGY IN BANKING Historical Perspective • 1980s • Back Office computerisation – Accounts, MIS • 1990s • Front office computerisation • Preliminary networks - LANs • Front Office computerization • Total Branch Automation • 2000s • Holistic computerisation • Core Banking Systems