wipro banking report

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BANKING AT THECROSSROADSWhere will Indian banking go in the next ten years? This explorative study endeavors to identify key growth drivers and opportunities that lie ahead.

F U T U R E T H O U G H T O F B U S I N E S SA W I P R O T H O U G H T L E A D E R S H I P I N I T I AT I V E

W W W. W I P R O . C O MDO BUSINESS BETTER

Research partners Dun & Bradstreet India


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The Indian banking sector has evolved into a robust banking system,emerging as one o the strong pillars o stability and growth in theIndian economy over the past decade . The growth o the sector hasbeen largely acilitated by higher disposable income and savings infnancial assets by Indian households. While the growth in the sector has been healthy, the penetration o the banking industry in India hasbeen relatively low, mostly in the low income clustered regions suchas rural and semi-urban areas. As emergi ng technologies andinnovative channels continue to trans orm the banking industry, our role as stakeholders in trans ormation will be to anticipate and gear

up the banking system or uture opportunities and challenges.

While under penet ration will rem ain a key ocus area o b anks, anumber o recent initiatives by RBI such as new licenses to privatebanks and savings rate deregulation is expected to increasecompetition in the industry. Thus, banks will have to addresscontrasting challenges o expanding their reach as well as risingcompetition in the coming decade or their share o the wallet.

Similarly, there is contrasting set o challenges or banks related tocustomer in ormation. Banks will have to create segregated strategies

to servi ce customers based on adva nced business ana lytics. On theother hand, banks will have to increase their customer base amongrural customers and SMEs or which in ormation access is low.

Creating interoperability across plat orms and channels will emergeas another key challenge or banks. While innovation throughchannels such as mobile gain momentum in the coming years,interoperable systems will be needed to leverage technology

through these channel s where customer s have savings account andmobile number portability.

Against this backdrop, Wipro and Dun & Bradstreet present TheFuture Thought of Business for Banking . This is an endeavour

to highlight the potential that the Indian Banki ng sector holds in t hecoming decade, and to identi y the key growth drivers that willenable the sector to leverage on the uture opportunities.

I hope you enjoy reading this report and look orward to receivingyour suggestions.

Anuj VaidGeneral Manager and BFSI Vertical Head,Client Relationship Group,

Wipro Limited

THE FUTURETHOUGHT OFBUSINESS FOR BANKING.


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The coming decade is going to witness a major trans ormation in

the Indian banking sector. Financial Inclusion is expected to

emerge as a key catalyst or the next phase o growth in the

banking sector. Government initiatives through the Unique

Identifcation Authority o India(UIDAI) will provide impetus in

improving fnancial access orth rural population while innovations

through the payment system and e ective business models will be

critical in achieving fnancial inclusion goals. The Future Thought o

Business or Banking is an endeavour towards identi ying and

analyzing the key trends that will trans orm the banking sector in

the near uture.

Some of the key highlights from the study of future trends in the

Indian banking industry are as follows.

Financial inclusion and In rastructure spending will emerge as

the two key growth drivers or Indian banks in the coming

decade. The extent o fnancial exclusion among rural population

is enormous with only 9.9% o the population having a loan

account and 18.8% o the population having a debit card as on

Mar 31, 2011. The increased thrust on in rastructure spending as

per the Twel th Five Year Plan will require savings as a proportion

o gross domestic product (GDP) increasing to almost 38% by

fnancial year 2017 (or FY17) rom 33.7% as on FY10.

A number o recent regulatory re orms pertaining to new

licenses in the banking sector and savings rate deregulation by RBI

are expected to improve the competitive scenario in Indian

banking and provide urther impetus to the industry growth. A

proactive approach towards strengthening the risk management

ramework with ocus towards liquidity risk management, fnancial

conglomerates and systemically important fnancial institutions is

expected to provide stability in the banking system as Basel III

ramework is implemented in the system.

Improvement and innovation in payment system, as conduits

or banking transaction, will be critical or the trans ormation o

banking. India already has a dedicated body in National Payment

Corporation o India (NPCI) or developing improved payment

systems. Recent developments in payment system include next

gen RTGS, inter-mobile payment system and Aadhar Enabled

payment system. There are also a number o non-banking entities

which have become part o developing payment system in India in

the recent years. Certain telecom operators have also introduced

mobile wallets in India.

Cost o physical in rastructure and products catering to low

income population are the biggest challenges or last mile

connectivity. Indian banks are currently pursuing their fnancial

inclusion goals through business correspondence model. However,

a sustainable business model still remains elusive to banks. A viable

business model which has emerged rom the study reveals that

banks will have to operate through customised branchless banking

model based on strategic priorities. The role o branches will also

need to be re-engineered to become more automated and

provide additional fnancial services.

Customer segmentation will emerge as the key tool or

product innovation and improved CRM in banking. Banks will have

to segregate their product design and services based on income,

location, age and pre erences. The business needs o banks will

have to be met with robust in rastructure or database ware-

housing and in ormation security. Innovative channels such as TV

banking and social media banking are also expected to improve

customer interaction experience in banking in the coming years. There are also a number o key strategic initiatives needed to

leverage technology as well as e ectively trans orm the banking

system. Interoperability across plat orms and channels is one o the

key steps that is needed to seamlessly conduct fnancial transaction

across every plat orm and channel. In ormation security is another

aspect which banks will need to ocus on as banks migrate

towards cloud computing and virtualisation.

EXECUTIVE SUMMARY

NO ONE GETS LEFT BEHINDFinancial inclusion is a leading factor that will create growth by the year 2020


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Objective of the Study

The objective o The Future Thought o Business or banking

report is to identi y the uture trends that are likely to emerge

in the Indian banking sector in the coming decade, which

would have a signifcant in uence on the uture o business.

It is an initiative to serve as a strategic plat orm tool or the

industry to understand and meet the c hallenges that would

un old in the uture. Possible recommendations to address

the issues so identifed have also been detailed in the report.

Research design

The report has been developed based on quantitative and

qualitative in ormation. Data and in ormation collection was

conducted through secondary research and interviews with

industry experts.

Methodology

1. Desk research

A detailed review o relevant literature or the Indian

banking sector was conducted at this stage.

2. Questionnaire development and industry interactions

Findings o the desk research were used to develop

appropriate questionnaires or interviews. Face-to- ace

and telephonic interviews were conducted with experts

in the sector.

3. Collation and analysis of information

All data and in ormation gathered through secondary

research and interviews was collated and analysed or

the purpose o developing the report.

4. Report writing

Finally, the analysis, results and key fndings were

written in the orm o the current report.

ResearchFramework How we went about taking a closer look at banking and the challenges the uture presents.


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Table of contents

01. Section I: Indian Banking Landscape

03. Structure of the Indian Banking Sector

05. Payment System in Indian Banking

08. Risk Assessment of Indian Banks

11. Section II: Factors Shaping the Future of Indian Banking

13. Financial inclusion

17. Enhancements and improvements in payment systems

19. Internet and Mobile Banking

21. Section III: Emerging Trends in Banking

22. Emerging business model using branchless banking

25. Role of branches will be re-engineered as focus on branchless banking increases

26. Transformation towards customised services and cost effective operations

29. Leveraging technology beyond core banking solution

30. Data Warehousing

31. Convergence among products, channels and payment system

33. Banks to focus towards aggressive CRM strategies for customer acquisition

35. Section IV: Strategic Focus and Challenges for the Banking Industry

36. Need for interoperability across platforms and channels in the payment system

37. Strengthening information security for data processed through cloud or virtualised network

38. Role of non-banks in the payment system

38. Outsourcing

38. Holistic technology management key to optimise overall innovation in the banking system

39. Conclusion

39. The Way Forward

40. References and Sources

41. Acknowledgements


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Flow of money and credit in the Indian economy

Item1991-

2000

2001-

2010

2004-

2008

2009-

2011

(Percentage change % )

Non- ood Bank Credit 15.4 22.4 26.7 18.7

Investment in G-Secs 20.9 17.7 13.3 16.2

Credit-GDP Ratio 20.6 37.7 39.5 49.7

Broad Money-GDPRatio 49.9 73.6 74.3 84.6

Source: RBI

Trends in gross domestic savings in India

Source: RBI and D&B Research

Section :

Where we are. And where were headed.

Indian BankingLandscapeThe Indian banking sector has emerged as one o the major

bene actors as well as benefciaries o strong domestic economic

undamentals. While prudent policy measures ensured that

demand in the domestic economy remained strong, critical

re orms and initiatives in the banking sector have helped it to scale

its operational capabilities to meet the increased credit demand

during this period. As a result, credit penetration, measured by

the overall bank credit to gross domestic product (GDP) ratio has

increased substantially rom 20% during 1991-2000 to 49.7% in

2009-11. Credit expansion also accelerated signifcantly over the

last two decades. This was because t he domestic economy gained

momentum as non- ood credit growth jumped 700 basis points

(bps) to 22.4% during 2001-2010.

An increase in household savings is another critical aspect that has aided the growth o the Indian

banking industry. Gross domestic savings in India are estimated to have been Rs 22.1 trillion in

FY10, aggregating to 33.7% o the GDP; household savings contributed 69.5% o the overall gross

domestic saving, amounting to Rs 15.3 trillion. These savings were equally distributed between

fnancial assets and physical assets, while fnancial saving data indicate that bank deposits orm

almost 42% o the gross domestic savings in fnancial assets duringthe period.

02


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Structure of the IndianBanking Sector

ank group-wise share* by number

ource:RBI and D&B Research,* As on March 31, 2011

Source:RBI and D&B Research,* As on March 31, 2011

Bank group-wise share* by business

Banks in India are classifed into commercial banks (scheduled

ommercial banks or SCBs, and non-scheduled commercial banks) and

o-operative credit institutions (that include various c o-operative

banks). The SCBs are urther classifed into public sector banks (PSBs),

private banks, oreign banks and regional rural banks (RRBs).

nterestingly, Indian banks are concentrated in terms o number o banks

nd total business size. As can be seen in the charts above, although the

RRBs and co-operative banks constitute 65% o the total number, they

only cater to 5.6 %o the total business. As against this, SCBs (excluding

RRBs i.e. SBI and its associates, nationalised banks, private banks and

oreign banks) orm only 35% o the total number but cater to around

94% o the total business o banks. This implies the domination and

pivotal role o SCBs excluding RRBs in the Indian banking sector.

RRBs consolidation strengthens capital base

since FY05

The RBI encourages and acilitates consolidation and emergence o

strong entities as well as provides an avenue or non-disruptive exit o

weak/unviable entities in the banking sector. As per RBI, there are merits

in mergers/amalgamations, especially i there is synergy in operations and

technology, such as creation o stronger banks with a larger capital base,

improved fnancial parameters, higher exposure thresholds, international

acceptance and capacity to reap economies o scale and scope. Further,

RBI recommends banks are neither too small (in which case they may

lack scale e fciency) nor too large (in which case they may be unable to

sustain, and thus ail).

With regard to mergers too the RBI has generally avoured a

market-driven process. Over the years, there has been considerable

progress in consolidation in India and mergers have occurred not only

between weak and healthy banks but also between healthy and

well- unctioning banks. The RBI has been supportive o initiatives or

consolidation and there have been no cases where merger approval has

been denied by RBI, i the proposals have con ormed to the RBIs

requirements and guidelines.

Since FY05, the RRBs have seen heightened consolidation due to

policy-driven mergers ollowing the recommendations o the Committee

on the Flow o Credit to Agriculture and Related Activities. Among

SCBs, in FY08, State Bank o Saurashtra merged with State Bank o India

(SBI), and Centurion Bank o Punjab was acquired by the Housing

Development Finance Corporation (HDFC) Bank. Consequently, by

December 2010, the number o SCBs (excluding RRBs) declined to 81

and RRBs declined to 82. As on FY11, total number o SCBs stood at 163.

Branches in the semi-urban area increased the most

during FY06-11

While banks are consolidating or greater benefts, they are expanding

their reach extensively to metro, urban, village and remote areas to

increase market share. In March 2010, the total branch network o the

163 SCBs registered a fve-year compound annual growth rate (CAGR)

o 6.6% that resulted in 93,080 branches rom 72,072 branches in FY06.

During 2006-11, maximum branches were added in semi-urban areas

(7,057 new branches added), whereas 5,924 and 4,676, branches were

added in urban and metropolitan regions respectively. The growth in

branch expansion in metros and urban areas is attributable to oreign

banks setting up operations in India, primarily in urban regions.

Cross segmental mix of branch network FY11

Source: RBI and D&B ResearchSource: RBI and D&B Research

No. of commercial banks [FY05 FY11]

04

011

,

s

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hare in the total branch network

SBI & itsAssociates

Nationalised Banks

Private Banks

ForeignBanks

RegionalRuralBanks

FY06 19.77% 49.89% 8.99% 0.35% 21.00%

FY11 20.22% 49.26% 12.89% 0.34% 17.23%

New branches opened during FY11

Rural Semi-Urban

Ur ba n Me tr op oli ta n Tot al

State Bank &its Associates

NationalisedBanks

Private Banks

Foreign Banks

RegionalRural Banks

he share o SBI and its associates and private banks in the total number

bank branches nationwide increased rom FY05 to FY11. The branch

etwork o private banks grew at a fve-year CAGR o 10.4% ollowed by

BI and its associates with a CAGR o 5.4 %.

A total o 4,877 branches were opened in FY11 (as against 5,022 in

FY10), the maximum number being opened by nationalised banks which

notched up a 41.5% share in the total number o new branches opened.

Most branches in FY11 were opened in semi-urban areas ollowed by

rural areas, highlighting the ocus o banks towards fnancial inclusion.

Payment System inIndian BankingPayment and settlement systems orm the backbone o any economy.

They are the conduits or arteries or conducting trade, commerce and

other orms o economic activities including remittances in any country.

An e fcient payments system can be envisaged as the lubricant which

peeds up liquidity ow in the economy, thereby creating the necessary

mpetus and momentum or economic growth. The payments process

s a vital aspect o fnancial intermediation; it enables the creation and

trans er o liquidity among di erent economic agents. A smooth, well

unctioning and regulated payments system thus not only ensures

e fcient utilisation o scarce resources but also eliminates systemic risks.

The payments and settlement system is, there ore, a crucial component

o the fnancial in rastructure o any country and more so o a country

like India.

The stage o payment system development in a country to a large

extent depends upon the adoption o technology, introduction o new

payment instruments and the confdence o the public in using these

payment instruments. In India, cash still continues to be the predominant

payment mode. This can be gauged rom the act that value o bank

notes and coins in c irculation as a percentage o narrow money is very

high at 60.07% or the year FY10, when compared to other emerging

economies like South A rica (18.51%), China(18.83%), Mexico (39.14%).

Brazil comes close to India with 52.70% o the value o banknotes and

coins in circulation as a percentage o narrow money. This is perhaps a

pointer that India has been relatively slow in embracing cashless payment

modes and using them as cash substitute. The pre-dominant use o cash

could also be attributed to the act that the process or adoption o

non-cash mode o payments started relatively late in the country.

Some of the reasons for low credit card usage are structural and include the lower acceptability of cards by merchants in India. The lower acceptability, especially in the smaller towns, are due to the pricing structure of these cards, the preference for immediate cash, and thereluctance to wait for settlement of dues.

S Gopinath

High Value Clearing 21.8 5.5 0 45,50,667 18,61,560 -

RTGS 13.4 33.2 49.3 91.8% 32,279,881 39,453,359 48,487,234 22.6%

Total 35.2 38.8 49.3 18.3% 36,830,548 41,314,919 48,487,234 14.7%

Retail Clearing

ECS DR 160.1 149.3 156.7 -1.1% 66,976 69,524 73,646 4.9%ECS CR 88.4 98.1 117.3 15.2% 97,487 117,613 181,686 36.5%

EFT/NEFT 32.2 66.3 132.3 102.7% 251,956 409,507 939,149 93.1%

Total 280.6 313.8 406.4 20.3% 416,419 596,644 1,194,481 69.4%

Cards

Credit Cards 259.6 234.2 265.1 1.1% 65,356 61,824 75,516 7.5%

Debit Cards 127.7 170.2 237.1 36.3% 18,547 26,418 35,705 38.7%

Total Cards 387.2 404.4 502.2 13.9% 83,903 88,242 114,207 16.7%

FY09 FY10 FY11 CAGR FY09 FY10 FY11 CAGR

Volume (in million) Value (Rs crore)

06

271

509

137

2

152

193

1043

712

2

73

84

442

285

1

56

89

389

415

4

13

637

2383

1549

9

294

h

.

s.

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Majority of the transaction volume ishrough paper-based clearingaper-based clearing accounts or 59% o the total volume o transac-

ons but represents only 10% o the total value o transactions. The RBI

s taken a number o initiatives to promote e fciency in paper based

earing such as widespread use o Magnetic Ink Character Recognition

MICR) technology at 66 major centres in the country. Simultaneously,

e introduction o speed clearing in 2008 has acilitated collection o

utstation cheques on a local basis leveraging on core-banking in rastruc-

re o banks. Speed clearing is currently available in 240 centres across

e country.

ectronic Payment Systems account or 41% o the total volume o

ansactions and represent 90% o the total value o transactions. The

troduction o electronic payment products such as electronic clearing

rvice and electronic unds trans er, which over the years have

etamorphosed into National Electronic Clearing Service, National

ectronic Fund Trans er and RTGS have ushered in new ways o

yment processing.The use o electronic payment systems has gained

gnifcant traction over the past three years. RTGS transaction volumes

ve witnessed over 90% CAGR growth in the past three years while

eir values have grown at an average o 22.6% during the same period.

EFT transactions have gained even more acceptance among retail

stomers growing at a three year CAGR o over 100% and 90% in

rms o volume and value, respectively, during the same period.

ational Electronic Fund Trans er (NEFT): introduced in November

005 NEFT now covers 77,821 branches. One o the unique eatures o

e system is a mandatory Positive Confrmation to the originator

confrming success ul credit to the benefciarys account. Since its

inception, the system has witnessed a surge in the volume and value o

transactions with 1.4 million transactions settling on a single day which is

the highest volume processed till date.

Electronic Clearing Service (ECS) suite including NECS: the ECS suite o

products enables bulk payments. The ECS suite consists o local ECS

which has its jurisdiction limited to local clearing house branches,

regional ECS (RECS) and national ECS (NECS). Both RECS and NECS

acilitate straight-through-processing (STP)-based processing o bulk

payments in a centralised manner in all core-banking enabled bank

branches within their jurisdiction. Average monthly volumes are 8.05million transactions (ECS credit: NECS, regional and local) and 13.40

million transactions (ECS debit: regional and local), while monthly values

are averaging about Rs126.43 billion and Rs 60.60 billion or ECS credit

and ECS debit, respectively.

Real time gross settlement (RTGS): the RTGS system was introduced in

March 2004 and now extends to 77,093 branches as at the end o June

2011. RTGS settles gross inter-bank and customer (two lakh rupees and

above) transactions. On an average RTGS settles 1.8 lakh transactions

valued at our trillion rupees, on a daily basis. Considering the impor-

tance o RTGS or settling large value payment systems, action has been

initiated or putting in place a next generation RTGS.

Rising interest rates to affect asset quality,but systemic stability to remain

Risk assessment of Indian Banks

Risk management in the banking system has emerged as t he most

critical aspect or stability and growth post the global fnancial crisis

period. Banking systems globally were a ected by the fnancial crisis in

2008, which originated rom the sub-prime lending market in the

United States. Global banks were impacted largely because o signifcant

exposure to complex fnancial products linked with the sub-prime

market. Indian banks, on the other hand, emerged relatively resilient on

the back o stringent regulation which minimized their exposure to

complex derivative products. To urther strengthen the stability o the

banking system, the Government has set up the Financial Stability and

Development Council (FSDC).

There are certain structural and regulatory eatures that make Indias

fnancial system resilient to stress.

Commercial banks are required to hold a signifcant proportion

(currently 24%), o their assets as government paper.

The RBI mandates a reserve requirement whereby banks are

required to hold reserves with the central bank to the extent o the

cash reserve ratio (CRR).

Commercial banks in India are well-capitalized; system-level capital

to risk-weighted assets ratio (CRAR) under the Basel II norms stood

at 13.2% as at t he end o Sep 2011, well above the Indian regulatory

minimum o 9%.

As per the Financial Stability Report released in Dec 2011, a series o

stress tests in banks on credit, liquidity and interest rate risks showed

that banks remained reasonably resilient though their proftability could

be a ected signifcantly. The RBI has suggested banks need to remain

vigilant with regard to the prevailing in ation and interest rate situation,

which may a ect their asset quality, since changes in interest rate were

ound to have the most signifcant (negative) impact on the slippage

ratio o the banks. It has also proposed urther enhancement in

provisioning to insulate banks rom economic downturn shocks.

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Proactive measures to further strengthenrisk management in Banks by RBI

Strong regulatory ramework o RBI has helped Indian banks to be at a

relatively com ortable position or transitioning towards Basel III. While

rising asset quality and liquidity concerns prevail, RBI is working towards

urther strengthening o the risk ramework o the banking system. Some

o the recent developments have been as ollows:

Guidelines or liquidity risk management: RBI announced dra t

guidelines or liquidity risk management to meet tighter Basel III require-

ments on Feb 2012. It has asked banks to fle with it their liquidity returns

under the Basel III ramework rom the quarter ending June 2012. The

central banks guidelines are pursuant to the recent global fnancial crisis,

which has underlined the importance o sound liquidity risk management

ramework to the unctioning o fnancial institutions and markets. Banks

are there ore expected to maintain high-quality liquid assets, both in cash

and government bonds, which can be converted into cash to meet

liquidity needs or a 30-day period under a stress situation.

Framework or fnancial conglomerates (FCs): Over the years,

banks have set up subsidiaries in various non-banking fnancial areas such

as Mutual Funds, Housing Finance, Insurance, NBFCs, etc. This, in turn, led

to the development o some large and complex fnancial institutions in the

country, which are commonly re erred to as Financial Conglomerates (FC).

The emergence o FCs in India brought to the ore questions about the

organisational structure o such entities, i.e. which should be the pre erred

corporate model or these entities. The issue acquired relevance rom two

distinct, though inter-related, perspectives one, e fcient corporate

management within the groups addressing the growth and capital

requirements o di erent entities; and two, the degree o regulatory

com ort with di erent models, particularly in regard to the concerns

relating to contagion risks. FCs in India, at present, are generally organised

under the Bank Subsidiary Model (BSM) in which the bank is the parent o

all the subsidiaries in the group. In contrast to this, a Holding Company

Model (HCM), is one where commercial banking, insurance, investment

banking, mutual und, stock broking and other fnancial activities are

conducted under the same corporate umbrella

Convergence towards IFRS: In India, there are di erences between

the IFRS and current regulatory guidelines on classifcation and measure-

ment o fnancial assets. IFRS ocusses on the business model ollowed by

banks as compared to the relatively rule-based approach being currently

adopted. This poses signifcant challenges to banks as it requires judgement

to be exercised by management, based on the principles enunciated in the

standard. Further, application o air values or transactions, where not

much guidance is available in India in terms o market practices or

benchmarks, has its own di fculties. Banks are also required to be

prepared or changes in certain areas, such as measurement and recogni-

tion o fnancial liabilities, consolidation and de-recognition as also more

and detailed disclosures. The IT systems as also the MIS o banks would

need to be changed to cater to the requirements o IFRS. RBI, on its part

has already taken several measures to assess the situation, promote skill

development, engage stakeholders and monitor developments. A working

group to address implementation issues in IFRS is attempting to acilitate a

smooth transition to an IFRS converged environment.

Proposed policy or Systemically Important fnancial institutions:

International policy initiatives in recent period have ocused on developing

a policy ramework or Systemically Important Financial Institutions (SIFIs),

especially Globally Systemically Important Bank (G-SIBs).The Financial

Stability Board (FSB) and the Basel Committee have fnalised a set o

proposals or managing crises at SIFIs and reducing their impact. The policy

measures include:

A new international standard as a point o re erence or re orms o

national resolution regimes, to strengthen authorities powers to resolve

ailing fnancial frms in an orderly manner and without exposing the

taxpayer to the risk o loss;

Requirements or resolvability assessments, recovery and resolution plans

and institution-specifc cross-border co-operation agreements or G-SIFIs;

Requirements or additional loss absorption capacity above the Basel III

minimum or G-SIBs; and

More intensive and e ective supervision through stronger supervisory

mandates and higher supervisory expectations or risk management

unctions, risk data aggregation capabilities, risk governance and

internal controls.

Minimum Capital Requirements

Common Equity Tier 1 (CET1) capital must be at least 5.5% o risk-weighted assets (RWAs);

Tier 1 capital must be at least 7% o RWAs; and

Total capital must be at least 9% o RWAs.

Capital Conservation Buffer

The capital conservation bu er in the orm o Common Equity o 2.5% o RWAs.

Transitional Arrangements

It is proposed that the implementation period o minimum capital requirements and deductions rom Common Equity

will begin rom January 1, 2013 and be ully implemented as on March 31, 2017.

Capital conservation bu er requirement is proposed to be implemented between March 31, 2014 and March 31, 2017.

The implementation schedule indicated above will be fnalized taking into account the eedback received on

these guidelines.

Instruments which no longer quali y as regulatory capital instruments will be phased-out during the period beginning

rom January 1, 2013 to March 31, 2022.

Enhancing Risk Coverage

For OTC derivatives, in addition to the capital charge or counterparty de ault risk under Current Exposure Method,

banks will be required to compute an additional credit value adjustments (CVA) risk capital charge.

Leverage Ratio

The parallel run or the leverage ratio will be rom January 1, 2013 to January 1, 2017, during which banks would be

expected to strive to operate at a minimum Tier 1 leverage ratio o 5%. The leverage ratio requirement will be fnalized

taking into account the fnal proposal o the Basel Committee.

DRAFT GUIDELINES FOR IMPLEMENTATION OF BASELIII RELEASED BY RBI ON DEC 31,2011

CorporateGoveranceFramework

DateHistory

& Analysis

Risk Analystics

Risk Management

SeniorManagement

Oversight

Disclousers

Infrastructureand skill

CapitalModelling

Supervisory AssessmentAdvanced Approaches

Independent AssessmentStandardised Approaches

The Framework for Advanced Approaches under Basel II

Financial Stability Report Dec,2011, RBI

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Section :

Mapping the path ahead

X MARKS THE SPOT

The Planning Commission o India in its Twel th Five Year Plan

(2012-2017) has envisaged a GDP growth o 9-9.5%.

The Governments thrust on in rastructure development along with

private sector investment will be one o the key drivers or

accelerating investment demand. Assuming the existing incremental

output ratio o 4.5 continues through the next Five Year Plan

period, investment-to-GDP ratio will have to be at 40.5% to realize

9% growth in the economy. Gross domestic savings as a proportion

o GDP will have to increase to 38-38.5% during the period,

assuming that current account defcit does not rise signifcantly over

the next fve years. This growth in savings will have to be generated

largely rom the household sector, which provides majority

contribution to the gross domestic savings. This provides immense

growth opportunities or banks or tapping into increased per capita

income o urban households, as well as the largely under penetrated

rural and semi-urban population through fnancial inclusion.

Factors shaping the future of Indian Banking

Deregulation of saving bank deposits: Paradigm shift in banking Market driven rates to attract more customer towards banking

Increased fnancial cost or banks to drive increased value proposition in products

Banks will have to be more cost competitive, paving the way or low cost transaction costs

Improved asset-liability management will be required to manage increased short-term deposits

While macro-economic actors provide ample avenues or growth in banking, the real challenge or the banking industry will be to leverage

emerging trends and technologies.

The key drivers that will shape the uture o banking are:

Financial inclusion Enhancements and improvements in payment systems Internet and mobile banking.

While fnancial inclusion is expected to trans orm existing business models or banks in the country, innovative channels, technologies as well as

improved payment system will act as main pillars to make it sustainable in the coming decade.

One of the basic requirements for increased penetration of banking inthe rural areas is increased real sector activity. Mere undertaking of banking penetration without the concomitant real sector activity would be counterproductive.

S S Tarapore

IMPLICATIONS OF DEREGULATION OF SAVING BANKDEPOSIT ANNOUNCED BY RBI IN OCT 2011

Financial inclusion, better payment systems, internet and mobilesystemsthese are the paths that will take banking to its goals.

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Financial InclusionFinancial Inclusion will be the paramount ocus in India rom the

perspective o growth in the economy as well as the banking Industry in

his decade. Financial Inclusion can be defned as:

The process o ensuring access to appropriate fnancial products and

services needed by all sections o the society in general and vulnerable

groups such as weaker sections and low income groups in particular, at

an a ordable cost in a air and transparent manner by regulated

mainstream institutional players.

Financial Inclusion in India as compared to some major countries in 2010

inancial Access Survey 2010, IMF

ndia has been lagging behind major economies in achieving fnancial

nclusion over the years. The extent o fnancial exclusion in low incomedominated regionsis even more staggering with only 30,000 habitation

out o 600,000 habitations, having access to fnancial services. This

means that almost 95% o the habitations (which are largely based in the

ural and semi-urban region) have limited or no access to adequate

nancial services. Primary sectors as well as micro, small and medium

nterprises (MSMEs) provide enormous potential to strengthen the

domestic economy. Limited access to fnancial assistance and basic

banking services have acted as constraints to the growth o these sectorsand unlocking their savings in the past.

Low banking penetration with minimal access to fnance in

rural areas

Though, the Indian banking system has made impressive strides in

resource mobilization, geographical and unctional reach, fnancial

viability, proftability and competitiveness; vast segments o the popula-

tion, especially the underprivileged sections o the society, still have no

access to ormal banking services. The extent o fnancial exclusion in

India is signifcantly large, especially in low income dominated rural areas,

with only 9.9% o the population having a loan account and 18.8% o the

population having a debit card as on Mar 31, 2011. in 2010. Moreover,

61% o the population has access to a deposit account.

Increased regulatory support provides impetus to Financial

Inclusion e orts o bank

The RBI has been undertaking fnancial inclusion initiatives in a mission mode

through a combination o strategies ranging rom provision o new products,relaxation o regulatory guidelines and other supportive measures to achieve

sustainable and scalable fnancial inclusion.

Relaxation on know your customer (KYC) norms: KYC require-

ments or opening bank accounts were earlier relaxed or small accounts,

simpli ying procedure by stipulating introduction by an account holder who

has been subjected to ull KYC process. This has now been urther relaxed

to include a job card issued by the National Rural Employment Guarantee

Act (NREGA) or Aadhaar number provided by UIAI.

Simplifed branch authorisation: SCBs can reely open branches in

Tier 3 to Tier 6 centres with population o less than 50,000 under general

permission, subject to reporting. In the north-eastern states and Sikkim,

domestic scheduled commercial banks can now open branches in rural,

semi-urban and urban centres without the need to take permission rom

RBI in each case, subject to reporting.

Pricing has been made ree: Banks have been given the reedom to

price their advances. This will result in competitive and market driven

lending rates among banks to augment credit growth.

Moreover, deregulation o saving bank deposit rates, especially in RRBs, is

expected to promote fnancial savings among the lower penetrated regions.

Liberalization o business correspondents model: In January 2006, RBI permitted banks to engage business acilitator and business

correspondent (BC) as intermediaries or providing fnancial and banking

services. The BC model allows banks to provide doorstep delivery o

services especially cash in-cash out transactions at a location much

closer to the rural population, thus addressing the last mile problem. The

list o eligible individuals/entities who can be engaged as BCs is being

enlarged rom time to t ime. For-proft companies have also been

allowed to be engaged as BCs. This model has been highly success ul so

ar. As on March 31, 2011, domestic commercial banks have reported

deploying 58,361 BCs, providing banking services in 76,081 villages.

The BC model currently used by banks is still in its early days and willimprove as banks increasingly implement it to service new customers.Hence, changes in the business correspondence model will happen inthe coming years but it will be a gradual process.

Sonu Bhasin

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Role and scope o UIDAI in promoting fnancial inclusion

The UIDAI through its UID number and Aadhaar enabled payment

system (AEPS) o ers a cost-e ective and e fcient payment solution or

promoting fnancial inclusion in India. The AEPS is a bank-led model

which allows online fnancial inclusion transaction at PoS (Micro ATM

using handheld device) through the business correspondent o a bank

using the Aadhaar authentication. At present AEPS service can be

availed by customers at their respective bank business correspondent

outlets. AEPS will support our types o banking services viz. balance

enquiry, cash withdrawal, cash deposit and Aadhaar to Aadhaar unds

trans ers. The benefts o UID-enabled micropayment systems are

discussed below.

UID KYR or KYC details: banks in India are required to ollow

customer identifcation procedures while opening new accounts, to

reduce the risk o raud and money laundering. The strong authentica-

tion that the UID will o er, combined with its KYR standards, can

remove the need or such individual KYC by banks or basic, no- rills

accounts. It will thus vastly reduce the documentation the poor arerequired to produce or a bank account, and signifcantly bring down

KYC costs or banks.

Ubiquitous BC network and choice o BCs: the UIDs clear

authentication and verifcation processes will allow banks to network with

village-based BCs such as sel -help groups and kirana/grocery stores.

Customers will be able to withdraw money and make deposits at the

local BC. Multiple BCs at the local level will also give customers a choice

o BCs. This will make customers, particularly in villages, less vulnerable

to local power structures, and lower the risk o being exploited by BCs.

Cost-e ective approach: the UID will mitigate the high customer

acquisition costs, high transaction costs and fxed IT costs that we now

ace in bringing bank accounts to the poor.

Electronic Transaction: The UIDs authentication processes will

allow banks to veri y poor residents both in person and remotely. Rural

residents will be able to transact electronically with each other as well as

with individuals and frms outside the village. This will reduce their

dependence on cash, and lower costs or transactions. Once a general

purpose UID-enabled micropayments system is in place, a variety o

other fnancial instruments such as micro-credit, micro-insurance,

micro-pensions, and micro-mutual unds can be implemented on top o

this payments system.

This system also envisages the creation o an Aadhaar Enabled Payment

Bridge (AEPSB) which would acilitate direct disbursement o govern-ment benefts to the benefciary by credit t o their bank accounts using

Aadhaar. The Finance Ministry recently announced that AEPSB will be

used or direct t rans er o subsidies on kerosene, liquefed petroleum gas

(LPG) and ertilizers. Stored value cards provide another opportunity to

leverage AEPSB or building database as well as making low cost

payments in the model o oyster cards used in London.

1 Villages Covered - Grand Total ( 2+3+4 = 5+6) 54258 100183 107604 218574 352269

2 Villages Covered - Total Branches 21475 22662 22870 24995 26440

3 Villages Covered - Total BCs 32684 77138 84274 192249 323699

4 Villages Covered - Total Other Modes 99 383 460 1330 2130

5 Villages Covered >2000 27353 54246 59640 86806 91440

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As per the Capgeminis World Payment Report 2011, India is the

leventh largest non-cash payment market in the world. While majority

o the volume o transactions currently are paper based, non-cash and

lectronic transactions are steadily gaining prominence. For instance,

eliance on cheques in the B2B sphere has kept cheque usage high, but

t is declining (to 65% o all transactions in 2009 rom 93% in 2001).

The market share o cards has increased during that time ( rom six to

9%). Payment system in rastructure have expanded steadily over the

past ew years with emergence o new payment system, growing

cceptance o new delivery channels, increased number o ATMs

80,000+) and augmentation o payment processing in rastructure. The

use o services provided by payment service acilitators such as

ntermediaries, technology solution providers and merchant acquirers

gained ground in the industry during this period.

National Payment Corporation of India bolsters payment

ystem infrastructure development

National Payment Corporation o India (NPCI) has been set up as an

umbrella organisation or retail payments with the objective o

ntegrating and consolidating various clearing houses in the country or

heques and electronic payments and introduces new payment

pplications with a ocus on electronic payments. The NPCI has already

ntroduced RuPay, an indigenous domestic card scheme. It has also

tarted operating Interbank Mobile Payment System (IMPS) which o ers

n instant 24X7, interbank electronic und trans er service through

mobile phones. The NPCI has played an instrumental role in setting up

o AEPS and AEPSB along with UIDAI.

Recent developments in the payment system landscape

The payment system landscape in India is in the process o continuous

evolution. The emergences o innovative payment systems as well as

integration o technology with various channels are continuously

ocused in providing e fcient, secure and low-cost payment transactions.

Some o the developments in the payment system landscape are

discussed below.

NextGen RTGS: Steps have been initiated to replace the existing

RTGS system with the Next Generation Real Time Gross Settlement

(NG-RTGS) by adopting the latest technology and emerging business

processes. Some o the new eatures proposed to be implemented in

the NG-RTGS system are advanced liquidity management acility;

extensible markup language (XML) based messaging system con orming

to ISO 20022; and real time in ormation and transaction monitoring and

control systems.

Enhancements and improvementsin Payment Systems

Inter-bank mobile payment system: The Inter-bank mobile

payment system (IMPS) isa service operated by NPCI which provides an

instant, 24X7, interbank electronic und trans er service through mobile

phones. Publicly launched on November 22, 2010 this syst em acilitates

customers registered with their banks or this service to use mobile

instruments as a channel or interbank und t rans ers in a secured

manner with immediate confrmation eatures. This service is in

consonance with the Mobile Payment Guidelines 2008 issued by RBI

which stress on interoperability both across banks and mobile operators

in a sa e and secured manner.

RRBs included in the payment system fold: The Report o the

Working Group on technology upgradation o Regional Rural Banks, set

up by RBI in 2008, recommended that as a matter o policy, all RRBs

should begin moving towards CBS and achieve 100% coverage by

September 2011. Currently, 45 out o 82 RRBs have achieved 100% CBS

status, and the remaining are in various stages o implementation.

CBS-enabled RRB opens up immense possibilities in terms o products

and services. As a frst step, the sponsor banks would need to integrate

the CBS o RRBs with their own Core Banking. This would enable the

customers o RRBs to enjoy the same benefts o anywhere and anytime

banking and the use o multiple payment delivery channels such as RTGS,

NEFT, ECS, ATMs, internet, tele-banking, mobile and SMS banking.

RBIs core banking solution (CBS): RBI is in the process o

implementing a core banking solution. The C BS once implemented will

bring signifcant benefts to all the key st akeholders like government,

banks, primary dealers, FIs and the common citizens. CBS in RBI will

enable anywhere banking (especially payments) to government

departments, treasuries, sub-treasuries through online access and use o

e-payment modes/ delivery channels. In other words, it would acilitate

government to use RTGS, NEFT, NECS and other electronic delivery

channels or making all its payments through a single bank resulting in

reconciliation being that much easier. Banks and fnancial institutions will

beneft rom system o having a centralised account or unds and

securities and an on-line transaction tracking mechanism linking unds

and security legs. CBS is also intended to provide limited unctionality o

RTGS in case the RTGS services are not available.

Entry of non-banks in payment systems: Payment systems

in India till recently have been the domain o banks. With the legislation

o Payment and Settlement System Act, 2007 (PSS Act) the arena has

been opened up or entry o non-bank entities. Currently 31 non-bank

entities have been permitted to operate payment systems such as

issuance o pre-paid payment instruments, providing cross-border

in-bound money trans er, cards payment network and ATM networks.

The entry o non-bank entities has t he potential to change the payment

system landscape as these entities can leverage on their product

o erings with latest technological eatures to cater to wide segment o

the market. O course the RBI has laid down appropriate guidelines and

sa eguards to protect the customers fnancial and other interest and

promote orderly growth in the markets. Entry o non-bank entities will

promote competition and thereby provide more choice to customers.

The RBI is replacing the existing RTGS with the NG-RTGS systemwhich would be using the latest technology and several new eaturessuch as advanced liquidity management acility; extensible markuplanguage, and real time in ormation and transaction monitoring and control system. The major beneft would be liquidity management asbanks would not need to hold high levels o cash.

S Gopinath

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Domestic card scheme (RuPay): The need or a domestic

payment card the RuPay card is on account o two actors: (a) the

high cost borne by t he Indian banks or a fliation with international card

ssociations in the absence o a domestic price setter and (b) the

onnection with international card associations resulting in the need or

outing even domestic transactions, which account or more than 90%

o the total, through a switch located outside the country. NPCI has

ince been granted approval to launch the RuPay a fliated cards or

use at ATMs and Micro ATMs. NPCI has been advised to ensure that

he use o these cards under the Aadhaar Enabled Payment System

AEPS) is in strict compliance with the DBOD guidelines on BCs. Four

banks have started using the RuPay card. These include: Kashi Gomati

Gramin Bank; Bank o India DhanAdhaar Card; The Gopinath Patil

Parsik Janata Sahkari Bank Ltd; NKGSB Urban Co Op Bank Ltd.

Mobile Wallet: Mobile wallet applications allow the use o mobile

handsets as a fnancial tool mainly or the purpose o making payments.

This innovative payment system was pioneered by Google through its

Google Wallet application. It leverages the Near Field Communication

(NFC) technology in mobile handsets to purchase a range o products

using credit card in ormation which can be stored in the handset using

the application. This payment mechanism also has a prepaid card

eature. Mobile wallets enable non-bank entities to handle unds or

retail purchases and thus have the potential to be in direct competition

with banks in the coming years. In India, mobile wallet services have

been launched by telecom operators such as Airtel by the name o

Airtel Money.Other mobile payment service providers too provide such

services. The RBI has enhanced the limit o virtual money that a user

can load on a cell phone under the semi-closed mobile wallet acility

rom Rs. 5,000 to Rs. 50,000 in a bid to relax the norms or making

payments through mobile phones.

Internet users in rural areas and mobilenternet using population to witness robust growth

As more people get connected, mobile bankingrepresents a significant developing opportunity.

Internet and mobile banking

Among rural villages as o March 2011, there are 18 million claimed

nternet users and 14.3 million active internet users and the total

nternet users in India is estimated to be 121 mn by 2011 as per

nternet and Mobile Association o India (IAMAI) study. It is expected

hat the growth in the rural villages will be higher compared to urban

ities. Wireless subscribers (GSM and CDMA) in India also witnessed

obust growth over the past ew y ears and have reached 858.37

million as on September 2011. An IAMAI study on mobile internet in

ndia reveals that there are 16.4 million mobile internet users, out o

which only 1.96 million use mobile banking.

The growth o internet users, particularly in the rural areas, provides

bank with a cost-e ective channel such as internet to cater rural

customers. The growth o e-commerce and the ocus o banks towards

internet security have already initiated trans ormation o internet

banking services. Banks will have to urther innovate towards wider and

customized o erings, secure payment systems using internet plat orms.

Mobile banking is at a nascent stage in India currently. As the Smart-

phone market gets more competitive, the mobile internet user

population is expected to increase substantially. The development in

mobile payment system, payment security and integration o technology

such as Near Field Communication is expected to drive mobile banking

in India in the coming years.

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Section :

Technology innovation will provide the edgeThe banking system in India is set to undergo signifcant trans or-

mation in the coming years driven by fnancial inclusion, innovation

in payment system and emergence o new channel such as mobile

banking. Technology will emerge as the main di erentiator as

competition in the banking space increases. Banks will have to

become increasingly agile to adopt as well as adapt to innovations

in technology. They will have to s trategise the role o branches as

part o the cost e ective business models. Banking services will

witness signifcant innovation towards customer-centric and

low-cost product while e ective CRM strategies will provide the

competitive edge or customer acquisition in the near uture.

Emerging Trendsin Indian Banking

The major growth drivers or the banks in the coming decade will beinclusive banking, in rastructure fnancing and small medium businessfnancing. Banks will have to use a combination o channels including branch as well as branchless banking or reaching the large number o potential new customers. Innovation in existing channels will be criticaland technology is expected to play a key role in this.

Usha Thorat

Emerging business models inbranchless bankingAs fnancial inclusion gains traction, banks will have to increasingly adopt

branchless banking models owing to their low in rastructure cost as

compared to running physical branches. While branchless banking per

se, cannot act as a panacea to the several challenges aced by banks to

achieve last mile connectivity, setting strategic priorities and customised

business models using branchless banking can be more e ective.

A study by CGAP has identifed our main business models to better

understand the choices the industry aces in pursuit o viable models in

branchless banking: money service provider, mobile bank, agent-based

acquirer, and m-wallet aggregator.

These models re ect di erent strategic priorities o the businesses

involved. First, all o these businesses need a network o agent locations

or customers to cash-in or cash-out. The cash-in/out network, as a

result, sets the oor on the cost structure or all the models. At scale, in

all models, agent commissions become the principal component.

The RBI is replacing the existing RTGS with the NG-RTGS systemwhich would be using the latest technology and several new eaturessuch as advanced liquidity management acility; extensible markuplanguage, and real time in ormation and transaction monitoring and control system. The major beneft would be liquidity management asbanks would not need to hold high levels o cash.

S Gopinath

Agent-based acquirers can o er a valuable proposition to any o the

other three businesses to reach customers who live in predominantly

cash economies. Agent acquirers may be attractive to banks developing

an agent channel or a Mobile Network Operator (MNO) pursuing a

money service provider model.

Second, the mobile bank business model is advantageous because it

makes it easier to allocate profts between the MNO and the bank. Banks

and mobile operators could enter into a joint-venture to pursue such a

model, or, where regulation permits it, enter into even closer partner-

ships. I the bank and the mobile operators are under a single ownership

Banking must innovate to reduce costs,to retain a competitive edge and to getcloser to the customer.

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The service was initially developed by the Voda one Group which owns

a 40% stake in Sa aricom and the 6 month pilot phase o the project was

partly unded by the UK Department or International Development.

The current arrangement between Sa aricom and Voda one Group is a

revenue share model where Sa aricom controls the on-the-ground

operation o the product and Voda one Group manages the develop-

ment and delivery o the technical service. An M-PESA Holding

Company Limited was registered or the launch o the service and is

controlled by directors that are independent o Sa aricom Limited. This

company acts as a trustee or M-PESA customers and holds all unds

rom the M-PESA business in trust to ensure that those unds are

sa eguarded at all times. M-PESA was the frst product o its kind to be

introduced in Kenya and is generally viewed as a s uccess ul implementa-

tion that should be used as a model or other developing countries

Success Factors

Anchor Product or Products: National remittance is the main product

o ering o M-PESA. Sa aricom positioned the product as a ast, sa e and

easy way to send money home. The service also enables airtime

purchase, bill payment, ATM withdrawal and purchase o goods and

services.

Mobile Phone Penetration: Medium by the end o 2008, mobile

penetration in Kenya was 39% or over 15 million subscribers. The

subscriber base is expected to rise to 29.28 million, or 66.7 percent

penetration, by year-end 2013.

Literacy Levels: High literacy levels in Kenya are over 90% or males

and over 80% or emales

Access to Finance: Medium In Kenya 38% o people didnt use any

orm o fnancial service; ormal, semi ormal or in ormal prior to the

launch o M-PESA while only 19% o the population had access to

ormal fnancial services.The country has approximately 4 or 5 million

bank accounts or a population o 31 million.

Demand for Services: High due to lack o other competitive money

trans er services and the need to reduce dependency on cash or

security reasons. Also, national money trans er is a common practice in

Kenya especially amongst urban migrant workers wishing to send money

back to their amilies in the villages. Prior to M-PESA many people

would have to resort to sending money with someone (possibly a

stranger) who was travelling to their village.

Regulatory Environment: Conducive The Central Bank o Kenya is

actively involved in the regulation o mobile money services in Kenya.

They have taken an open approach to allowing telecom operators to

o er mobile money services without the requirement or bank

partnership.

Technology Adoption: Prepared prior to the launch o M-PESA many Kenyans were amiliar with the basic operations o a mobile such as

texting and making voice calls. In Kenya, 83% o the population 15 years

and older have access to mobile phone technology.

Marketing Campaigns: M-PESA has benefted directly rom closely

binding its product brand to Sa aricoms strong corporate brand. At the

time o launch, Sa aricom was the only operator o ering mobile money

services and heavily invested in consumer education through aggressive

above the line marketing campaigns. M-PESAs marketing campaigns

have proven success ul since today most Kenyans know that M-PESA

can be used or money trans ers.

Ecosystem: Sa aricom has developed an extensive agent network

nationwide. Currently, there are over 11,000 active cash-in/cash-out

points servicing M-PESA. Several large institutions such as Kenya Power

and Light Commission (KPLC), Kenya Airways, and Nakumatt Supermar-

kets also support the product. Sa aricom is now care ully extending its

agent network with a ocus on under serviced or high volume locations.

Competitive Environment: Low M-PESA was the frst mobile money

trans er service to be launched in Kenya. The lack o competition

enabled Sa aricom to capture the market and lead the way. Sa aricoms

main competitor, Zain, launched Zap in early 2009 as a competitive

response to M-PESA.

ucture ( or example, EasyPaisa and BanKO) then there are certain

nique cost advantages in the orm o legal cost and income sharingPricing

s been made ree: Banks have been given the reedom to price their

vances. This will result in competitive and market driven lending rates

mong banks to augment credit growth.

inclusion will have to change rom being a regulatory requirement to a

sustainable business model. Business models will have to be recast rom

being cost-centric to revenue generating, which can provide quality basic

banking services.

early 2007, t he leading mobile operator in Kenya, Sa aricom (part o

e Voda one Group) launched one o the most success ul implementa-

ons o a mobile money trans er service, M-PESA. The product is called

-PESA since Pesa is the Swahili word or money and the M is or

obile. The service has grown rapidly since launch, and is c urrently used

y over 8 million subscribers. M-PESA is a SMS-based system that

ables users to deposit, send, and withdraw unds using t heir mobile

phone. Customers do not need to have a bank account and can transact

at any o the countrys over 11,0001 agent outlets. Registration and

deposits are ree and most other transactions are priced based on a

tiered structure to allow even the poorest users to be able to use the

system at a reasonable cost. Transaction values are typically small,

ranging rom USD 5 to USD 30.

Value proposed

to client

LegalStructure

Business logic

Revenue drivers

Key partnerships

Role o prudentially

regulated institution

Examples

Move small amounts o money electronically anywhere

Independtly licensed or subsidiary o bank or

MNO

Needs large volumes tosustain as there is largeinitial investment and low margin

Transaction ees

Billers, acquirers, switchers

Holds foat or the money service provider

M-Pesa (Kenya), Bank owned wing (Cambodia),Independent splash (Sierra

Leone)

Complete suite o banking servicesthrough mobile phone

JV between MNO and bank or MNO and bank under commonownership

Margins spread acrossdi erent products,need not be volumebased

Transaction ees and interest income

Bank and MNO

Holds the account and owns the customer

Easy Paisa (Pakistan)

Single cash conversionplat orm or all nancialservice providers

Independent serviceprovider(could besubsiidiary o bank)

Service ees charged tonancial service provider

to set up and manageagents. More pro table i single agent used acrossmultiple providers

Service ees

Financial service providers


Banco Lemon (Brazil)

Single electronicaggregator to all nancialservice providers

independentserviceprovider (technologycompany)

Up ront service eescharged to nancialservice provider

Service ees


SMART Money (Phillipines)

Mobile Bank MoneyService ProviderAgent Based

acquirerM-wallet

aggregator

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The landscape or banking products and services is expected to undergo

a major overhaul in the uture as various actors such as increased

competition, fnancial inclusion, growth in high net worth individuals

(HNIs) trans orm the entire spectrum o banking products and services.

While technology is expected to help banks lower transaction costs,

innovation in products and services which can be integrated with

technology will be the ocus o banks in the uture. Banks will have to

ace the challenge o building viable customer-centric models keeping in

mind the diversity in customer demography in the country.

s banks pursue cost-e ective models or providing banking services,

e role o branches as touch points to provide basic banking services to

e customer will diminish. Increased ocus towards electronic payment

stems and non-cash payments (debit cards, credit cards) will render

ansactions through branches irrelevant in the uture. Banks will have to

invent the branch ormat in the uture to make branches part o their

able business model. This can be achieved by containing cost o

perating a branch as well as increased revenue generating capabilities

rough a branch. Cost control can be achieved in a variety o ways

cluding shrinking the physical size o branches to cut real estate costs;

ereby reducing in rastructure costs, capital and running expenses;

ore automation and integration by enabling sel -service or assisted

l -service; and having ewer tellers to save on people costs. Higher

venue generations can be achieved by cross-selling fnancial products

d integrating business intelligence with branch-level and customer

relationship management (CRM) solutions. Several global banks have

tested reinventing the branch ormat, some o which are stated below.

The Spanish banking group Banco Bilbao Vizcaya Argentaria has

launched a more humanized ull sel -service branch based on

next-generation, advanced teller machines to replace the conventional

Cold ATM unctionality.

The Dutch ABN Amro Bank has experimented with a teleportal

branch that is an unsta ed videocon erencing acility.

Germanys Deutsche Bank innovated way back in 2005 with its Q110

branch in Berlin, which contains lounge and sel -service areas, along with

tangible product displays that allow customers to pick up a package and

pay or it at a counter.

Others include Citibanks Branch o the Future in Hong Kong,

Singapore and New York City, and BNP Paribass Opera Concept

Store, a boutique branch in Paris.

Based on the comfort of the customer, brick and mortar branchesare expected to continue to play a relevant role in providing banking access to the inclusive group. The role and size of thebranches might change in the coming years but the growth inphysical branches is expected to continue

Sonu Bhasin

Role of branches will bere-engineered as focus onbranchless banking increases

Transformation towardscustomised services andcost effective operations

Sales

Advisory

Servicing:Transaction-Based

Servicing:

Information-Based

Servicing Resolutions

Low-Complex OriginationsHigh-Complex OriginationsNew Customers

AdviceFinancial Planning Portfolio Management

Customer Servicing (Products & Accounts)

Product and ServicesInformation

Complaints Exceptions

BranchInternet

Branch

Internet Branch

Internet

BranchBranch CallCenter

Low Tech - High Value

Low Tech - High Value

High Tech - Low Value

Low Tech - Low Value

Low Tech - Low Value

Assisted Self -service

Assisted

Self-service Assisted self-service

Self -service

Assisted

Source: Sriram Srinivasan, senior vice president and global head of banking and financial services business, Wipro Technologies.

Service Delivery Model: The Wipro View

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Geographical segmentationCertain products have appeals based on geographies or example,

investment products have huge appeal in the State o Gujarat while

there is huge appeal or gold loans in Tamil Nadu. Banks need to take in

into account the geographical actors so as to increase the appeal o the

products. The areas where the income levels are lower should be

targeted with fnancial products with increased ocus on availability o

the term insurance component in the banking product o ering. Banks

must also consider that the needs o the rural populace di er rom their

urban counterparts. They need money on seasonal basis and KCC is a

very good mechanism or satis ying the fnancial needs o the armers

and the mobile van-based banking model and business correspond

model are suitable or covering a number o villages under the banking

ambit with Biometric ATM installed on the van. Some banks have

already identifed the potential o the rural customers and have started

reaching out to the rural customers by way o mobile vans.

Demographical segmentationThe younger generation looks at ast-paced solutions driven by

technology whereas middle aged & older people need a di erent set o

solutions. Younger people do not like to visit the banks branches and

want to take care o all their banking transactions sitting at their

Desktop/Laptop/Ipad/Mobile. There should be some incentive or not

coming to the branch and carrying out transactions in the electronic

mode. Pensioners on the other hand pre er to visit banks personally ,

hence they need not be charged or coming to the bank and should be

handled in the most cordial manner.

Segmentation on preferencesThe pre erences o the people should be given prime importance while

designing the fnancial product. There should be an extensive research

be ore a product is launched in the market a ter determining the needs

and pre erences o the people. The one size fts all approach will not

work in the t echnology-driven uture banking.

Wholesale bankingThe most important growth driver in the wholesale banking segment will

be in rastructure fnancing. The mammoth in rastructure spend envisaged

in the coming years can signifcantly boost revenues through wholesale

banking through lending, debt syndication, capital raising, and secondary

markets. Banks must be willing to innovate, potentially becoming active

developers in addition to operating through third parties, and they must

also embrace more sophisticated products, such as project fnancing,

through a mix o syndicated lending in oreign currencies, non-traditional

structured trade-fnance instruments, and securitization o cash ows.

Recent re orms in the fnancial market, such as introduction o C redit

De ault Swaps (CDS), are likely to provide urther impetus to lending in

the corporate sector.

MSME bankingThe growth o the micro, small and medium enterprises (MSME)

segment is extremely critical rom the perspective o inclusive growth

and the fnancial inclusion plan o banks. Banking access towards the

MSME segment has been very low with almost 95% o them not under

any fnancial institution. Another hurdle in extending credit to MSMEs

has been the availability to fnancial in ormation and credit in ormation o

the companies in this segment. The RBI as well as the banks have

realized the need or MSME banking and have taken a number o st eps

in improving credit to MSMEs. Some o these steps taken are as ollows:

Including Micro and Small companies as part o the priority sector

lending targets

Mandating banks to achieve atleast 20% annual growth in

MSME credit.

Banks have also setup specialized branches or MSME banking to

provide customized services.

etail banking: Retail banking in India has immense scope or product

novation and diversifcation. While cross-selling o products provides a

st-e ective alternative or customer acquisition, banks will have to

opt Customer Relationship Management (CRM) aggressively in pursuit

a cost-e ective model. Mortgage products are also witnessing a

eady growth in the retail port olio. They contribute about 10% o the

nk advances and have urther potential to increase their share in the

tail bank port olio. Wealth management is another key fnancial service

hich is expected to grow signifcantly in the near uture. According to

orld Wealth Report, the total number o HNIs in India increased by

% to 1, 53, 000 in 2010. The robust growth in HNIs provides

gnifcant opportunity or the growth o the private banking segment

India.

he product development has to be customer-centric and banks should

ways keep the needs o the customer in mind. The banks need to

sign products around various identifed customer segments. Productsed to be designed a ter gathering substantial in ormation through

RM activities. The individual customers can be segmented around the

ollowing broad categories:

Income group segmentationFor high net worth individuals, many o our private sector banks are

o ering various products such as online opening o Savings Accounts,

Wealth Management Advisory services and Structured Credit Products.

This product bouquet needs to be taken to newer levels and the

delivery o services is to be in the STP mode with no manual interven-

tion by using cutting edge technology. The middle income segments are

also technology savvy individuals and use technology extensively. This

group has various duties and aspirations. Products need to be designed

in such a way that they have embedded elements o both investment

and term insurance to take care o various li e stage needs. Unlike HNIs,

the middle income groups have very limited resources or allocating to a

basket o products and they rely heavily on retail credit such as housing

loan, vehicle loan and education loan to ulfl their aspirations. The

Government o India has been taking various initiatives in order to

increase the level o fnancial inclusion. Banks need to use products

which are simple and easy to understand. In these cases biometric-

enabled ATMs/hand-held devices should act as key drivers in the

delivery o services. This group has very simple fnancial needs and most

o their e orts are towards basic survival and meeting their ood and

duty needs. This group also needs some sort o fnancial protection and

bank accounts can be integrated with term insurance to provide fnancial

security to t hese individuals.

A sine qua non o e fcient strategies is that deposit acilities should be attractive. It is a canard that small deposits in rural areas arecostly to banks. In act, banks get low cost deposits rom rural areaswhich are stable. Banks should provide remunerative rates o interest on Savings Bank Accounts and also provide gold collateralloans at reasonable rates o interest..

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he role o technology in the banking industry has evolved rom being a

acilitator to one o the key strategic pillars or growth and innovation.

he advent o core banking solutions (CBS) was envisaged to improve

stomer access to banking services, in ormation management, provide

tter customer service and enable robust risk management. However,

e evolving dynamics in the industry will require urther innovations in

BS. Banks are likely to scale up their activities on this ront and the

ocus o technology adoption will be customers centric rather than

ndor or employee ocused as it largely is currently. The ocus o

chnology in the coming years is expected to centre on cost e ective-

ss, providing customer-centric and enhanced service, implement

novative strategies identi y niche businesses and capture new market

pportunities. While re orms, globalization and diverse business models

e expected to make Indian banking industry more complex, the

allenge or technology will be to make it simple and more customer-

iendly. Steps like back-o fce centralization, business process

-engineering would signifcantly reduce the branch workload which

ould enable the branches to unction as sale and service points.

ormation access: Improvement in in ormation access will be one o

e key ocus areas where banks can leverage technology, especially

om the perspective o fnancial inclusion. Banks currently have limited

cess to in ormation pertaining to unbanked customers, de aulters list,

stomer spending pattern, fnancial details o MSME companies and

eir credit ratings. Such in ormation will be critical or banks to

ormulate customer centric business models and improve fnancial access

the rural areas.

se o data analytics (business intelligence): Business intelligence helps

bank decide on various business strategies including customer

gments, product mix, channel mix etc. A good data warehouse can

also enable call centre technologies like outbound dialling to be used or

active marketing and sales channels and not just or transactions.

Treasury systems: As a key component o a banks activities, treasury

needs to be accorded adequate attention in terms o technology

solutions. Integrated plat orms or dealing with the broad range o assets

including oreign exchange, money market, fxed income and derivatives

would be o great value. Such systems may cover the range o unction-

alities including pricing, booking, risk management, value at risk, limit

control, confrmation, payment and accounting. More e fcient treasury

operations and better controls would be the key outcomes o

such systems.

TV banking: Television is one o the ubiquitous medium through which

banks can reach out to their customers in India. Few banks such as ICICI

have already initiated TV banking in association with DTH operators in

India providing in ormation regarding fnancial products. Innovation in

technology can empower customers with access to added services

in banking.

Social media banking: The growth o social media provides another

innovative channel or banking to leverage in the uture. The increasing

number o people active in social networks and emerging business

opportunities through social media provides bank with an ideal plat orm

to expand their capabilities. Some o the key opportunities that social

media provides the banking sector are:

building customer-base as well as enhancing brand value;

building social communities around their product and ocusing on

customer-centric services;

Using social media as a medium or product research and education.

Leveraging technology beyond core banking solution The warehouse in rastructure can support a wide range o applications

and reports to meet exact business needs. Some o the applications or

banking system are below:

Risk management: In banking, the most important o data warehousing

is building Risk Management Systems. A Risk Management System will

identi y the risks associated with a given set o assets. This helps in

understanding the way in which the market is likely to move in the

uture, based on past per ormance. The key measure here is volatility,

but there are many others, and this is highly complex and technical area.

One o the applications o Risk Management is Asset and Liability

Management (ALM), and the entire system can be implemented with

Data Warehousing.

Campaign Analysis: Accurately targeting customers in campaigns and

promotions and analysing their responses to promotion episodes are

the keys to enabling the transition rom mass marketing to mass

customisation. Most organisations launch many di erent kinds o

promotional campaigns or many di erent products using various media.

This application enhances the organisations understanding o the entire

process rom selecting customers to be targeted to analysing how they

responded. Campaign Analysis allows you to measure the responsive-

ness o households and individual customers to campaigns. It provides

the ability to measure the e ectiveness o individual campaigns and

di erent media and o ers the ability to conduct cost-beneft analyses

o campaigns.

Customer Profle Analysis: Customer profling allows organisations to

distinguish, in the mass o customers, the many microsegments that

make up the whole. Increasingly, customer segmentation is orming an

essential element o marketing strategy as markets become more

ragmented especially where customer segments exhibit distinct and

di erent characteristics. The profling and segmentation o customers

acilitate the building o genuine customer relationships in an era o

one-to-one marketing. Profling customer behaviour aims at extracting

patterns o their activities rom transactional data, and using these patterns

to provide or service provisioning, trend analysis, abnormal behaviour

discovery, etc. It has becoming increasingly important in a variety o

application domains such as raud detection or commercial promotion.

Loyalty Analysis: One o the keys to proftability in any enterprise is

customer loyalty. Yet very ew organisations measure customer loyalty in

a structured way or seek to understand the underlying causes o

customer attrition. The Loyalty Analysis application allows you to

measure customer loyalty rom di erent viewpoints such as duration o

relationship; range o services and products consumed; and the

demographic, psycho-graphic and geographic in uences on customer

attrition. By itsel , the Loyalty Analysis application measures and

monitors customer loyalty and acilitates the development o customer

retention programmes. The loyalty o customers can be assessed in t he

context o their value, their contact history, the segments they belong to

and the transaction events that may in uence their loyalty.

Customer Care Analysis: Customers interact with organisations in

many ways using di erent touch points to initiate inquiries, provide

eedback or make suggestions. This in ormation provides valuable insight

into the behaviour o customers and the track records o the organisa-

tions servicing customers. The likely level o satis action or dissatis action

o a customer can be determined by their customer contact history.

Analysing customer contacts is an essential ingredient in maintaining and

nurturing customer relationships and preserving the loyalty o customers

into the uture.

Business Per ormance Analysis: The Business Per ormance Analysis

application or banking exploits the industry specifc, transaction-level

data in a t ypical retail banking enterprise. Analyzing a banks business

per ormance requires an understanding o customer behaviour, including

usage patterns o the di erent services the bank o ers. It acilitates

Data Warehousing

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alysis o product per ormance, branch and ATM activity and utilisation.

also provides the in ormation needed to ormulate e ective up-sell

d cross-sell strategies. It provides the business intelligence in ormation

ost needed by sales and marketing executives, as well as strategic

anners in banks everywhere. The atomic data stored in this key

ortion o the warehouse becomes the engine that powers the entire

lution and, when combined with the related applications, will

volutionize the way a bank manages and satisfes its customers.

ales Analysis: The Sales Analysis application allows analysis o sales

om a variety o viewpoints such as sales by channel, outlet or organisa-

onal unit; sales by product, product category or group; and sales by

gion and by s

wipro banking report

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