Status of IT in Loss Making Regional Rural Banks

8/21/2019 Status of IT in Loss Making Regional Rural Banks

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New Delhi (ESTD. 1973)

STATUS OF IT IN LOSS MAKING R EGIONAL R URAL

BANKS

T HESIS PROJECT REPORT SUBMITTED IN PARTIAL FULFILLMENT OF THE

REQUIREMENTS FOR THE POST G RADUATE P ROGRAMME IN P LANNING &

E NTREPRENEURSHIP FROM IIPM, N EW D ELHI

S UBMITTED T O S UBMITTED BY E XTERNAL GUIDE

P ROF . S UMANTA S HARMA A BHISHEK D EVRA M R. R IPUDAMAN M AGON

(D EAN P ROJECTS ) PGP/SS 2008-10 G.M., HCL I NFOSYSTEMS LTD.



CERTIFICATE

I am glad to become a mentor for Mr. Abhishek Devra (Spring

Summer- 08 - 10) for Thesis with Topic “Scope of IT in loss making

Regional Rural Banks.”

Regards’

Ripudaman Magon

HCL Infosystems Ltd.



DETAILS

Desired area of researchScope and status of automation in Regional Rural Banks

Title of the thesis

STATUS OF IT IN LOSS MAKING R EGIONAL R URAL BANKS

Scope of thesis work

To understand the reasons for failure of the regional rural banks on the IT front

and propose improvements.

Research Methodology

Data collection tools: - Primary and secondary data.

- Primary data collected by interviewing bank executives.

- Analysis of the data and discussion with the experts.

- Scope analysis for further improvement.

- Secondary data collected from the internet to get across various articles and research

papers relating to main areas of concern.

Justification for choosing a particular research proposal

Regional Rural Banks have always been a pain in the neck for the state governments while

presenting the financial performance at the end of each year. So I have chosen this as my

research topic



Details of the student

Name : Abhishek Devra

Batch : PGP/SS/2008-10

Specialization : Finance and Information Technology

Enrollment ID : D0810SS10777

Phone no : +91-9953752252, +91-9783452252

E-mail ID : [email protected] , [email protected]

External Guide

Name: Mr. Ripudaman Magon

Designation: G.M., HCL Infosystems Limited

Contact: [email protected]



ACKNOWLEDGMENT

It is well known fact that in-depth analysis of the subject makes theoretical and practical

knowledge more interesting. I am very fortunate that I am getting our theoretical knowledgefrom my well – known B-School like IIPM. But for being perfectionist in the field of

management, working in real world must.

For the same purpose I decided to present this project for my thesis; that is “Status of IT in

loss making Regional Rural Banks.”

Words are seldom found to express one’s own heartfelt sentiments. Yet, I take this

opportunity to express my deep sense of gratitude and profound regards to everybody who

helped me throughout the exposure.

Special thanks to Mr. Ripudaman Magon, who gave me chance to associate with his

esteemed organization and encouraged me to go ahead with the challenging topic. His

guidance and valuable suggestions proved very helpful throughout the project .I thank him

for accommodating me and appreciate his understanding attitude.

I would like to thank IIPM for such an innovative idea for exposing the students first hand to

the corporate world.

During the period of preparation and analysis, I learnt many new things including the concept

of implementation of theoretical knowledge in practical field. This report is the sincere

attempt of summarizing all the meaningful information that I could gather during the

preparation. I am deeply indebted to many people who have contributed in making my thesis project a gaining experience as it stands today. I am also thankful to my honorable and

distinguished professors who helped us timely as and when I required some assistance which

indeed makes us able to do this sensible project. I must admit that I immensely enjoyed and

processed my thesis project, which will add up to my knowledge and led me become a sound

manager.

Abhishek Devra

(PGP/SS 2008-10)

Date:

Place: HCL, Sitapura, Jaipur



HCL INFOSYSTEMS BUYS NATURAL TECHNOLOGIES

HCL Infosystems, India's premier information enabler, leading ICT System Integrator andDistribution Company today announced the acquisition of Natural Technologies Pvt Ltd

(NTPL) a niche banking software product Company.

With 3 decades of providing ICT Infrastructure solutions and services into the BFSI sector

across the country, the acquisition of niche products from NTPL will further consolidate

HCL's leadership position in this sector.

NTPL with over 10 years of developing software products for Indian banking sector has over

30 clients from PSU, Private sector, Cooperative sector and Regional Rural sector banks.

Announcing the acquisition, Mr. J V Ramamurthy, Chief Operating Officer, HCL

Infosystems said: "This acquisition will strengthen our range of offerings into the BFSI

segment and is part of our vision of a "Transforming HCL". He further added that HCL will

be developing the facility at Jaipur into a Banking "Center of Excellence". This center will

build products for the Cooperative and Rural banking sector and the newly emerging

financial inclusion sector."

Commenting on the acquisition, Mr. Ripudaman Magon, Managing Director, NTPL said:

"This is a major collaboration between HCL Infosystems and NTPL that will reinforce HCL's

focus on System Integration in the BFSI domain through our niche banking infrastructure and

bilingual solutions. We are a niche player in the banking software-related product segment

and there exist great synergies between us and HCL in the BFSI segment. NTPL's product

range will enhance HCL's existing range of offerings."



CHAPTER 1. BANKING

You know people earn money to meet their day-to-day expenses on food, clothing, educationof children, housing, etc. They also need money to meet future expenses on marriage, highereducation of children, house building and other social functions. These are heavy expenses,which can be met if some money is saved out of the present income. Saving of money is alsonecessary for old age and ill health when it may not be possible for people to work and earntheir living.

The necessity of saving money was felt by people even in olden days. They used to hoardmoney in their homes. With this practice, savings were available for use whenever needed,

but it also involved the risk of loss by theft, robbery and other accidents.

Thus, people were in need of a place where money could be saved safely and would beavailable when required. Banks are such places where people can deposit their savings withthe assurance that they will be able to withdraw money from the deposits whenever required.

People who wish to borrow money for business and other purposes can also get loans fromthe banks at reasonable rate of interest.

Bank is a lawful organization, which accepts deposits that can be withdrawn on demand. Italso lends money to individuals and business houses that need it. Banks also render manyother useful services – like collection of bills, payment of foreign bills, safe-keeping of

jewellery and other valuable items, certifying the credit-worthiness of business, and so on.

Banks accept deposits from the general public as well as from the business community.Anyone who saves money for future can deposit his savings in a bank. Businessmen haveincome from sales out of which they have to make payment for expenses. They can keep theirearnings from sales safely deposited in banks to meet their expenses from time to time.

Banks give two assurances to the depositors:

- Safety of deposit- Withdrawal of deposit, whenever needed

On deposits, banks give interest, which adds to the original amount of deposit. It is a greatincentive to the depositor. It promotes saving habits among the public. On the basis ofdeposits, banks also grant loans and advances to farmers, traders and businessmen for

productive purposes.

Thereby banks contribute to the economic development of the country and well being of the people in general. Banks also charge interest on loans. The rate of interest is generally higherthan the rate of interest allowed on deposits. Banks also charge fees for the various otherservices, which they render to the business community and public in general. Interestreceived on loans and fees charged for services which exceed the interest allowed on depositsare the main sources of income for banks from which they meet their administrativeexpenses.



The activities carried on by banks are called banking activity. ‘Banking’ as an activityinvolves acceptance of deposits and lending or investment of money. It facilitates businessactivities by providing money and certain services that help in exchange of goods andservices. Therefore, banking is an important auxiliary to trade. It not only provides money forthe production of goods and services but also facilitates their exchange between the buyer andseller.

You may be aware that there are laws which regulate the banking activities in our country.Depositing money in banks and borrowing from banks are legal transactions. Banks are alsounder the control of government. Hence they enjoy the trust and confidence of people. Also

banks depend a great deal on public confidence. Without public confidence banks cannotsurvive.



1. DISTINCTION BETWEEN BANKS AND MONEYLENDERS



2. ROLE OF BANKING

2.1. Banks provide funds for business as well as personal needs of individuals. They play asignificant role in the economy of a nation. Let us know about the role of banking.

2.2. It encourages savings habit amongst people and thereby makes funds available for productive use.

2.3. It acts as an intermediary between people having surplus money and those requiringmoney for various business activities.

2.4. It facilitates business transactions through receipts and payments by cheques instead ofcurrency.

2.5. It provides loans and advances to businessmen for short term and long-term purposes.

2.6. It also facilitates import export transactions.

2.7. It helps in national development by providing credit to farmers, small-scale industriesand self-employed people as well as to large business houses which lead to balancedeconomic development in the country.

2.8. It helps in raising the standard of living of people in general by providing loans for purchase of consumer durable goods, houses, automobiles, etc.



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3.1. CENTRAL BANK

A bank which is entrusted with the functions of guiding and regulating the banking system ofa country is known as its Central bank. Such a bank does not deal with the general public. Itacts essentially as Government’s banker; maintain deposit accounts of all other banks andadvances money to other banks, when needed. The Central Bank provides guidance to other

banks whenever they face any problem. It is therefore known as the banker’s bank. TheReserve Bank of India is the central bank of our country.

The Central Bank maintains record of Government revenue and expenditure under variousheads. It also advises the Government on monetary and credit policies and decides on theinterest rates for bank deposits and bank loans. In addition, foreign exchange rates are alsodetermined by the central bank.

Another important function of the Central Bank is the issuance of currency notes, regulatingtheir circulation in the country by different methods. No other bank than the Central Bank can

issue currency.

3.2. DEVELOPMENT BANKS

Business often requires medium and long-term capital for purchase of machinery andequipment, for using latest technology, or for expansion and modernization. Such financialassistance is provided by Development Banks. They also undertake other developmentmeasures like subscribing to the shares and debentures issued by companies, in case of undersubscription of the issue by the public. Industrial Finance Corporation of India (IFCI) and

State Financial Corporations (SFCs) are examples of development banks in India.



3.3. COMMERCIAL BANKS

Commercial Banks are banking institutions that accept deposits and grant short-term loansand advances to their customers. In addition to giving short-term loans, commercial banksalso give medium-term and long-term loan to business enterprises. Now-a-days some of thecommercial banks are also providing housing loan on a long-term basis to individuals. Thereare also many other functions of commercial banks, which are discussed later in this lesson.

TY PES OF COMMER CI A L B A NKS:

3.3.1. PU B LI C SECTOR BA NKS:

These are banks where majority stake is held by the Government of India or ReserveBank of India. Examples of public sector banks are: State Bank of India, CorporationBank, Bank of Baroda and Dena Bank, etc.

3.3.2. PRIVATE SECTORS BANKS: In case of private sector banks majority of share capital of the bank is held by privateindividuals. These banks are registered as companies with limited liability. Forexample: The Jammu and Kashmir Bank Ltd., Bank of Rajasthan Ltd., DevelopmentCredit Bank Ltd, Lord Krishna Bank Ltd., Bharat Overseas Bank Ltd., Global TrustBank, Vysya Bank, etc.

3.3.3. FOREIGN BANKS: These banks are registered and have their headquarters in a foreign country butoperate their branches in our country. Some of the foreign banks operating in ourcountry are Hong Kong and Shanghai Banking Corporation (HSBC), Citibank,

American Express Bank, Standard & Chartered Bank, Grindlay’s Bank, etc. Thenumber of foreign banks operating in our country has increased since the financialsector reforms of 1991.



FUNCTIONS OF COMMERCIAL BANKS

• Primary functions:

o Accepting deposits : The most important activity of a commercial bank is to

mobilise deposits from the public.People who have surplus income and savingsfind it convenient to deposit the amounts with banks. Depending upon the natureof deposits, funds deposited with bank also earn interest. Thus, deposits with the

bank grow along with the interest earned. If the rate of interest is higher, publicare motivated to deposit more funds with the bank. There is also safety of fundsdeposited with the bank.

o Grant of loans and advances : The second important function of a commercial bank is to grant loans and advances. Such loans and advances are given tomembers of the public and to the business community at a higher rate of interestthan allowed by banks on various deposit accounts. The rate of interest charged onloans and advances varies according to the purpose and period of loan and also the

mode of repayment.

Loans: A loan is granted for a specific time period. Generally commercial banks provide short-term loans. But term loans, i.e., loans for more than ayear may also be granted. The borrower may be given the entire amount inlump sum or in installments. Loans are generally granted against thesecurity of certain assets. A loan is normally repaid in installments.However, it may also be repaid in lump sum.

Advances: An advance is a credit facility provided by the bank to its

customers. It differs from loan in the sense that loans may be granted forlonger period, but advances are normally granted for a short period oftime. Further the purpose of granting advances is to meet the day-to-dayrequirements of business. The rate of interest charged on advances variesfrom bank to bank. Interest is charged only on the amount withdrawn andnot on the sanctioned amount.

Types of Advances Banks grant short-term financial assistance by way ofcash credit, overdraft and bill discounting.

• Cash Credit : Cash credit is an arrangement whereby the bankallows the borrower to draw amount up to a specified limit. Theamount is credited to the account of the customer. The customer

can withdraw this amount as and when he requires. Interest ischarged on the amount actually withdrawn. Cash Credit is grantedas per terms and conditions agreed with the customers.

• Overdraft : Overdraft is also a credit facility granted by bank. Acustomer who has a current account with the bank is allowed towithdraw more than the amount of credit balance in his account. Itis a temporary arrangement. Overdraft facility with a specified



limit may be allowed either on the security of assets, or on personalsecurity, or both.

• Discounting of Bills : Banks provide short-term finance bydiscounting bills, that is, making payment of the amount before thedue date of the bills after deducting a certain rate of discount. The

party gets the funds without waiting for the date of maturity of the bills. In case any bill is dishonored on the due date, the bank canrecover the amount from the customer.

• Secondary functions :

o Issuing letters of credit, traveler’s cheque, etc.o Undertaking safe custody of valuables, important document and securities by

providing safe deposit vaults or lockers.o Providing customers with facilities of foreign exchange dealings.o

Transferring money from one account to another; and from one branch to another branch of the bank through cheque, pay order, demand draft.o Standing guarantee on behalf of its customers, for making payment for purchase of

goods, machinery, vehicles etc.o Collecting and supplying business information.o Providing reports on the credit worthiness of customers.o Providing consumer finance for individuals by way of loans on easy terms for

purchase of consumer durables like televisions, refrigerators, etc.o Educational loans to students at reasonable rate of interest for higher studies,

especially for professional courses.



3.4. CO‐OPERATIVE BANKS

People who come together to jointly serve their common interest often form a co-operativesociety under the Co-operative Societies Act. When a co-operative society engages itself in

banking business it is called a Co-operative Bank. The society has to obtain a license fromthe Reserve Bank of India before starting banking business. Any co-operative bank as asociety is to function under the overall supervision of the Registrar, Co-operative Societies ofthe State.

As regards banking business, the society must follow the guidelines set and issued by theReserve Bank of India.

TYPES OF CO‐OPERATIVE BANKS

3.4.1. PRIMARY CREDIT SOCIETIES: These are formed at the village or town

level with borrower and non-borrower members residing in one locality. Theoperations of each society are restricted to a small area so that the membersknow each other and are able to watch over the activities of all members to prevent frauds.

3.4.2. CENTRAL CO-OPERATIVE B ANKS: These banks operate at the districtlevel having some of the primary credit societies belonging to the same districtas their members. These banks provide loans to their members (i.e., primarycredit societies) and function as a link between the primary credit societies andstate co-operative banks.

3.4.3. STATE CO-

OPERATIVE B ANKS: These are the apex (highest level) co-

operative banks in all the states of the country. They mobilize funds and help inits proper channelization among various sectors. The money reaches theindividual borrowers from the state co-operative banks through the central co-operative banks and the primary credit societies.

These banks are organized at three levels, village or town level, district level and statelevel.



3.5. SPECIALIZED BANKS

There are some banks, which cater to the requirements and provide overall support forsetting up business in specific areas of activity.

EXIM Bank, SIDBI and NABARD are examples of such banks. They engage themselvesin some specific area or activity and thus, are called specialized banks.

3.5.1. EXPORT IMPORT B ANK OF INDIA (EXIM B ANK ): If you want toset up a business for exporting products abroad or importing products fromforeign countries for sale in our country, EXIM bank can provide you therequired support and assistance. The bank grants loans to exporters andimporters and also provides information about the international market. It givesguidance about the opportunities for export or import, the risks involved in it andthe competition to be faced, etc.

3.5.2. SMALL INDUSTRIES DEVELOPMENT B ANK OF INDIA (SIDBI): If you want to establish a small-scale business unit or industry, loan on easyterms can be available through SIDBI. It also finances modernization of small-scale industrial units, use of new technology and market activities. The aim andfocus of SIDBI is to promote, finance and develop small-scale industries.

3.5.3. N ATIONAL B ANK FOR AGRI .& RURAL DEV . (NABARD): It is acentral or apex institution for financing agricultural and rural sectors. If a personis engaged in agriculture or other activities like handloom weaving, fishing, etc. NABARD can provide credit, both short-term and long-term, through regionalrural banks. It provides financial assistance, especially, to co-operative credit, inthe field of agriculture, small-scale industries, cottage and village industries

handicrafts and allied economic activities in rural areas.



4. E‐BANKING (ELECTRONIC BANKING)

With advancement in information and communication technology, banking services arealso made available through computer. Now, in most of the branches you see computers being used to record banking transactions. Information about the balance in your deposit

account can be known through computers. In most banks now a days human or manualteller counter is being replaced by the Automated Teller Machine (ATM). Bankingactivity carried on through computers and other electronic means of communication iscalled ‘electronic banking’ or ‘e-banking’. Let us now discuss about some of thesemodern trends in banking in India.

4.1. AUTOMATED TELLER MACHINE Banks have now installed their own Automated Teller Machine (ATM) throughout thecountry at convenient locations. By using this, customers can deposit or withdraw moneyfrom their own account any time.

4.2. DEBIT CARD Banks are now providing Debit Cards to their customers having saving or current accountin the banks. The customers can use this card for purchasing goods and services atdifferent places in lieu of cash. The amount paid through debit card is automaticallydebited (deducted) from the customers’ account.

4.3. CREDIT CARD Credit cards are issued by the bank to persons who may or may not have an account in the bank. Just like debit cards, credit cards are used to make payments for purchase, so thatthe individual does not have to carry cash. Banks allow certain credit period to the credit

cardholder to make payment of the credit amount. Interest is charged if a cardholder is notable to pay back the credit extended to him within a stipulated period. This interest rate isgenerally quite high.

4.4. NET BANKING With the extensive use of computer and Internet, banks have now started transactionsover Internet. The customer having an account in the bank can log into the bank’s websiteand access his bank account. He can make payments for bills; give instructions for moneytransfers, fixed deposits and collection of bill, etc.

4.5. PHONE BANKING In case of phone banking, a customer of the bank having an account can get informationof his account; make banking transactions like, fixed deposits, money transfers, demanddraft, collection and payment of bills, etc. by using telephone. As more and more peopleare now using mobile phones, phone banking is possible through mobile phones. Inmobile phone a customer can receive and send messages (SMS) from and to the bank inaddition to all the functions possible through phone banking.



5. RURAL BANKING

Rural banking in India started since the establishment of banking sector in India. Rural Banksin those days mainly focused upon the agro sector. Today, commercial banks and RegionalRural Banks in India are penetrating every corner of the country are extending a helping hand

in the growth process of the rural sector in the country.

INTRODUCTION

Rural banking in India started since the establishment of banking sector in India. Rural Banksin those days mainly focused upon the agro sector. Today, commercial banks and Regionalrural banks in India are penetrating every corner of the country are extending a helping handin the growth process of the rural sector in the country.

BANKS: FUNCTIONING FOR THE DEVELOPMENT O F RURAL AREAS

The area of operation of a majority of the RRBs is limited to a notified area comprising a fewdistricts in a State.SBI has 30 Regional Rural Banks in India known as RRBs. The rural

banks of SBI are spread in 13 states extending from Kashmir to Karnataka and HimachalPradesh to North East. Apart from SBI, there are other few banks which functions for thedevelopment of the rural areas in India. Few of them are as follows.

• Haryana State Cooperative Apex Bank Limited• NABARD• Sindhanur Urban Souharda Co-operative Bank• United Bank of India• Syndicate Bank• Co-operative bank

CO‐OPERATIVE BANKS AND RURAL CREDIT

The Co-operative bank has a history of almost 100 years. The Co-operative banks are animportant constituent of the Indian Financial System, judging by the role assigned to them,the expectations they are supposed to fulfill, their number, and the number of offices theyoperate.

Their role in rural financing continues to be important even today, and their business in theurban areas also has increased phenomenally in recent years mainly due to the sharp increasein the number of primary co-operative banks.



Co-operative Banks in India are registered under the Co-operative Societies Act. The RBIalso regulates the cooperative bank. They are governed by the Banking Regulations Act 1949and Banking Laws (Co-operative Societies) Act, 1965.

Co-operative banks in India finance rural areas under:

• Farming• Cattle• Milk• Hatchery• Personal finance

Institutional Arrangements for Rural Credit (Co-operatives)

• Short Term Co-operatives• Long Term Co-operatives

Short Term Co-operatives|

District Central Co-operative Banks|

State Co-operative Banks|

Primary Agriculture Credit Co-operative Societies|

Branches

Long Term Cooperatives|

State Agriculture & Rural Development Banks|

Primary Agriculture & Rural Development Banks|

Branches



PRIMARY AGRICULTURAL CREDIT SOCIETIES (PACSS)

An agricultural credit society can be started with 10 or more persons normally belonging to avillage or a group of villages. The value of each share is generally nominal so as to enableeven the poorest farmer to become a member. The members have unlimited liability, that iseach member is fully responsible for the entire loss of the society, in the event of failure.Loans are given for short periods, normally for the harvest season, for carrying onagricultural operation, and the rate of interest is fixed. There are now over 92,000 primaryagricultural credit societies in the country with a membership of over 100 million.

The primary agricultural credit society was expected to attract deposits from among the well –to-do members and non-members of the village and thus promote thrift and self-help. Itshould give loans and advances to needy members mainly out of these deposits.

CENTRAL CO‐OPERATIVE BANKS (CCBS)

The central co-operative banks are located at the district headquarters or some prominenttown of the district. These banks have a few private individuals also who provide bothfinance and management. The central co-operative banks have three sources of funds,

• Their own share capital and reserves• Deposits from the public and• Loans from the state co-operative banks

Their main function is to lend to primary credit society apart from that, central cooperative banks have been undertaking normal commercial banking business also, such as attracting

deposits from the general public and lending to the needy against proper securities. There arenow 367 central co-operative banks.

STATE CO‐OPERATIVE BANKS (SCBS)

The state Co-operative Banks, now 29 in number, they finance, co-ordinate and control theworking of the central Co-operative Banks in each state. They serve as the link between theReserve bank and the general money market on the one side and the central co-operative and

primary societies on the other. They obtain their funds mainly from the general public by way

of deposits, loans and advances from the Reserve Bank and they are own share capital andreserves.



COMMERCIAL BANKS AND RURAL CREDIT

The commercial banks at present provide short term crop loans account for nearly 45 to 47%of the total loans given and disbursed by the commercial banks. Term loans for varying

periods are given for purchasing pump sets, tractors and other agricultural machinery, forconstruction of wells and tube well, for development of fruit and garden crops, for levelingand development of land, for purchase of ploughs, animals, etc. commercial banks alsoextend loans for allied activities viz., for dairying, poultry, piggery, bee keeping, fisheries andothers. These loans come to 15 to 16%.

COMMERCIAL BANKS AND SMALL FARMERS

The commercial banks identifying the small farmers through Small Farmers DevelopmentAgencies (SFDA) set up in various districts and group them into various categories for creditsupport so as to enable them to become bible cultivators. As regard small cultivators nearurban areas and irrigation facilities, commercial banks can help them to go in for vegetablecultivation or combine it with small poultry farming and maintainence of one or two milchcattle.

IRDP AND COMMERCIAL BANKS

Since October 1980, the Integrated Rural Development Programme (IRDP) has beenextended to all the blocks in the country and the commercial banks have been asked by thegovernment of India to finance IRDP. The lead banks have to prepare banking plans andallocate the responsibility of financing the identified beneficiaries among the participating

banks. Commercial banks have been asked to finance all economically backward peopleidentified by government agencies.



REGIONAL RURAL BANKS AN D RURAL CREDIT

The Narasimham committee on rural credit recommended the establishment of RegionalRural Banks (RRBs) on the ground that they would be much better suited than thecommercial banks or co-operative banks in meeting the needs of rural areas. Accepting therecommendations of the Narasimham committee, the government passed the Regional RuralBanks Act, 1976. The main objective of RRBs is to provide credit and other facilities

particularly to the small and marginal farmers, agricultural laborers, and artisians and smallentrepreneurs and develop agriculture, trade, commerce, industry and other productiveactivities in the rural areas.

The progress of RRBs in the initial stage was quite rapid. For instance, the Sixth Five-year plan (1980-85) had envisaged the setting up of 170 RRBs covering 270 districts by the end ofMarch 1985.The target was exceeded. There are now 196 RRBs in 23 states of the countrywith 14,200 branches.

STRUCTURE OF REGIONAL RURAL BANK

The establishment of the Regional Rural Banks (RRBs) was initiated in 1975 under the provisions of the ordinance promulgated on 26.9.1975 and thereafter Section 3(1) of the RRBAct, 1976. The issued capital of RRBs is shared by Central Government, sponsor bank andthe State Government in the proportion of 50%, 35% and 15% respectively.

RRBs established with the explicit objective of:

* Bridging the credit gap in rural areas* Check the outflow of rural deposits to urban areas* Reduce regional imbalances and increase rural employment generation

ROLE OF RBI IN RURAL CREDIT

Since it was set up in 1934, RBI has been taking keen interest in expanding credit to the ruralsector. After NABARD was set up as the apex bank for agriculture and rural development,

RBI has been taking a series of steps for providing timely and adequate credit through NABARD.

Scheduled commercial banks excluding foreign banks have been forced to supplement NABARDs efforts-through the stipulation that 40percent of net bank credit should go to the priority sector, out of which at least 18 percent of net bank credit should flow to agriculture.Besides, it is mandatory that any shortfall in fulfilling the 40 percent target or the 18 percentsub-target would have to go to the corpus Rural Infrastructure Development Fund(RIDF).RBI



has also taken steps in recent years to strengthen institutional mechanisms such asrecapitalization of Regional Rural Banks (RRBs) and setting up of local area banks(LABs).

MICRO‐FINANCE

Micro-finance is a novel approach to "banking with poor" as they attempt to combine lowertransaction costs and high degree of repayments. The major thrust of these micro-financeinitiatives is through the setting up of Self Help Groups (SHGs), Non-Governmentalorganizations (NGOs), Credit Unions etc.

KISAN (FARMERS ') CREDIT CARD

Another notable development in recent years is the introduction of Kisan Credit Cards(KCC)in 1998-99.The purpose of the Kisan Credit Cards(KCC) scheme is to facilities short termcredit to farmers. The scheme has gained popularity and its implementation has been taken up

by 27 commercial banks, 187 RRBs and 334 Central cooperative banks.

AGRICULTURAL INSURANCE

As Agricultural is highly susceptible to risks such as drought, flood, pests etc.It is necessaryto protect the farmers from natural calamities and ensure their credit eligibility from the nextseason. Towards this purpose, the Government of India introduced a comprehensive cropinsurance scheme throughout the country in 1985 covering major cereal crops, oilseeds and

pulses. Among commercial crops, seven crops viz., sugarcane potato, cotton, ginger, onion,turmeric and chilies are presently covered.

MARKETING OF MUTUAL FUND UNITS ‐ RRBS

With a view to expanding the scope of business of RRBs and considering that marketing ofMutual Fund (MF) units provides a profitable avenue for banks, it has been decided by RBIon 17th May 2006 to allow Regional Rural Banks (RRBs) to undertake marketing of units ofMutual Funds, as agents.

Accordingly, RRBs may, with approval of their Board of Directors, enter into agreementswith Mutual Funds for marketing their units subject to the following terms and conditions:

* The bank should only act as an agent of the customers, forwarding applications of theinvestors for purchase / sale of MF units to the Mutual Fund / Registrar Transfer Agents.

* The purchase of MF units should be at the risk of customers and without the bankguaranteeing any assured return.



* The bank should not acquire such units of Mutual Fund from the secondary market.

* The bank should not buy back units of Mutual Funds from their customers.

* The bank holding custody of MF units on behalf of their customers should ensure that its

own investment and investments belonging to their customers are kept distinct from eachother.

* Retailing of units of Mutual Funds may be confined to some select branches of the bank toensure better control.

* The bank should comply with the extant KYC/ AML guidelines in respect of the applicants.

* The RRBs should put in place adequate and effective control mechanisms in consultationwith their sponsor banks.



CONCLUSION

RRBs' performance in respect of some important indicators was certainly better than that of

commercial banks or even cooperatives. RRBs have also performed better in terms of providing loans to small and retail traders and petty non-farm rural activities. In recent years,they have taken a leading role in financing Self-Help Groups (SHGs) and other micro-creditinstitutions and linking such groups with the formal credit sector.

RRBs should really be strengthened and provided with more resources with which they canundertake more of these important activities. And most certainly they should be kept apartfrom a profit-oriented corporate motivation that would reduce their capacity to provide muchneeded financial services to the rural areas, including to agriculture. Ideally, the best use ofthe resources raised by RRBs through deposits would be through extensive cross-subsidization. This, in turn, really requires an apex body that would cover and oversee all theRRBs, something like a National Rural Bank of India (NRBI).

The number of rural branches should be increased rather than reduced; they should beencouraged to develop more sophisticated methods of credit delivery to meet the changingneeds of farming; and most of all, there should be greater coordination between district

planning authorities, panchayati raj institutions and the banks operating in rural areas. Onlythen will the RRBs fulfill the promise that is so essential for rural development.



5. HISTORY OF BANKING IN INDIA

Without a sound and effective banking system in India it cannot have a healthy economy. The

banking system of India should not only be hassle free but it should be able to meet new

challenges posed by the technology and any other external and internal factors.

For the past three decades India's banking system has several outstanding achievements to its

credit. The most striking is its extensive reach. It is no longer confined to only metropolitans

or cosmopolitans in India. In fact, Indian banking system has reached even to the remote

corners of the country. This is one of the main reasons of India's growth process.

The government's regular policy for Indian bank since 1969 has paid rich dividends with the

nationalization of 14 major private banks of India.

Not long ago, an account holder had to wait for hours at the bank counters for getting a draft

or for withdrawing his own money. Today, he has a choice. Gone are days when the most

efficient bank transferred money from one branch to other in two days. Now it is simple as

instant messaging or dial a pizza. Money has become the order of the day.

The first bank in India, though conservative, was established in 1786. From 1786 till today,

the journey of Indian Banking System can be segregated into three distinct phases. They are

as mentioned below:

• Early phase from 1786 to 1969 of Indian Banks• Nationalization of Indian Banks and up to 1991 prior to Indian banking sector

Reforms.• New phase of Indian Banking System with the advent of Indian Financial & Banking

Sector Reforms after 1991.

To make this write-up more explanatory, I prefix the scenario as Phase I, Phase II and Phase

III.



Phase I

The General Bank of India was set up in the year 1786. Next came Bank of Hindustan and

Bengal Bank. The East India Company established Bank of Bengal (1809), Bank of Bombay(1840) and Bank of Madras (1843) as independent units and called it Presidency Banks.

These three banks were amalgamated in 1920 and Imperial Bank of India was established

which started as private shareholders banks, mostly Europeans shareholders.

In 1865 Allahabad Bank was established and first time exclusively by Indians, Punjab

National Bank Ltd. was set up in 1894 with headquarters at Lahore. Between 1906 and 1913,

Bank of India, Central Bank of India, Bank of Baroda, Canara Bank, Indian Bank, and Bank

of Mysore were set up. Reserve Bank of India came in 1935.

During the first phase the growth was very slow and banks also experienced periodic failures between 1913 and 1948. There were approximately 1100 banks, mostly small. To streamline

the functioning and activities of commercial banks, the Government of India came up with

The Banking Companies Act, 1949 which was later changed to Banking Regulation Act 1949

as per amending Act of 1965 (Act No. 23 of 1965). Reserve Bank of India was vested with

extensive powers for the supervision of banking in India as the Central Banking Authority.

During those days public has lesser confidence in the banks. As an aftermath deposit

mobilization was slow. Abreast of it the savings bank facility provided by the Postal

department was comparatively safer. Moreover, funds were largely given to traders.

Phase II

Government took major steps in this Indian Banking Sector Reform after independence. In

1955, it nationalized Imperial Bank of India with extensive banking facilities on a large scale

especially in rural and semi-urban areas. It formed State Bank of India to act as the principal

agent of RBI and to handle banking transactions of the Union and State Governments all over

the country.

Seven banks forming subsidiary of State Bank of India was nationalised in 1960 on 19th July,

1969, major process of nationalisation was carried out. It was the effort of the then Prime

Minister of India, Mrs. Indira Gandhi. 14 major commercial banks in the country were

nationalized.

Second phase of nationalization Indian Banking Sector Reform was carried out in 1980 with



seven more banks. This step brought 80% of the banking segment in India under Government

ownership.

The following are the steps taken by the Government of India to Regulate Banking

Institutions in the Country:

• 1949: Enactment of Banking Regulation Act.• 1955: Nationalization of State Bank of India.• 1959: Nationalization of SBI subsidiaries.• 1961: Insurance cover extended to deposits.• 1969: Nationalization of 14 major banks.• 1971: Creation of credit guarantee corporation.• 1975: Creation of regional rural banks.• 1980: Nationalization of seven banks with deposits over 200 crore.

After the nationalization of banks, the branches of the public sector bank India rose to

approximately 800% in deposits and advances took a huge jump by 11,000%.

Banking in the sunshine of Government ownership gave the public implicit faith and

immense confidence about the sustainability of these institutions.

Phase III

This phase has introduced many more products and facilities in the banking sector in its

reforms measure. In 1991, under the chairmanship of M Narasimham, a committee was set up

by his name which worked for the liberalization of banking practices.

The country is flooded with foreign banks and their ATM stations. Efforts are being put to

give a satisfactory service to customers. Phone banking and net banking is introduced. The

entire system became more convenient and swift. Time is given more importance than

money.

The financial system of India has shown a great deal of resilience. It is sheltered from any

crisis triggered by any external macroeconomics shock as other East Asian Countries

suffered. This is all due to a flexible exchange rate regime, the foreign reserves are high, the

capital account is not yet fully convertible, and banks and their customers have limitedforeign exchange exposure.



6. BANKING SECTOR IN INDIA

Immediately after Independence, the government of India initiated measures to play an activerole in the economic life of the nation. In pursuance of this policy, government adopted

Industrial Policy Resolution in 1948 in which it envisaged a mixed economy. From now

onwards, government decided to play an active role in different segments of an economy

including banking and finance.

The Government of India, in a major step nationalized Reserve Bank of India in 1948. In

1949, the Banking Regulation Act was enacted which empowered the Reserve Bank of India

(RBI) "to regulate, control, and inspect the banks in India.

Government in order to have firm grip over this sector nationalized the private banks first in

1969 and later in 1980. With the second dose of nationalization, the GOI controlled around

91% of the banking business of India. After this, until the 1990s, the nationalized banks grew

at a pace of around 4%, closer to the average growth rate of the Indian economy.

In the early 1990s the then Narsimha Rao government embarking on a policy of

liberalization, gave licences to a small number of private banks, which came to be known as

New Generation tech-savvy banks, which included banks such as Global Trust Bank, UTI

Bank, (now re-named as Axis Bank), ICICI Bank and HDFC Bank. This almost kick started

the banking sector in India, which has seen rapid growth with strong contribution from all the

three sectors of banks, namely, government banks, private banks and foreign banks.



FDI IN BANKING SECTOR

The next stage for the Indian banking has been setup with the proposed relaxation in the

norms for Foreign Direct Investment, where all Foreign Investors in banks may be givenvoting rights which could exceed the present cap of 10%, at present it has gone up to 49%with some restrictions.

PR ES ENT SI TU A TI ON

In the present situation, banking in India has attained fair amount of maturity in terms ofsupply, product range and reach-even though reach in rural India still remains a challenge forthe private sector and foreign banks. In terms of quality of assets and capital adequacy, Indian

banks are considered to have clean, strong and transparent balance sheets relative to other

banks in comparable economies in its region.Since Indian economy is witnessing strong growth the demand for banking services,especially retail banking, mortgages and investment services are expected to be strong. Onemay also expect M&As, takeovers, and asset sales.

Currently, India has 88 scheduled commercial banks (SCBs) - 28 public sector banks (that iswith the Government of India holding a stake), 29 private banks (these do not havegovernment stake; they may be publicly listed and traded on stock exchanges) and 31 foreign

banks. They have a combined network of over 53,000 branches and 17,000 ATMs.According to a report by ICRA Limited, a rating agency, the public sector banks hold over 75

percent of total assets of the banking industry, with the private and foreign banks holding18.2% and 6.5% respectively.



APPENDIX: R EPORT ON TECHNOLOGICAL UPGRADATION OF

THE R EGIONAL R URAL BANKS ( RBI – 86358 )

Chapter1 . Introduction

Background

Despite the measures for social control and nationalisation of major commercial banks in1969, a large proportion of the rural poor continued to be outside the banking fold. AWorking Group under the Chairmanship of Shri M. Narasimham was set up in 1975 toexplore the possibilities of evolving an alternative rural credit agency to benefit the rural

poor. The Group recommended formation of a new set of regionally oriented rural bankswhich would combine the local feel and familiarity of rural problems characteristic ofcooperatives and the professionalism and large resource base of commercial banks. Regional

Rural Banks (RRBs) were set up as a sequel to this recommendation.

The RRBs have a special place in the multi-agency approach adopted to provide agriculturaland rural credit in India. These banks were established under the Regional Rural Banks Act,1976 “with a view to developing the rural economy by providing, for the purpose ofdevelopment of agriculture, trade, commerce, industry and other productive activities in therural areas, credit and other facilities, particularly to small and marginal farmers, agriculturallabourers, artisans and small entrepreneurs, and for matters connected therewith andincidental thereto”. The capital of RRBs is contributed by the Union Government, concernedState Government and a sponsor bank in the ratio 50:15:35.

The RRBs have played a key role in rural institutional financing in terms of geographicalcoverage, clientele outreach, business volume and contribution to the development of therural economy. Between 1975 and 1987, 196 RRBs were established. From a modest

beginning of 17 branches covering 12 districts of thecountry in December 1975, they grew to14,446 branches in 518 districts of the country by the end of June 2005.



Initiatives taken

The RRBs have been in sharp focus over the last few years with several measures initiated

towards strengthening them and making them vibrant channels of credit delivery, particularlyfor the rural sector. The most prominent of these has been the process of state-wiseamalgamation of RRBs sponsored by the same sponsor bank. The process of amalgamation,initiated in 2005, is now nearing completion. As a result of the amalgamation process, thenumber of RRBs in the country declined from 196 to 96 at the end of March 2007 and furtherto 88 at the end of June 2008. These included 45 amalgamated banks, 42 stand alone banksand one new bank (Puduvai Bharathiar Grama Bank with jurisdiction over the UnionTerritory of Puducherry).

The structural consolidation of RRBs has resulted in formation of new RRBs, which arefinancially stronger and bigger in size in terms of business volume and outreach. They willthus be able to take advantages of the economies of scale and reduce their operational costs.

With the advantages of local feel and familiarity acquired by the RRBs, they would now be ina better position to achieve the objectives of rural development and financial inclusion.

At the end of March 2007, 27 RRBs were having negative net worth of Rs 1740.97 crore. Therecapitalisation of such banks, in a phased manner, was announced in the Union Budget of2007-08. The process of recapitalisation has already commenced and its completion wouldmake all RRBs comply with the necessary prescribed minimum capital requirements. As afirst step to bring RRBs to international capital adequacy standards, all RRBs have beenadvised to disclose their Capital to Risk Weighted Assets Ratio (CRAR) as on March 31,2008 in their balance sheets. Following this disclosure, a road-map for achieving the desiredCRAR norms would be drawn up.

Further, measures have been taken to provide greater autonomy to RRBs and enlarge their business activities. A majority of the recommendations of the Task Force on EmpoweringRRB Boards for Operational Efficiency (Chairman: Dr K.G. Karmakar) have already beenimplemented. RRBs have also been allowed to open currency chests, conduct Stategovernment business as sub-agents of sponsor banks, take up corporate agency businesswithout risk participation for distribution of all types of insurance products and open

NRO/FCNR accounts, subject to certain conditions. The branch licensing procedure forRRBs has been simplified with powers now delegated to the Regional Offices of ReserveBank. The branch licensing policy has also been liberalised and the norms for opening new

branches in hitherto uncovered districts have been relaxed. As a result, there has been a rapidincrease in the number of branches of RRBs during the last one year. The spread of RRBs hasalso increased and at the end of June 2008, they covered 585 out of the 622 districts of thecountry. (Source: NABARD)

Measures have also been taken to address the manpower challenges in the RRBs. Acommittee under the chairmanship of Dr Y.S.P. Thorat, then Chairman, NABARD was set upto examine and lay down parameters for staffing norms in RRBs and suggest norms and



procedures for new recruitments. The report of the committee is under examination ofGovernment. It is hoped that many of the manpower related issues would be taken care ofafter the recommendations of the committee are implemented.

It is envisaged that with their increasing strength and spread, RRBs would have to enlarge

their client base and become the principal vehicles for financial inclusion and rural banking inthe country. However, technological changes are sweeping the banking sector. In order tosurvive effectively in the present scenario, the RRBs would require to be adequately equippedin terms of technology to provide efficient customer service to their clientele. While thecommercial banks have gone ahead in computerisation of their operations and most banks arein an advanced stage of implementing total Core Banking Solutions (CBS), the RRBs arelagging behind in this area.

The expectations of the Union Government and the State Governments from the RRBs arealso increasing. It is envisaged that RRBs are able to render the same quality of service thatcommercial banks are able to give to their clients. Further, the Government, in order toreduce intermediation and reach out directly to the beneficiaries under several of its

programmes, proposes to reach these persons through the electronic mechanisms. It is thus becoming imperative for RRBs to become increasingly technologically sound so as to offercompetitive services to their clients.

The Task Force on Empowering RRB Boards for Operational Efficiency had reviewed thecomputerisation scenario in RRBs and recommended that RRBs need to take upcomputerisation of major areas of operation, MIS in branches, controlling offices and HO inthe next three years by adopting an Action Plan. It had also indicated broad indicative normsfor the same. Within such norms, the Task Force suggested that RRBs may be givenautonomy to take their own decision on designing of their computerisation process and theymay seek guidance from their sponsor institutions wherever necessary.



Setting up of Working Group

In paragraph 148 of the Reserve Bank’s Mid-term Review of Annual Policy for 2007-08, itwas stated that in order to prepare RRBs to adopt appropriate technology and migrate to Core

Banking Solutions (CBS) for better customer services, it is proposed to constitute a WorkingGroup with representatives from Reserve Bank, NABARD, sponsor banks and RRBs for preparing a road-map for migration to core banking solutions by RRBs.

Accordingly, a Working Group under the chairmanship of Shri G.Srinivasan, Chief GeneralManager in-Charge, Rural Planning and Credit Department, Reserve Bank of India was setup with the following Terms of reference:

(i) To determine the nature of core banking solutions required for RRBs having regard to therange of their business and customer service;

(ii) To examine various options including extending core banking solutions of the sponsor banks

to their RRBs with necessary modifications and firewalls;

(iii) To estimate the likely costs involved and funding and training arrangements that may benecessary; and

(iv) To draw out a time-bound road map for implementation.



Chapter 2. Profile of RRBs

1. As at the end of March 2008, there were 91 RRBs with a total of 14,816 branches. Theseincluded 46 amalgamated and 45 stand alone banks. These RRBs employed 68,069 staff.

2. However, there was a wide disparity among these banks in regard to various parameters. Thenumber of branches varied from 10 to over 600 branches.

The total deposits ranged from less than Rs 20 crore to more than Rs 5,000 crore. Similarly,total assets varied from less than Rs 20 crore to over Rs 4,000 crore. As regards profitability,while 83 RRBs made net profits, the remaining 8 RRBs incurred losses. The net profitsranged from less than Rs 1 crore to over Rs 90 crore.

The total owned funds (share capital + share capital deposits + reserves) varied from Rs 1crore to over Rs 500 crore.

3. The distribution of RRBs on various parameters as per their financial position as on March31, 2008 is given below (provisional data given by NABARD).



Key Findings and Suggestions:

Illustration 1. RRBs according to number of branches

Key Findings : Majority of the regional rural banks have branches between 51-250. Whilemost of them are loss making they must concentrate reducing branch transactions , andreplacing them with electronic means such as Debit Cards , Credit Cards , e-chequesandmobile payments.

RRBs According to the total branches

0 to 50 51to 100 101 to 250 251 to 500 500+



Scope Of IT : To provide the customers with mobility and ease of paymentsand receipts any branch banking , mobile banking and at par banking must be provided to reduce branch loadand reduce branches per unit area.

Illustration 2. RRBs according to the deposits in the branches

Key Findings : More than 33% of the regional rural banks have deposits between 251-1000crores. While most of them are loss making they must concentrate reducing branchtransactions , and replacing them with electronic means such as Debit Cards , Credit Cards ,e-chequesand mobile payments.

Scope of IT : Introduction of any time banking , e – banking , electronic transfers ,e – cheques , creartion of FD’s at the blink of an eye etc. discussed later in detail.


0 to 250 251to 1000 1001 to 2000 2001 to 3000 3000+



Illustration 3. RRBs according to the total assets

Key Findings : RRB’s on basis of assets are almost equally distributed and the importantthing to be noticed here is whether these asstets are long term or short term assets. It has alsoto be taken care of whether how this assets are managed.

Scope of IT : When financials of the banks are handled through IT softwares such as finnacleor bancmate , a single point access to them is provided , further application of funds forinvestments into loans , securities etc becomes very easy. CRR , DRR , etc can be


0

to

200 201to

500 501

to

1000 1001

to

2000 2000+



incorporated in the application itself which keeps a check on piled over inventories or cashrunning out.

Illustration 4. RRBs according to the total net profit

Key Findings : Though the number of loss making RRBs is pretty less but these RRB’s canvery easily be pulled out of losses with effective implementation of IT. Cost of effectiveimplementation of IT and its recovery period and benefits needs to be carefully worked out.

Scope of IT : Investment in IT and moderization of the processes might incur some costs tothe bank but it can obtain tax sheild and long term and short term benefits also. Intelligentapplication can help the institution to decide its investment decisions , financing decisionsand operating decisions. External charges , additional accounts due to facilities would

RRBs According to the net profits (in crores)

0

to1 1

to

5 5

to

10 10

to

30 30+



increase the profits. Increased transactions between banks would raise the profits by bankcharges.

Illustration 5. RRBs according to the total owned funds

Key Findings : Total owned funds of the banks include Share Capital , Share CapitalDeposits and the Reserves. These funds are share funds and can be used any time forexpansion etc., new branches [land accqusition etc] , for giving secured loans etc.

Scope of IT : IT coud help the RRBs to create the resreves which aacumulate over time sothat they do not require less borrowing in future and reduce the liabilities. Further it canebable the RRBs to decide on proper debt-equity mix.

RRBs According to the total owned funds

0 to 25 26 to 50 51 to 100 101 to 400 400+



Illustration 6. RRBs according to the total owned funds

Key Findings : Such a huge number of RRBs having negative net worth indicate that the banks arent able to control the losses they make.on account of non repayments of loans,agricultural ,coopertive etc.

RRBs According to the net worth (in crores)

0 to 25 26 to 50 51 to 100 101 to 400 400+



Scope of IT : IT coud help the RRBs to take proper investment decisions and calculate the

NPV ( Net Present Value ) , ICR ( Intrest Cover Ratio ) to take intelligent investmentdecisions.

Illustration 7. RRBs according to the levels of automation

• New Customer Introduction

Key Findings : None of RRBs , Nationalized or Multi National Banks have fullyautomated solution to new cusomer introduction.

Shortcomings : Mannual form filling ,Delays in processing ,Multiple Branch Visits ,

Scope of IT : IT could help the RRBs to take a leap ahead of all the nationaized andmulti national banks by automizing the process of new customer introduction.

• Secure Transactions * (Cost Implications apply)

Key Findings : None of RRBs , Nationalized and a very few Multi National Banks(probably only HSBC , in India , RBS and Natwest in England) have provision foronline security device..

Shortcomings : Single point of failure in case of lost pin code ,Frauds ,

Scope of IT : Introduction of the Online Security Devicemakes it impossible to make a transaction unless the pin codeand the device , both are available.

• e – cheques , e - Statements , e – Drafts , e - Payments

Key Findings : Only a handful of RRBs have the abovesaid features.

Shortcomings : Costly in terms of amount of paper used ,Cumbersome to visit branches ,

Non Availability of offdays ,Multiple Branch Visits ,

Scope of IT : IT could help the RRBs to gain a huge customer base by providingabove services 24X7 and set new standards.



Chapter 3. Computerization in RRBs

• The need for having computerization in RRBs had been felt since long and some RRBs

had been taking some steps in that direction. In July 2001, Government of India and

NABARD advised the RRBs to initiate immediate steps so that Head Office, Area Office

and a minimum of 50 per cent of the branches are computerized in a phased manner in the

next five years.

• Sponsor banks were also advised to formulate RRB-wise Action Plans, keeping in viewthe financial position of RRBs, infrastructure facilities available in their command area

and the business potential of the RRB branches. Necessary support to implement the

programme was also required to come from the sponsor bank.

• NABARD made a beginning by extending support to select RRBs by providing PCs,

peripherals, standard software packages as also customised MIS package and training

inputs under its Swiss Agency for Development and Cooperation (SDC) programme.

• A review made by NABARD in respect of 152 RRBs in 2005 indicated that only nine

banks had reported achieving 100 per cent computerisation. Most of the RRBs werelagging behind the target of computerising 50 per cent of their branches.

• In paragraph 7.05 of its report, the Task Force on Empowering RRBs for OperationalEfficiency (Chairman: Dr K.G.Karmakar) had made the following observations regardingthe computerisation scenario in RRBs:

- Level of computerisation is far behind schedule.

- Even RRBs of same sponsor banks although following the same technology, are atdifferent levels of computerisation due to varied financial health, environment, local

conditions which has become a problem when such RRBs have been amalgamated.

- Computerisation needs both capital and recurring expenses which are beyond thecapability of some of the banks.

- RRBs, which have progressed well, have adopted a particular technology mainly ofthe sponsor bank and invested sizeable amounts.



- Such amalgamated RRBs have grown bigger in size and volume of business is likelyto grow further.

- While there is much benefit in standardization of technology application, it may not pose any problem for such RRBs which are in a nascent stage of development; forsuch of the RRBs which have progressed well in computerization will face difficulties

not only in financial implications, but also for switching over to new technology.

- A few RRBs reaped the benefit of hosting their own website by way of mobilisationof deposits from non traditional segments.

- A few of them established direct links with money market operators for investments.

- Internet facilities have been used for faster communication with techno savvycustomers and other agencies.

• These observations highlight the varying status of RRBs with regard to computerisation.

Another dimension to this problem has been that the process of amalgamation of RRBshas resulted in RRBs at different levels of computerisation being amalgamated leading tointra-RRB differences among the new amalgamated banks.

• The status of computerisation at the end of March 2007 as reported by 76 of the 96 RRBsto the Committee to Formulate a Comprehensive Human Resource Policy for RRBs(Chairman: Dr Y.S.P.Thorat) indicated that 35 of the reporting banks had achieved 100 per cent computerisation while 25 banks had achieved 50 to 100 per cent computerisation.However, it was noticed that the interpretation of the word ‘computerisation’ is also notuniform among banks as certain banks with ALPM while others with TBM have reportedthem as computerised.



Chapter 4. Present status

• The Committee also reviewed the present status of computerization in RRBs by obtaininginformation from NABARD as well as the sponsor banks of RRBs. Two statements prepared in this regard in respect of 89 of the 91 RRBs, which were in existence in March2008, state-wise and sponsor bank-wise are given in Annex 2.1 and 2.2 respectively.Although the data in the statements may not be fully accurate, it gives a fairly true pictureof the state of computerization of the RRB sector. It may be seen that the progress ofcomputerization varied greatly among the RRBs at the individual level, group of RRBs at

state level and group of RRBs at sponsor bank level.

• At the bank level, it may be seen that out of 89 RRBs, 20 (22 per cent) had reported 100 per cent computerisation of all their branches. Among these, there were four RRBs fromMaharashtra, three each from Gujarat and Karnataka, two each from Madhya Pradesh andPunjab and one each from the states of Andhra Pradesh, Haryana, Himachal Pradesh,Kerala, Rajasthan, and Tamil Nadu.

• At the branch level, it may be seen that out of 14,456 branches for which information wasfurnished 4,944 branches (34 per cent) had achieved 100 per cent computerisation. Inaddition, 3,829 branches (26 per cent) had achieved partial computerisation. Thus, even

part computerisation had not yet taken place in as many as 40 per cent of the RRB branches.

• Among states, while Gujarat and Kerala had achieved 100 per cent computerization of allRRB branches, the percentage was only 3 per cent and 5 per cent for Jharkhand andJammu and Kashmir respectively.

• Six sponsor banks namely, Indian Bank, State Bank of Bikaner and Jaipur, State Bank ofIndore, State Bank of Patiala, State Bank of Saurashtra and Vijaya Bank had achieved100 per cent computerisation of the seven RRBs sponsored by them. On the other hand,in the seven RRBs sponsored by five banks namely, Indian Overseas Bank, Punjab and

Sind Bank, Union Bank of India, The Bank of Rajasthan Ltd and Uttar Pradesh StateCooperative Bank, there was no branch which had been 100 per cent computerised.Further, within the same sponsor bank also, there were extreme variations in the level ofcomputerisation of RRBs. While some RRBs had achieved 100 per cent computerisationof all their branches, other RRBs had not achieved that level in any of their branches.Thus the percentage of branches computerised even within a sponsor bank ranged fromzero to cent per cent (for example, in Bank of Maharashtra, Syndicate Bank and StateBank of India).



• Further analysis carried out by NABARD revealed that the total number of personalcomputers (PCs) in RRBs was 32,376, of which 28,587 PCs were at the branch level. Theaverage number of PCs per branch worked out to 2.02. There were over 5,000 brancheswhere the PCs were either not available or non-functional.

• The committee is of the view that these significant differences in the level ofcomputerisation between different RRBs need to be taken into account while preparingany plan for further technology upgradation of RRBs.



Chapter 5. Annexures





















Chapter 6. Need for CBS IN RRBs

1. Although there is no formal definition of CBS, the term has been in use during the lastfew years. The advancement in technology, especially internet and informationtechnology, has led to a new way of doing business in banking. The technologies have cut

down time, working simultaneously on different issues and increased efficiency. The platform where information and communication technology are merged to suit core needsof banking may be referred to as CBS. In CBS, computer software performs the coreoperations of banking like handling and recording of transactions, maintenance of passbooks, interest calculations on deposits and loans, maintaining customer records andgenerating reports and statements. The software is installed at bank branches and theninterconnected by means of communication lines telephone, internet and satellitecommunication. It allows customers to transact with the bank from any branch if it hasinstalled CBS. This new platform has changed the way of working of banks.

2. In an ideal CBS scenario, all products, processes, channels and customer relationshipmanagement tools are integrated and administered via a central database of the bank with branches and channels as delivery points. This enables data integration for various purposes including regulatory reporting and internal MIS all at considerably lower cost.The new generation private sector banks were the first to adopt CBS technologies in Indiafollowed by a few public sector banks. Gradually, the same were adopted by most of thecommercial banks as part of their computerisation processes.

3. As per the Report on Trend and Progress of Banking in India 2006-07, the process ofcomputerisation in commercial banks was now reaching near completion for most of the banks. Public sector banks continued to expend large amounts on computerization anddevelopment of communication networks. The cumulative amount spent duringSeptember 1999 to March 2007 aggregated Rs 12,826 crore. Of this, the State BankGroup itself had spent Rs 4,703 crore.

4. Further, the proportion of branches providing CBS increased rapidly from 28.9 per cent atthe end of March 2006 to 44.4 per cent at the end of March 2007. Seven subsidiary banksof State Bank of India had fully implemented CBS. Additionally, eight public sector banks, viz., Andhra Bank, Bank of Baroda, Bank of India, Bank of Maharashtra,Corporation Bank, Punjab National Bank, Vijaya Bank and State Bank of India hadachieved full computerisation of branches. At the end of March 2007, fully computerised branches, including branches under CBS, formed 85.6 per cent of the total branches of public sector banks. Of the 27 public sector banks, 15 banks had computerised their branches fully, while six banks had computerised between 70 to 90 per cent of their branches. Only four banks (Punjab and Sind Bank, UCO Bank, Union Bank of India andUnited Bank of India) had yet to computerise more than half of their branches.

5. The latest position in this regard was sought by the committee from all sponsor banks.The data indicated that the position had significantly improved during the past year.



6. The committee obtained the views of sponsor banks, RRBs and the representative bodiesof the RRBs on the requirement of CBS in RRBs. Three broad views emerged:

First, there was no need for CBS in RRBs at the present juncture;Second, CBS was required but only in larger or urban branches of RRBs; andThird, RRBs require CBS in order to compete with commercial banks

7. It was stated that CBS is a sophisticated and costly system which may not be suited to theneeds of the RRBs. It was argued that though RRBs are implementing various schemes of both state and central governments, the quantum of business handled by them was notadequate and remunerative for moving towards CBS. Sometimes there was no fee orcommission for transacting such operations. It was suggested that before moving towardsCBS, both state and central governments should provide adequate fees to RRBs forstrengthening their operations and keep their deposits with RRBs. A view expressed wasthat since many RRB branches were still at a manual stage and had not moved towardscomputerisation and since even TBA had not yet stabilised in most RRBs, at the firststage RRBs should complete computerisation of all branches under TBA before movingtowards CBS.

8. It was also stated that CBS, though required in RRBs, was not necessary for their entirenetwork. There were many branches in all RRBs where the business was extremely lowand the number of vouchers per day was very limited. In such branches, there would not be any need for CBS at this juncture. It was suggested that CBS may be restricted to onlyurban and semi-urban branches and such branches where the business requirementdemanded it. Business criteria in terms of volume could be an indicator for fixing thelimit for introducing CBS.

9. The third view expressed was that CBS was necessary for RRBs in view of the emergingtrends in the banking sector. RRBs could not afford to remain left behind the commercial

banks. In fact, state and central governments were reluctant to give business to RRBs because they were not in a position to offer the same kind of service as commercial banks. Further, the present ALPM and TBM platforms were not able to handle largenumber of standard applications. However, the high cost likely to be incurred during CBSwas a deterring factor and it was expressed that either the stakeholders should comeforward and share the costs or financial resources should be made available to RRBs sothat they are not burdened with the cost.

10. The committee is of the opinion that RRBs cannot afford to remain isolated from thetechnological developments sweeping the banking sector. With the commercial banksracing towards a higher degree of technological sophistication, the RRBs would berequired to adopt technology for improving the quality of their customer

service.However, given the different levels at which the different RRBs are presently placed in regard to their status of computerisation, a “one strategy fits all” approach maynot be workable.

11. The committee is of the view that as a matter of policy, all RRBs should begin movingtowards CBS. The CBS in RRBs should be geared towards better management controland monitoring, wider range of services offered and enhanced level of customersatisfaction. Adoption of CBS would lead to uniformity in work environment, more



informed decision making, centralised processing and better MIS and reporting andimproved regulatory compliance.



Chapter 7. Options for introducing CBS

1. The various options available for introducing CBS in RRBs were explored by thecommittee. In this connection, several presentations were made by various vendors who presented their solutions for achieving CBS in RRBs. The experience of CBS incommercial banks was also taken into account. After taking into account all the available

inputs, it was observed that there could be three broad approaches for introducing CBS inRRBs.

2. First, the individual RRBs develop their own Data Centre (DC) and Data RecoveryCentre (DRC). A variant of this model could be the Application Service Provider (ASP)Model where the entire work is outsourced to an outside agency. Second, all RRBs in thecountry brought under a common DC and DRC, owned and managed by a centralisedagency. Third, all RRBs sponsored by a particular bank share the DC and DRC of thesponsor bank.

3. So far, the computerisation efforts in RRBs have largely remained bank-specific. Only in

the case of a very few sponsor banks, some uniform strategy for computerization of theirRRBs has been implemented. However, CBS being a cost intensive technology,individual decisions by RRBs in going in for their own strategies may not be desirable.Moreover, most RRBs would not have the technical expertise available to take sounddecisions in the matter. They would thus be exposed to the different vendors trying to push their products in the market. Further, RRBs lack the manpower skills that would berequired for such technology management, particularly in the initial stages. Therefore, thefirst approach mentioned above, could not be considered further.

4. A variant of the first approach discussed was the case of an Application Service Provider(ASP) which would outsource the entire work for the RRB. It would provide the DC/

DRC facilities and take care of the operations for a price. However, it was viewed that forindividual RRBs the proposition would be costly. It would be more advantageous if agroup of RRBs adopt this approach. For logical reasons, the grouping could be on sponsor bank basis. In that respect, the third approach was favoured.

5. The case for bringing all RRBs under a common umbrella for the purpose of CBS was putforth before the committee. It was highlighted that a single agency having thisresponsibility would lead to huge economies of scale and ensure uniform technology and processes among the entire RRB sector. It was suggested that RBI or NABARD may takeup this responsibility. It was also suggested that even a separate institution or companycould be created to initially install the system and thereafter manage it.

6. This approach was examined by the committee and it was observed that it would not be possible for RBI to enter this domain in view of its regulatory responsibilities. At present, NABARD is the supervisory authority for RRBs and hence it may not be appropriate toentrust it with this operational area. Creating a new authority for this purpose may also bedifficult in view of multiple stakeholders of RRBs and numerous sponsor banks, whichinclude public sector banks, private sector banks and a cooperative bank. The integration



of different RRBs, which are at varying stages of computerisation and adopting different platforms, would also be an extremely difficult task to manage.

7. The third approach merited detailed consideration. Most of the sponsor banks as well asRRBs which interacted with the committee during its deliberations were of the opinion

that RRBs could share the infrastructure of their sponsor banks. Almost all sponsor bankshave achieved considerable experience in CBS in their banks. It was suggested that aseparate database instance could be created for the RRBs in the DC and DRC of thesponsor bank. This would make the implementation cost effective. It was pointed out thatCentral Vigilance Commission (CVC) guidelines would not permit extending the sponsor bank’s CBS in its entirety to their RRBs. The requirements of RRBs may also be differentform their sponsor banks, although not to a great extent. Under this approach, the sponsor bank could provide all necessary technical, managerial and training support to the RRBs.In the light of the above, the committee is of the opinion that the ASP model for CBS ofRRBs may be suitable. However, where significant cost reduction and economies of scaleresult, the resource sharing model with sponsor bank may be considered.

8. It may be noted that out of 28 sponsor banks, 11 banks have sponsored only one RRBwhile 7 others have sponsored two RRBs each. These RRBs are mostly located in thestate where the Head office of the sponsor bank is located. The approach of these sponsor banks could be different from sponsor banks which had more number of RRBs, spreadover different states.

9. Most sponsor banks have relied upon a few providers for their CBS requirements. While11 banks have adopted Finacle solutions provided by Infosys Technologies, State Bank ofIndia, its associate banks and 4 other banks are on the TCS Bancs 24 platform. Two banksare using the Flexicube solution of iflex while one bank has developed its inhouse system.

10. ASP model : The Application Service Provider (ASP) model is based on outsourcing ofthe DC, DRC and system management process. Typically, ASPs develop, deploy, andmanage specialized software services from centralized facilities for a broad customer base. ASPs offer economies of scale, enabling their customers to eliminate high upfrontand fixed capital costs, and reduce ongoing maintenance costs through the sharing ofapplication services. In addition to cost savings, ASPs also deliver continually enhancedcapabilities – freeing up a bank’s resources and enabling it to focus on its core business.Many companies have constructed DCs, DRCs and system applications for individual banks. The committee invited selected vendors to make presentation of their products for banks and also obtained the views of sponsor banks and RRBs regarding their experiencewith the vendors.

11. One vendor who made a presentation before the committee depicted a model usingB@NCS 24 software, which has already been adopted by 116 banks in 35 countries,including India. The software is being used in the CBS of State Bank of India, its sevenassociate banks, Allahabad Bank, Indian Bank, Central Bank of India and Bank ofMaharashtra. It was mentioned that the software is a highly advanced, state-of-the-artsystem that provides reliability, flexibility and rapid response to market pressures. Usingon-line, real time transaction processing technology along with the latest in relational data



base techniques, it provides a stable, resilient and flexible core banking facility. It can bescaled from the smallest organisations to the largest depending on the performancerequired.

12. A typical ASP architecture, using this software as the core banking solution, is

represented as follows:

There are multiple models to deploy the above solution based on an individual bank’srequirement. In one option, the bank and its branch servers are connected through highspeed dedicated links. This may be required where customer base is huge and demand forapplication connectivity is of a high order. It is depicted as follows:



13. There are multiple models to deploy the above solution based on an individual bank’srequirement. In one option, the bank and its branch servers are connected through highspeed dedicated links. This may be required where customer base is huge and demand forapplication connectivity is of a high order. It is depicted as follows



14. The other option provides for a dedicated link from the main server of the service provider to the Head Office of the bank and creates a virtual private network (VPN)for branch level connectivity. It can be depicted as follows

15. The system has offline ‘store and forward’ processing features that enable branchoperations to continue should there be a communication malfunction. This systemcaters for transaction data storage and posting and forwards the data when thecommunication has been re-established.

16. Different providers have varying products in the market. In this context, the

committee is of the view that respective sponsor banks may be given the option ofselecting the provider for their RRBs. This provider may be same as for the sponsor bank or different as per the requirement of the RRBs. In case a sponsor bank hasdeveloped its own software, it may consider making the same available to its RRBs.

17. The committee is of the view that any technology platform for CBS needs to bereliable, scalable, easily available, manageable and secure. For this, the background,credentials and experience of the vendor are extremely important. It would therefore be prudent to rely on the trusted and established vendors to provide services to RRBs.

18. The committee is also of the view that sponsor banks must own major responsibilityin taking RRBs on the path to CBS. However, the requirements of the RRBs have to be borne in mind as these banks may not require the full suite of services that areavailable in sponsor banks and hence a plain vanilla tailored to their needs should be provided.

19. As regards connectivity, there are several methods of connecting the branches, such asleased lines, ISDN line, VSATs and radio connectivity. Most of the banks are using



leased line connectivity for their branches with minimum 64 kbps bandwidth. As afall back, they are using ISDN lines. At remote branches, where the leased line andISDN lines are not available, banks have used VSAT connectivity, which provideslimited bandwidth sufficient up to four users. Connectivity through VSAT is costeffective too. RRBs may go in for economic connectivity options, depending upon thesituational position of the branch.

20. The committee is of the view that while the critical branches (say up to 10 per cent ofthe total branches) may be completely online, other branches may be in hybrid mode.Such branches would be on offline mode with local memory and the dataincrementally uploaded at desired hours during the day. This would help bring downconnectivity costs considerably.



Chapter 8. Costing Aspects and Training Requirements

1. The costing aspects of migrating RRB branches to CBS would depend upon the CBSarchitecture used. These can be split into (a) branch requirements, which wouldinclude nodes and back-up server for local transactions and to be used during

nonavailability of connectivity; (b) data centre requirements, which would includeapplication server, database server and web servers; and (c) disaster recovery centrerequirements, which would include application server, database server and webservers.

2. Although half a dozen vendors made presentations of their products before thecommittee, it was not possible to come to an accurate estimate of the costing aspectsof the exercise due to numerous variables involved. First, the situational aspects of theRRBs as well as their branches were vastly different. Second, the technologyconfigurations taken into account were not uniform. Third, the vendors werethemselves reluctant to place the costing details before the committee and did notfurnish full details despite requests. Further, although the vendors had providedsolutions for large commercial banks as well as small urban cooperative banks, noneof them had actually provided any specific CBS solution to an RRB, which could betaken as the model. However, a rough cost estimate has been attempted by thecommittee based on the inputs received.

3. One sponsor bank, which has gone ahead towards implementing CBS architecture forall is sponsored RRBs has estimated that the total cost would be Rs 8,060 lakh forover 1,300 branches of its six RRBs. Of this, the cost of software and licences comesto Rs 2,670 lakh. The remaining cost of Rs 5,390 lakh will be of hardware,connectivity, networking and creating physical infrastructure of DC and DRC.However, these costs are stated to be indicative.

4. Another sponsor bank is exploring the option of networking of RRB branches byVirtual Private Network (VPN) by connecting to a central server at Head Office of theRRB through broad band connectivity and has launched a pilot for the same. The bank has estimated a total cost of Rs 1,976 lakh for 350 branches of its two RRBs. Inaddition there would be a recurring cost of Rs 0.40 lakh per branch. As most branchesof the banks are presently on ALPM, it plans to convert the branches first to TBA andthen to CBS. If the pilot proves successful, it would be extended to all branches.



5. Similarly, one estimate of the cost of converting RRBs from TBA and ALPM to CBSis given below:



6. Another estimate given by a vendor for rolling out 150 RRB branches on CBS isgiven below:



7. Another estimate of the cost given by other vendor can be given as

The above cost estimate , which is not a commercial quote , does not consider the legacyissues in the migration and assumes four users per branch.

8. Another vendor gave the following cost estimate for its proposed CBS Solution:

9. It may be seen that the different estimates given differ widely from one another. As such,the committee is unable to give precise uniform estimates for all RRBs. However, as arough estimate, the committee estimates that the cost for taking RRBs to CBS may broadly be calculated as follows:



It may be noted that if the DC/ DRC of the sponsor bank is used as suggested elsewhere inthe report, the above cost estimate would come down to some extent.

10. Funding the cost of moving towards CBS is an important issue for RRBs, particularly asseveral RRBs continue to incur operating losses. Further, many RRBs still continue tohave accumulated losses and even negative net worth. Despite this position, there are

RRBs which are healthy and making sustained profits. The committee considered thisaspect and is of the view that funding support may be provided to all RRBs in the matterof adopting CBS, irrespective of their financial position. This would enable the entiresector to move uniformly towards adopting CBS.

11. The committee is of the view that while sponsor banks may contribute 25 per cent of thecost required for taking their RRBs to CBS, the remaining cost may be borne by ReserveBank through Institute for Development and Research in Banking Technology (IDRBT).The IDRBT, in turn would provide necessary funds to the sponsor banks for theirsponsored RRBs. The support could be in the form of interest free loans, repayable inthree years.

12. The Financial Inclusion Technology Fund (FITF), with a corpus of Rs 500 crore, wasannounced in the Union Budget of 2007-08. The corpus of the fund would be contributed by Central Government, RBI and NABARD in the ratio 40:40:20. According to the paragraph 6.2 of the Guidelines for FITF, the eligible activities form the Fund include providing financial support to technological solutions aimed at providing affordablefinancial services to the disadvantaged sections of the society. According to paragraph 7.1of the Guidelines, RRBs are among the eligible institutions for getting assistance from theFund. As RRBs have embarked upon financial inclusion in a big way and anoverwhelming percentage of their branches are located in rural areas, funding support toRRBs for implementing CBS could be considered from FITF. However, taking intoaccount the total corpus of the Fund, the committee is of the view that funding support for

initial capital investment by RRBs for powering their remote rural branches through solar power as part of CBS may be provided through FITF.

13. Training requirements As is well known, the existing staff of RRBs has an adverse age profile with majority of staff in the above 45 years age group. Further, they are also notwell versed with technology. Many RRBs are also short of staff. As such, implementingCBS in RRBs would be a challenge, for which proper planning is required.

14. It is known that RRBs do not have their own training establishments so far. The existingtraining facilities available for RRB staff are Bankers Institute for Rural Development,

Lucknow, College of Agricultural Banking, Pune, Regional Training Colleges of NABARD at Mangalore and Bolpur, and the sponsor bank training institutes. However,all these institutions (other than sponsor bank training institutes) provide training only toofficers and not to clerical or subordinate staff.

15. The Committee to Formulate a Comprehensive HR Policy for RRBs (Chairman:Y.S.P.Thorat) has, in its report recommended that RRBs should have an exclusivetraining cell within the Personnel Department at Head Office and bestow more attention



to the training function. It also recommended that sponsor banks can consider earmarkingin any one training institute in a state, at least one channel to cater to the trainingrequirements of all RRBs within the state and/ or the adjoining states.

16. If the ASP model is adopted for the CBS of RRBs, the ASP would provide technical

training to a core group of staff. The RRBs would be required to identify a few such staffmembers to build a core team. This team would have to take responsibility for executingthe transition to CBS. It is expected that all RRBs would be able to identify such staffmembers.

17. As RRBs do not as yet have their own training set-ups, the committee is of the view thatthe training requirements of staff of RRBs on account of moving towards CBS wouldhave to be met by sponsor banks through their training establishments. The sponsor banksshould also meet the costs incurred in this regard.

18. It was also represented to the committee that RRBs may recruit fresh staff for their IT

requirements. The committee is in agreement with this view and suggests IT specialistsmay be recruited in RRBs to cater to their IT requirements.



Chapter 9. Road Map for Implementation

1. As has been detailed in an earlier section, different RRBs are at varying degrees ofcomputerisation. As such, the road map for implementation of CBS would be different fordifferent banks. The committee is of the view that the roll-out of the road map for

implementation of CBS in RRBs should start at the earliest and proceed as follows.

2. In case of RRBs in which 100 per cent branches are computerised, available data wouldnot be required to be created again for migration to CBS. As such, these banks shouldtake the least time to move to CBS. The committee is of the view that such banks shouldimplement CBS in all their branches by September 2009. There are 20 RRBs fallingunder this category.

3. The remaining RRBs may also start the process of moving their branches to CBS at theearliest. The committee envisages that such RRBs should implement CBS in at least 25 per cent of their branches by September 2009 and at least 50 per cent of their branches by

September 2010. The remaining branches may be endeavoured to be covered bySeptember 2011. By that date, at least 90 per cent of the business of the banks should beon CBS.

4. The overall responsibility of ensuring that the time frame suggested is adhered to would be that of the sponsor bank. The Board of Directors of RRBs may draw up a detailed timeschedule and ensure implementation as prescribed.

5. In addition, all new branches opened after September 2009 may be made CBS compliantfrom day 1.



Chapter 10. Recommendations

A summary of the recommendations of the committee made in the earlier sections is given below.

1. The significant differences in the level of computerisation between different RRBs need to betaken into account while preparing any plan for further technology upgradation of RRBs.

2. As a matter of policy, all RRBs should begin moving towards CBS. The CBS in RRBs should be geared towards better management control and monitoring, wider range of services offeredand enhanced level of customer satisfaction. Adoption of CBS would lead to uniformity inwork environment, more informed decision making, centralised processing and better MISand reporting and improved regulatory compliance.

3. The committee is of the opinion that the ASP model for CBS of RRBs may be suitable.However, where significant cost reduction and economies of scale result, the resource sharingmodel with sponsor bank may be considered.

4. The respective sponsor banks may be given the option of selecting the service provider fortheir RRBs. This provider may be same as for the sponsor bank or different as per therequirement of the RRBs. In case a sponsor bank has developed its own software, it may

consider making the same available to its RRBs.

5. Any technology platform for CBS needs to be reliable, scalable, easily available, manageableand secure. For this, the background, credentials and experience of the vendor are extremelyimportant. It would therefore be prudent to rely on the trusted and established vendors to

provide services to RRBs.

6. Sponsor banks must own major responsibility in taking RRBs on the path to CBS. However,the requirements of the RRBs have to be borne in mind as these banks may not require thefull suite of services that are available in sponsor banks and hence a plain vanilla tailored totheir needs should be provided.

7. As regards connectivity, RRBs may go in for economic connectivity options, depending uponthe situational position of the branch.



8. While the critical branches (say up to 10 per cent of the total branches) may be completelyonline, other branches may be in hybrid mode. Such branches would be on offline mode withlocal memory and the data incrementally uploaded at desired hours during the day.

9. RRB branches in remote areas where power is a serious problem may take recourse to powering their branches through solar power in a CBS scenario.

10. At a rough estimate, the technological cost of taking RRBs to CBS works out to Rs 730.78crore.

11. Funding support may be provided to all RRBs in the matter of adopting CBS, irrespective oftheir financial position. This would enable the entire sector to move uniformly towardsadopting CBS.

12. While sponsor banks may contribute 25 per cent of the cost required for taking their RRBs toCBS, the remaining cost may be borne by Reserve Bank through Institute for Developmentand Research in Banking Technology (IDRBT). The IDRBT, in turn would provide necessaryfunds to the sponsor banks for their sponsored RRBs. The support could be in the form of

interest free loans, repayable in three years.

13. Funding support for initial capital investment by RRBs for powering their remote rural branches through solar power as part of CBS may be provided through FITF.

14. The training requirements of staff of RRBs on account of moving towards CBS would haveto be met by sponsor banks through their training establishments. The sponsor banks shouldalso meet the costs incurred in this regard.

15. The committee suggests IT specialists may be recruited in RRBs to cater to their ITrequirements.



16. The roll-out of the road map for implementation of CBS in RRBs should start at the earliest.RRBs in which 100 per cent branches are computerised, should implement CBS in all their

branches by September 2009.

17. The remaining RRBs may also start the process of moving their branches to CBS at theearliest. Such RRBs should implement CBS in at least 25 per cent of their branches bySeptember 2009 and at least 50 per cent of their branches by September 2010. The remaining

branches may be endeavoured to be covered by September 2011. By that date, at least 90 percent of the business of the banks should be on CBS.

18. The responsibility of ensuring that the time frame suggested is adhered to would be that ofthe sponsor bank.

19. All new branches opened after September 2009 may be made CBS compliant from day 1.



Chapter 11. Implementation

11.1 Issues in Computerization and Support

What is the desired level of IT in a bank, irrespective of size, location & profits?

The Group opined that the minimum level of IT infrastructure in a bank should be a computerizedfront office services, back-office accounting, MIS and regulatory reporting.

What are the available solutions?

Several solution providers from big firms to middle range players and banks etc., existed in themarket. Peer group banks working jointly for developing facilities like data centre for use bygroup members could also come together to provide solutions for the smaller banks. Even localdevelopers were offering inexpensive solutions to banks which were workable in theshort/medium term. However, choosing standardized products was essential for ensuringreliability and continued support.

What is the cost?

Costs of the ASP models have been discussed earlier. However, the costs mentioned abovewere the ‘list costs’ of the firms and would be negotiable, particularly if banks got together andbulk orders were to be placed. Different payment terms were also available which included asmall charge every month combined with per transaction fee which could possibly be of interestto the smaller banks. In addition to the ASP model, the outright purchase offering also existed

Which approach could be adopted for computerization of banks?

In respect of the small banks, particularly the unit banks, it was felt that the best method forcomputerization could be through the ASP model wherein a few software vendors could be short-listed by an agency like IDRBT and the banks could select the vendor from out of the list, basedon their geographical location and convenience. There was another view, however, that theindependent application model might also be considered, should a bank be capable anddesirous.

Who should be supported and How?

The Group deliberated upon the need for mandating the minimum level of IT usage by UCBs. It

was observed that so far, mandates had been given by the Reserve Bank for regulatorypurposes only, but if necessary, Reserve Bank could explore the possibility of laying downprescriptions for business purposes too. Prima facie banks that were making losses or verymeagre profits or those that are very small in size and therefore do not have the financialstrength to acquire the IT infrastructure set by RBI, require support. However, in case support isextended only to the weak or small banks, the better performing or growing banks may tend tointerpret that they were indirectly suffering because of their good performance or growth as RBIwas not extending support to them for their IT efforts. Even though, in fact, the better performingbanks may not be needing support, this approach of providing support to only those which areloss making or small may give a wrong and unintended signal to better performing banks.



This dilemma can therefore be addressed by ensuring that the support is not seen as a grantfrom Reserve Bank which was suggested by NAFCUB, as the banks must feel importance ofparticipating by owing what they get. In any case, interest free payment over a period of timeitself provides the built-in subsidy element. Similarly, the Committee felt that 3 years’ subsidy onmonthly rentals, as proposed by NAFCUB, may not be required. Instead it could be in the formof, say, an interest free conditional loan. The repayment could be structured for differentcategories of banks. For loss making banks, for example, there could be a moratorium on

repayment till the bank turned around. RBI could also attach conditions and link declaration ofdividend to the repayments . In such a case, while the loss making banks would not have anyproblem in accepting the loan, the profit making banks that avail of it would have an incentive topay back quickly so that they can declare dividend. Another area of support that Reserve Bankmay provide to all banks could be in the area of training which could range from PC application topurchase/sale of securities over the Negotiated Dealing System.

Further, financial support may be needed for purchasing and/or leasing in adequate andenchmarked hardware, required for setting up the system envisaged by the Group. The terms ofthe loan could be the same as that for acquisition of software, discussed earlier, as the existenceof appropriate hardware in every bank is a very important plank in the over-all proposal ofensuring a minimum standard of computerization in all UCBs.

How to route financial support?

On the issue of strategy for routing financial support to UCBs, the options were as under:(a) Providing funds directly to banks for outright purchase of customised software and hardware.(b) Paying the vendors who provide the software, on behalf of the UCB(c) Funding a national-level institution like IDRBT and routing the support through it.

In this context, it may be mentioned that in case of the first option i.e. providing finance toindividual banks, it would be difficult to manage as effecting timely payment and monitoring theproper end use of the funds would be a major issue. RBI would also not be able to enforce theagreement between the vendor and the bank as RBI or its agency like IDRBT would not be aparty to the agreement. Option 2 would mean a direct support to a vendor rather than to banks.

Therefore, In Option 3, the ASP model, the agreement could be tripartite. In this option i.e.providing support through IDRBT, it needs to be mentioned that the institution was created byRBI for providing services to banking and financial sector in India and it is already providingapplications such as SFMS to many banking entities on similar lines. Further, IDRBT’s budgetarydeficit is fully financed by the Reserve Bank and therefore it is very easy and logistically simplefor the Reserve Bank to extend financial support to the UCBs through IDRBT. IDRBT couldshortlist vendors for procuring the ASP model for urban cooperative banks, as IDRBT couldprovide IT consulting and could also monitor the implementation of the SLA. As such, the 3rd

Option is considered to be very practical. Further, the ASP approach will make it easier tonegotiate the price as consolidating the demand would provide economies of scale for both thevendor and the purchaser. ASP model would be a way of ensuring that even the smallest banksacquired standard software with continued support through reputed vendor.

There was also a view that banks which decided to select vendors independently should also besupported by RBI. Representatives of the sector felt that banks that had already selected or werein advanced stage of vendor selection for acquiring Core Banking Solutions stood to benefit fromthe support provided by RBI and should not be limited in the choice of vendor for availing thesupport. The Group debated this and concluded that such an option can be considered only forthose banks which are well capitalised and with good track record, on whom we have confidenceand comfort that the end use of funds are assured, and that they have IT savvy personnel toimplement/oversee and ideal with the vendors and for whom investing in an outright purchaseoption is financially a preferable option. The group felt that only banks which have deposits of



over Rs.100 crore and are making profits for the last 3 years and have CRAR of over 9% shouldbe supported for such outright purchase.

Documents

Status of IT in Loss Making Regional Rural Banks