Benefits of Information Technology to the Banking Sector
A Case Study of the Cosmos cooperative bank Ltd.
Information technology has transformed the functioning of business all over the world. It has expanded the reach and coverage of systems. Use of IT made it possible to take better decisions on the basis of latest and accurate information. It has also contributed to reduction of costs and improvement in efficiency. In India the financial sector especially the banking sector is a major beneficiary from the implementation of IT. The banking sector uses IT basically for two different purposes one is communications and connectivity other is business process reengineering. The post liberalization period witnessed a sea change in the banking sector of India. Implementation of reforms has transformed the banking sector which is now entirely different from what it was few years ago. Reforms have introduced competition in this sector which has lowered the profit margins. The key business objective of banks in the changed scenario is to manage increasing competition by enhancing profitability, productivity and customer satisfaction. Technology has a very important role to play in achieving this objective. Adoption of technology leads to a number of benefits to the bank and its customers. The paper focuses on the following benefits.
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• Benefits to the customer
• Reduction in operational costs
• Increase in efficiency
• Improvement in the quality of assets.
This paper aims to highlight the benefits of IT with special reference to the Cosmos Cooperative Bank Ltd. (Cosmos Bank) which made a humble beginning as a small cooperative credit society on January 18, 1906 and is at present a leading multi-state scheduled cooperative bank providing banking facilities in the states of Maharashtra, Andhra Pradesh, Madhya Pradesh, Tamilnadu, Karnataka and Gujarat. The thrust areas of Cosmos Bank are growth, continuous adoption of updated technology, and constant endeavor for making available desired products and services to the customers. The adoption of IT by the bank has led to a number of benefits to its customers and banks itself.
Benefits to the Customers
Technology played a key role in providing the multi service platform of transacting banking business through ATM, telephone, internet etc. Implementation of IT has brought revolution in the functioning of banks. RBI has played a proactive role in implementation of IT in the banking sector. Dr. Rangrajan Committee had drawn up as early as in 1983-84 the first blueprint for computerization and mechanization in banking industry. Payment and settlement system is an important aspect of the financial system. Cosmos Bank utilizes various e-payment services of the RBI like Electronic Clearing System and Electronic Funds Transfer introduced in 1995, Real Time Gross Settlement in March 2004, and National Electronic Funds Transfer in November 2005, thus benefiting its customers in terms of quick transfer of funds, payments, settlements, etc. at reduced cost.
Electronic Clearing Service:
ECS is a retail payment system that can be used to make bulk payments/receipts of a similar nature, especially where each individual payment is of a repetitive nature and of relatively small amount. It has two variants – one for direct credit and the other for direct debit. Under ECS (credit) one entity/company makes payments from its bank account to a number of recipients by direct credit to their bank accounts. The direct credit facility enables companies and Government departments to make large volume of payments such as salary and pension. With the ECS debit the organisations such as utility companies, electricity, telecom and insurance companies collect their bills, insurance premia directly from the bank account of their customers. The Cosmos Bank provides ECS service to its customers.
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Real Time Gross Settlement (RTGS)
The Real Time Gross Settlement facility is available to the customers of Cosmos Bank since July 2004. Due to this service remittance of funds anywhere in the country within two hours by giving written instruction to the bank with low fee is possible for accountholder of Cosmos Bank. RTGS services are available at all branches of the Bank.
National Financial Switch (NFS):
NFS network which started its operations on august 27, 2004 is owned and operated by the Institute for Development and Research in Banking Technology (IDRBI).
NFS interconnects the ATM switches of the banks together and enables inter- operationality of ATM cards issued by any bank across the network. The main advantage is that there is no need to have bank specific ATM installations in the same geographical area. This reduces costs. To quote
Mr. Rajesh Nayar, Country Manager, Finanncial Services Sector, IBM, “the cost of transactions over channels like ATMs and the internet is lower than doing it through branches.” Networking of ATMs across the country, by leveraging the technology, is really a very customer oriented development. The Cosmos Bank has linkage to NFS as a result ATM card holder of the Bank can withdraw money from the account in Cosmos Bank from nearly 10000 ATMs across India.
Core Banking:
Recognizing the role of technology in reducing the transaction costs and delivering the financial services in an efficient way the Cosmos Bank has introduced centralized banking system or core banking. To quote Mr. Shashikant Bugde, MD Cosmos Bank, “ We believe that in the current highly competitive Indian banking scenario, a strong technology infrastructure based on centralized core banking platform, is the need of the hour.’’ Core banking improves efficiency and productivity levels tremendously. It enables the bank to shift from branch banking to bank banking. The employees of the bank have been trained to efficiently implement the core banking.
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As is evident from the above information, Cosmos Bank is very keen in implementing technology for improvement in the customer service. “Customers Delight” is the mantra for retaining the customers in this era where customers do not hesitate to substitute an age old service provider to a better one. Cosmos Bank has been quick enough to introduce new products like ATMs, Debit Cards and Internet Banking etc. to suit the dynamic needs of the customers.
Reduction in Operational Costs:
Operating at minimum cost is a must in the competitive environment. Shifting customer access to IT-based lower cost channels brings down operational costs. Continuous up gradation of the technology has definitely contributed to the lowering of operational costs of the Bank. The data in Table-1 indicates a continuous decline in operating costs of the Cosmos Bank from 7.1% in 2002 to 5.8% in 2007.
Table-1: Operating Expenses of Cosmos Bank
Year Operating Expenses
(% to Total Assets)
2002 7.1
2003 6.9
2004 6.5
2005 6.0
2006 6.0
2007 5.8
Source: RBI Report on Trend & Progress of Banking in India
Increase in Efficiency
Efficiency is the key to enhance productivity. Business per employee and profit per employee are the two indicators of efficiency. The bank exhibits improvement with reference to both these parameters. As stated in Table-2, the business per employee has registered a growth from Rs. 258.6 lac in 2002 to Rs. 427.4 lac in 2007. While the profit per employee increased from Rs. 2.3 lac in 2002 to Rs. 4.0 lac in 2007.
Table-2: Business Per Employee & Profit Per Employee
Year Ended March 31st Business per Employee (Rs. Lac) Profit per Employee (Rs. Lac)
2002 258.6 2.3
2003 279.4 2.4
2004 312.8 3.1
2005 349.3 3.1
2006 421.6 3.8
2007 427.4 4.0
Source: Annual Reports of Cosmos Bank.
Income Composition
The income earned by a bank can be classified as interest and non–interest income. The non-interest income includes commission, fees, exchange charges, brokerage etc. which the bank charges for variety of services rendered by it. With increased use of IT, more number of customers is expected to be served, leading to increase in greater contribution to total income coming from non-interest part. By using IT effectively Cosmos Bank has been able to
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provide wide range of services to its customers and has been able to increase its non-interest income component. As indicated in the Table-3, the contribution of non interest income in the total income of the Bank has increased from 2.6% in 2002 to 11.5% in 2007, which proves the impact of IT.
Table-3: Contribution of Non-Interest Income to Total Income
Year
Contribution % Year
Contribution %
2002 2.6 2005 7.8
2003 20.2 2006 10.8
2004 25.2 2007 11.5
Source: Annual Reports of Cosmos Bank.
Improvement in Asset Quality
Risk assessment is another area where technology can play a major role. The objectives of the banking sector have changed towards profitability, productivity and corporate excellence in the post reforms period. To achieve these objectives management of non-performing assets received greater attention. NPAs are a serious strain on profitability. For effective and proper pre-sanction appraisal of loan proposals IT plays an important role. IT can be used for regular inspection of the activities of the borrower, proper verification of various records and monitoring loan account effectively. Data in Table-4 shows that IT has definitely contributed to the lowering of gross NPAs of the Bank from 14% in 2002 to 9.4% in 2007, and the net NPAs declining from 7.1% in 2002 to 3.3% in 2007.
Table-4: NPA of Cosmos Bank
Year Gross NPA (%) Net NPA (%) Year Gross NPA (%) Net NPA (%)
2002 14.0 7.1 2005 13.3 2.1
2003 14.9 3.6 2006 12.5 2.7
2004 14.3 2.1 2007 9.4 3.3
Source: Annual Reports of Cosmos Bank
Conclusions
IT has played a very important role in the competitive strength of the Cosmos Cooperative Bank Ltd. Although there are other factors such as efficient management, human resource development, corporate governance, effective marketing etc. which have contributed to the growth of the bank, IT too has played a significant role in improved performance of Cosmos Cooperative Bank Ltd..
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References
1. Annual Reports of Cosmos Cooperative Bank Ltd.
2. Repost on Trend and Progress of Banking in India, various issues.
3. RBI – Vision Document, 2004.
4. Seema Sant, Urban Cooperative Banking & Technology, Professional Banker, May 2008.
5. Ashwini Kumar Sharma – The World After Core Banking, Bank Quest, June 2007.
6. V.Chandrasekar, Tomorrow’s Technology for Tomorrow’s Banking, Bank Quest, June 2007.
7. R.I.S.Sidhu, Technology and Resultant Innovations in Customer Service and Products, Bank Management, August 2007.
