Criticism of Core Banking Concept in India


Vijay Pithadia
Ph.D., Electronics Technocrat
Assistant Professor [Reader] & Chair: Kidevices AG
Shri Leuva Patel MBA Mahila College, Saurashtra University
Amreli-365 601

In the public sector banking has first evolved from automating the accounting processes in a stand alone mode and subsequently graduated into so called TBM's which in reality only integrated the these stand alone accounting applications. Several registers, legers scrolls and other forms of MIS continue to be generated manually in the branch. Several application packages still function in a stand alone mode even in a TBM branch like FDR, PPF etc. Such disjointed view of the branches resulted in a complex unmanageable IT infrastructure within these banks such distributed data based / applications pose sever administrative problems. Changing / modifying applications imply that these changes need to be applied over vast geographically distributed systems, resulting in slow and error prone updating. 

With frequent interest rate changes, product launches regulatory report MIS needs, it is indeed a night mare to carryout these changes across 1500 odd branches and retrieve the information and consolidate them to yield specific MIS reports. Added to this is the quality of Data emanating from branches. Most data entry operations are out sourced and validity of such massive data is questionable. It is often said, albeit in a lighter vein, that if the weekly return same week, then it would be different repeatability, integrity and accuracy, became real issues.

In one panoramic / integrated view and develop that package. It is beyond view of the branches view of the market and customers. This holistic view is implemented in centralized software called Core Banking. 

Information Technology Idea: 

If one sits down coolly and ponders over all these issues that them would make any same mind to seek a strategy that will solve. If not all, most of the problems Look around the world and see what others are doing? A core part of that strategy is deployment of a centralized core banking system. Today after decades of existence outside India it is now been talked about only now in our country. This is the only way to run a bank.

From business perspective Core Banking relates to the basic business of a bank or financial institution. That in a nut shell is taking deposits from customers and lending to customers. While doing so, ensure that profits are generated for the bank. From a technology perspective Core Banking is the short name for a Centralized Banking system that a bank has to deploy in order to perform its core banking business.

Core Banking:

The reason for calling it Core Banking System, after deployment, is the hart or the Core of the Bank / financial institution. All entities that form part of the eco-system of the bank / financial institution interact with. The entities are;

* Bank employees head office, regional offices, branches etc…
* Bank Management: executives / managers at respective locations head office, regional offices branches etc…
* Bank customers: Personal banking, corporate banking international banking etc.
* Bank Auditors, internal and external auditors who need to verify systems and procedures.
* Bank Regulators: mandatory reporting to central bank and other financial bodies.
* Bank share holders: providing the desired return to shareholders from banking operations.

For a bank / financial institutions the Core Banking system must address the Core Business of deposits and loans and the same time, address the work place needs of all above entitles at their respective locations.


There are 5 ingredients that form part of the Core Banking system. These are the essential building blocks for the entire bank / institution.

(1) General Ledger:

The absolute Core is the General Ledger of the bank accordingly, the absolute core of the banking system is the General Ledger system, every single financial activity that happens at any location within entire bank has to be reflected in the G.L. system that generates the financial statements for the entire bank which provides any entity to monitor the financial health of the bank.

Throughout the world, almost all banks have all their financial activity reflected in G.L. every night and next morning the G.L. system provides the bank with enterprise wide balance sheet and trial balance report In short for those who have successfully implemented Core Banking Systems, the concerned entities in the bank know the financial condition of the bank at the beginning of each business day. If one is looking at the financial statements of the whole bank the G.L. System must provide that. If one is in regional office, the G.L. System must provide the financial statements for the region. If one is the branch the G.L. System must provide the financial statements at the branch. Each morning all these entities, at the respective workplaces, see these financial statements reflecting the condition as of close of business yesterday.

In a Core Banking System, this is achieved by deploying a centralized G.L. System which provides for thousands of sub legers with. Level's start with individual branch G.L. rolled up to regional G.L. with further rollup of all regional G.L's to bank G.L. financial transactions from various sources throughout the bank update these subsidiary ledgers and the G.L. system then performs rollups to report at branch, region, zone, country wise head office and any other level that is required by the bank / financial institution.

(2) Customer Information System:

The next major ingredient of a Core Banking system is the Customer Information System or CIS. Accordingly in the CIS, a customer is identified by uniquely by his / her CIS number and all information related to that customer (name, address, phones, employment, credit history, relatives, family members, and demographic data) is stored along with this unique number. All this is stored in a centralized CIS system allowing the customer to visit any branch to do business with the bank.

In addition, CIS stores Customer to account relationships. A single unique customer could have a current account a joint saving account with his wife a time deposit, a car loan and a house loan. The CIS links all these five account to this single unique customer I.D. whenever the customer visits any branch of the bank, all that he does is give his name (and / or address or phone or CIS number) and the CIS system shows the branch staff the information about this customer as well as all the accounts linked to this customer and the latest balance in each of these account.

(3) Deposit System:

The third major ingredient is the deposit system. The ability to process various types of deposits is a must. These include current, savings, time deposit and hundreds of variations in each of these. e.g. Simple current accounts, current accounts with overdraft, cash credit accounts, variable rate overdrafts, simple savings, multi-currency savings, time deposits, CDS, variable rate time deposit, recurring deposits, multi-currency, time deposits, and so on. This is required to handle the liability side of the bank / financial institution's business.

This all is achieved by having deposits system that are heavily deposit system that are heavily parameterized i.e. by simply setting a parameter "Fixed Rate" or "Variable Rate" the deposit account will be processed by the deposit system using the appropriate rate from the applicable rates.

Around the world banks do not open a new deposit account for a customer directly in the deposit system. When the customer wants to open a new deposit account, the branch staff to go the CIS screen verifies the customer details and opens the account. This way, the existing CIS data of the customer remains infect and the CIS information shows that this customer has now increased his relationship with the bank / financial institution. As a result banks who have implemented such systems do not need to have an inter branch reconciliation organization / system.

(4) Loan System:

The fourth major ingredient is the loan system. This system handles the asset side of this business. In most banks / financial institutions around the world loans are separated by those to retail customer and those to commercial customers processing requirement of loans to corporate customers is different form retail customers and hence there are loan systems that cater to retail customers and those that cater to commercial or corporate customers.

The loan process in a bank involves multiple stems. The loan appraisal and sanction step, the disbursement and monitoring step, the non-performance tracking step the recovery step and the closure. Owing to the fact that a multitude of entities and processes are involved in the appraisal and sanction step, most banks around the world separate the appraisal and sanction step and implement a system called a loan organization system. The other remaining steps of the loan process are handling by the loan system.

With authorized access, any staff working in any branch around the country should be able to retrieve the customer loan information on his terminal and help the customer do a financial transaction. These financial transactions are automatically sent to the bank / financial institution's General Ledger and they update the appropriate credits and debits in the subsidiary ledgers in the General Ledger.

(5) Management Information System (MIS):

Once the core deposit and loan business transaction for all customers of the bank are captured and appropriate General Ledger accounts are updated, various users of the Core Banking System throughout the bank need to know what is happening within the entire financial institution. As a result, the fifth major ingredient is the management information system. This enables everybody in the bank to obtain the relevant information from the system in order to carry out their business effectively.

MIS is simple terms takes information from the General Ledger, CIS Deposit, Loan Systems and present them to the bank / financial institution. The staff all employees including management.

Around the world, typical examples of information that bank staff (each with access rights) retrieves include.

* Branch transaction activity for today ( list of all branch transactions )
* Loan activity for a single customer or a group of customer.
* Branch General Ledger report printed at the branch.
* N P A report for the entire bank for all transactions as of yesterday.

New Components:

Besides the 5 major ingredients, there are optional components (like a car with options like leather seats, flashing light etc…) that can be added on to the Core Banking Systems to help the bank staff uses them in a more efficient manner, these include:

Delivery Channels:

All the 5 major ingredients of a Core Banking system can be operated by a bank staff from any location in the country simple by using their terminal at their workplace. Around the world as banks started focusing on customer relationship management, they realized that customers interact with the entire bank for banking transactions in many ways. Customer can go to the branch, go to an ATM, call on the phone, and log on to the Internet to do their banking transactions. They can use one or more of these delivery channels (Called customer touch paints) to conduct segment and decide on further investment design specific products and services to promote such delivery channels.

The Core Banking Systems are production factories creating products and services and tracking them and the delivery channels are distributors and retailers who ensure these products and services are available to the customers whenever they are in the country. Hence, the add-on systems for Core Banking System include;

* Branch Automation system
* ATM Switch and connected ATM
* Call center system
* Internet Banking System

Any transaction done by the customers in any of the above systems goes and updates the Core Banking System like deposit or loan at that in turn updates the Bank's G.L. in the Core.

What ingredients are not included in Core Banking?

Typically these systems are confined to a specific business department within the bank. They are not Core because they do not affect all areas and entities of the bank.

* Trade finance
* Treasure
* Credit Card
* Mutual Funds
* Stocks, Bonds
* External System
* Payment gateways
* Shared ATM network
* World Wide credit card networks, maestro, electron etc
* World wide ATM networks plus, Cirrus etc and possibly other systems that the bank may want to deploy in specific departments

Impact of Core Banking:

The Core Banking Systems have to satisfy the requirements of all the entities that form part of the eco-system of the Bank.

[1] Bank Employee: Head office, regional offices, branches etc: Using Core banking System. With appropriate authority employee as given above can help customers do their financial transaction.

[2] Bank management: Executives / managers at respective locations, head office, regional offices, branches etc. can obtain the financial position from Core Banking Systems related the respective sphere of banking operations and thus help pinpoint potential problems so as to avoid crises.

[3] Bank Customers:  Can operate any of their accounts from any branch or preferred delivery channel and have access to his funds any time 24 hours a day.

[4] Bank Auditors :  Ones accounts audited, they operate the same year on year thus enabling auditors to focus more on systems and procedures at delivery channels like branches, call center etc.

[5] Bank regulators: Core Banking Systems produce the required reports for regulatory bodies like the central bank, financial statement, asset and liability reports, NPA reports, large currency transaction reports etc. are all produced by either the deposits, or the loan or a combination of deposit, loan and G.L. System.

[6] Bank Share Holders:  C.B. providing the desired return to shareholders from banking operations Trends overtime on such data informs S.H. about how the banks is doing and help take timely action to accelerate or improve performance.

Vijay Pithadia
Ph.D., Electronics Technocrat
Assistant Professor [Reader] & Chair: Kidevices AG
Shri Leuva Patel MBA Mahila College, Saurashtra University
Amreli-365 601

Source: E-mail June 6, 2006


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