The crisis in the international financial markets had been simmering for quite some time. However, its effects are now evident with the collapse of some of the leading financial institutions.

While India has not been as seriously impacted by the global financial turmoil, the current credit crunch has affected all sectors of the Indian economy. On the one hand, the Indian banking industry is witnessing rapid change given the evolving regulatory environment, rapid technological advancements, heightened competition and consolidation. On the other hand, with the global recession looming, the industry is now exploring process innovation and is more aggressively adopting technology.

ValueNotes along with the Indian Banks' Association (IBA) conducted a conference on "Process Outsourcing in the Indian Banking Industry" on January 6th to address the immediate issues concerning the banking industry. There were several speakers from the banking industry including HDFC Bank, Punjab National Bank, Bank of India, IDBI, who spoke on the issues and concerns of the banks. There were also some service providers such as Intelenet, MphasiS BPO, HTMT Global and Shell Transource who were present at the conference. These service providers talked about their experience with the international banks and spoke about issues related to vendor selection and process transition.

Inaugurating the conference, Dr. K Ramakrishnan, Chief Executive, IBA talked about the economy and the banking sector in his opening remarks. He said "The country will see difficult times for at least another one year and in these trying times the question that most banks are asking themselves is - How do I still lend and keep the portfolio intact?" He emphasized that this is a time to look internally and examine and set processes in place.

Outsourcing in the Indian Banking Industry

Globally, the banking and financial services sector has been at the forefront of the outsourcing movement. Third party service providers have also built greater processing and analytical capabilities and are able to handle more complex functions like financial modeling and equity research. In contrast with global evolution of outsourcing, the Indian banking industry has been slower to outsource.

The Indian banking Industry is highly fragmented. There are banks ranging from small co-operative banks (presence limited to a few branches in a city) to large nationalized commercial banks like SBI with over 10,000 branches (one of the largest banking network in the world). The Indian banking Industry is dominated by PSBs with 70% market share. Further, there are different issues that concern the Indian banks when outsourcing.

Harsha Pai, General Manager, Sparsh BPO (part of Intelenet) touched upon the issue of vendor selection and the necessary parameters while selecting a suitable vendor. Several attendees said that Indian banks were wary of outsourcing especially given the client confidentiality issues and the associated risks. According to Pai, "Initially, international banks had also certain concerns about outsourcing, however, now a majority of the banks outsource a wide range of services to third-party service providers. Indian banks need to clearly understand and convey to the service providers what is truly confidential".

While there were some apprehensions about outsourcing, there were also banks such as HDFC Bank, Bank of India and Punjab National Bank who shared their experiences about outsourcing and its rewards. BinduMadhav Tikekar, Senior Vice President & Regional Head - Wholesale banking Operations, HDFC Bank talked about the rewards in the form of cost effectiveness, reduction in technical staff and low implementation and operational costs. However, he also cautioned the banks about the risks associated with outsourcing.

Gaurav Bhatia, Vice President) BFS Solutioning Head - BPO, spoke about process transition - possibility and plausibility. With the help of several case studies he drove home the point that processes are crucial for outsourcing. Banks need to standardize and document every process before they can initiate outsourcing.

Process Innovation and Technology

In India, outsourcing of processes is largely constrained by the RBI regulations and resistance from trade unions. According to Arun Jethmalani, CEO, ValueNotes, "Aggressive adoption of IT and centralization of operations have served as a key enabler to outsourcing of business processes in the banking industry." Other factors such as growth in the banking industry, deregulation, increasing competition, consolidation and improving benchmarks in the industry are driving the outsourcing of business processes.

PSBs have been sluggish in adopting new technology as compared to global banks. Post liberalization, with RBI tightening its regulations, PSBs have undertaken massive computerization to achieve 'Total Branch Automation'. With privatization and increasing competition, all the large banks are now aggressively implementing 'Core Banking Solutions'.

There is increasing focus on technology as evidenced by more and more PSU banks going for aggressive computerization and transferring their processes into some technology platform or other. While a few large PSBs have been quick to respond to competitive pressures by introducing new services, investing in technology and acquiring capabilities like marketing and sales, others lag behind.

Sanjay Sharma, MD & CEO, IDBI Intech Ltd spoke about leveraging technology for process innovation. He argued that "Banks still need to reach the level where processes are streamlined in a manner so that there is consistent customer service in every branch on any bank."

P A Kalyanasundar, General Manager, Bank of India said that "Unlike the new generation private and foreign banks, PSBs come with a legacy. The biggest challenge that PSBs are faced with is completeness of data. This poses a hurdle when a bank decides to outsource." On similar lines, R I S Sidhu, Chief General Manager (IT), Punjab National Bank said that "While banks need to invest in technology, it is a challenge for them to implement technology and train their staff. Explaining the marked difference when talking about technology in a PSB, he said that until recently there was very little 'technology' for the banker and processes were largely manual procedures, however today technology implies enterprise wide data warehousing."

Most banks have partially outsourced their IT related requirements and matured in terms of their understanding of risks and advantages in outsourcing. We believe that with greater success in IT outsourcing, banks will be more inclined to outsource their business processes and thus leverage on the benefits and economies gained through investments in IT.