PROJECT REPORT

On

Role of RRB in Financial Inclusion

Submitted in partial fulfillment of requirements for

the award of the degree of Bachelor of Commerce

Session : 2016-2017

Under Supervision of: Submitted by:

Mrs. Shuchi Goel Kanika
Lecturer Roll No. : 5516
Exam Roll No. :
VMM

Vaish Mahila Mahavidhyalya, Rohtak

MAHARSHI DAYANAND UNIVERSITY, ROHTAK
 DECLARATION

I, Kanika Roll No. 5516 of B.Com of VMM (MDU) Rohtak, hereby declare that the project entitled
Training & Effectiveness an original work and the same has not been submitted to any other institute for
award of any other degree. The interim report was presented to the supervisor on .and the
pre-submission presentation was made on.. The feasible suggestions have been duly
incorporated in consultation with the supervisor.

Signature of the Candidate

 ACKNOWLEDGEMENT

Gratitude is not a thing of expression; it is more a matter of feeling.

There is always a sense of gratitude which one express for others for their help and supervision
in achieving the goals. We too express my deep gratitude to each and everyone who has been
helpful to us in completing the project report successfully.

We would like to thank almighty God for blessing showered on us during the completion of
Dissertation Report.

We give our regards and sincere thanks to Mrs. Shuchi Goel (VMM) who has devoted her
precious time in guiding us & helping us complete it within time.

We feel self-short of words to thanks our parents and friends who had directly or indirectly
instrumental in the completion of the project. We are indebted to all respondents for their time
passion during the long conversations.

Kanika
INTRODUCTION

Indian economic environment is witnessing path breaking reform measures. The financial
sector, of which the banking industry is the largest player, has also been undergoing a
metamorphic change. Today the banking industry is stronger and capable of withstanding the
pressures of competition. While internationally accepted prudential norms have been adopted,
with higher disclosures and transparency, Indian banking industry is gradually moving towards
adopting the best practices in accounting, corporate governance and risk management. Interest
rates have been deregulated, while the rigour of directed lending is being progressively reduced.

Today, we are having a fairly well developed banking system with different classes of
banks public sector banks, foreign banks, private sector banks both old and new generation,
regional rural banks and co-operative banks with the Reserve Bank of India as the fountain Head
of the system. In the banking field, there has been an unprecedented growth and diversification
of banking industry has been so stupendous that it has no parallel in the annals of banking
anywhere in the world.

During the last 41 years since 1969, tremendous changes have taken place in the banking
industry. The banks have shed their traditional functions and have been innovating, improving
and coming out with new types of the services to cater to the emerging needs of their customers.
Massive branch expansion in the rural and underdeveloped areas, mobilization of savings and
diversification of credit facilities to the either to neglected areas like small scale industrial sector,
agricultural and other preferred areas like export sector etc. have resulted in the widening and
deepening of the financial infrastructure and transferred the fundamental character of class
banking into mass banking.

There has been considerable innovation and diversification in the business of major
commercial banks. Some of them have engaged in the areas of consumer credit, credit cards,
merchant banking, leasing, mutual funds etc. A few banks have already set up subsidiaries for
merchant banking, leasing and mutual funds and many more are in the process of doing so. Some
banks have commenced factoring business.

THE INDIAN BANKING SECTOR

The history of Indian banking can be divided into three main phases.

Phase I (1786- 1969) - Initial phase of banking in India when many small banks were set up

Phase II (1969- 1991) - Nationalization, regularization and growth

Phase III (1991 onwards) - Liberalization and its aftermath

 With the reforms in Phase III the Indian banking sector, as it stands today, is mature in
supply, product range and reach, with banks having clean, strong and transparent balance sheets.
The major growth drivers are increase in retail credit demand, proliferation of ATMs and debit-
cards, decreasing NPAs due to Securitization, improved macroeconomic conditions,
diversification, interest rate spreads, and regulatory and policy changes (e.g. amendments to the
Banking Regulation Act).

Certain trends like growing competition, product innovation and branding, focus on
strengthening risk management systems, emphasis on technology have emerged in the recent
past. In addition, the impact of the Basel II norms is going to be expensive for Indian banks, with
the need for additional capital requirement and costly database creation and maintenance
processes. Larger banks would have a relative advantage with the incorporation of the norms.

PERSPECTIVES ON INDIAN BANKING

In 2009-10 there was a slowdown in the balance sheet growth of scheduled commercial
banks (SCBs) with some slippages in their asset quality and profitability. Bank credit posted a
lower growth of 16.6 per cent in 2009-10 on a year-on-year basis but showed signs of recovery
from October 2009 with the beginning of economic turnaround. Gross nonperforming assets
(NPAs) as a ratio to gross advances for SCBs, as a whole, increased from 2.25 per cent in 2008
- 09 to 2.39 percent in 2009 10. Notwithstanding some knock-on effects of the global
financial crisis, Indian banks withstood the shock and remained stable and sound in the post-
crisis period. Indian banks now compare favorably with banks in the region on metrics such as
growth, profitability and loan delinquency ratios. In general, banks have had a track record of
innovation, growth and value creation. However this process of banking development needs to
be taken forward to serve the larger need of financial inclusion through expansion of banking
services, given their low penetration as compared to other markets.

During 2010-11, banks were able to improve their profitability and asset quality. Stress
test showed that banking sector remained reasonably resilient to liquidity and interest rate
shocks. Yet, there were emerging concerns about banking sector stability related to
disproportionate growth in credit to sectors such as real estate, infrastructure, NBFCs and retail
segment, persistent asset-liability mismatches, higher provisioning requirement and reliance on
short-term borrowings to fund asset growth

GLOBAL BANKING DEVELOPMENTS

 The year 2010-11 was a difficult period for the global banking system, with challenges
arising from the global financial system as well as the emerging fiscal and economic growth
scenarios across countries. Global banks exhibited some improvements in capital adequacy but
were beleaguered by weak credit growth, high leverage and poor asset quality. In contrast, in
major emerging economies, credit growth remained at relatively high levels, which was regarded
as a cause of concern given the increasing inflationary pressures and capital inflows in these
economies. In the advanced economies, credit availability remained particularly constrained for
small and medium enterprises and the usage of banking services also stood at a low, signaling
financial exclusion of the population in the post-crisis period. On the positive side, both
advanced and emerging economies, individually, and multi-laterally, moved forward towards
effective systemic risk management involving initiatives for improving the macro-prudential
regulatory framework and reforms related to systemically important financial institutions.

POLICY ENVIRONMENT

Banking sector policy during 2010-11 remained consistent with the broader objectives of
macroeconomic policy of sustaining economic growth and controlling inflation. The Reserve
Bank introduced important policy measures of deregulation of savings bank deposit rate and
introduction of Credit Default Swap (CDS) for corporate bonds. It initiated the policy
discussions with regard to providing new bank licenses, designing the road-ahead for the
presence of foreign banks and holding company structure for banks. The process of migration to
the advanced approaches under the Basel II regulatory framework continued during 2010-11,
while also facilitating the movement towards the Basel III framework Financial Inclusion
continued to occupy centre stage in banking sector policy with the rolling out of Board-
Approved Financial Inclusion Plans by banks during 2010-11 for a time horizon of next three
years.

RECENT TRENDS IN BANKING

1) Electronic Payment Services E Cheques

Now-a-days we are hearing about e-governance, e-mail, e-commerce, e-tail etc. In the
same manner, a new technology is being developed in US for introduction of e-cheque, which
will eventually replace the conventional paper cheque. India, as harbinger to the introduction of
e-cheque, the Negotiable Instruments Act has already been amended to include; Truncated
cheque and E-cheque instruments.

2) Real Time Gross Settlement (RTGS)

Real Time Gross Settlement system, introduced in India since March 2004, is a system
through which electronics instructions can be given by banks to transfer funds from their account
to the account of another bank. The RTGS system is maintained and operated by the RBI and
provides a means of efficient and faster funds transfer among banks facilitating their financial
operations. As the name suggests, funds transfer between banks takes place on a Real Time'
basis. Therefore, money can reach the beneficiary instantaneously and the beneficiary's bank has
the responsibility to credit the beneficiary's account within two hours.
 3) Electronic Funds Transfer (EFT)

Electronic Funds Transfer (EFT) is a system whereby anyone who wants to make
payment to another person/company etc. can approach his bank and make cash payment or give
instructions/authorization to transfer funds directly from his own account to the bank account of
the receiver/beneficiary. Complete details such as the receiver's name, bank account number,
account type (savings or current account), bank name, city, branch name etc. should be furnished
to the bank at the time of requesting for such transfers so that the amount reaches the
beneficiaries' account correctly and faster. RBI is the service provider of EFT.

4) Electronic Clearing Service (ECS)

Electronic Clearing Service 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 smaller amount. This facility is meant for companies and government
departments to make/receive large volumes of payments rather than for funds transfers by
individuals.

5) Automatic Teller Machine (ATM)

Automatic Teller Machine is the most popular devise in India, which enables the
customers to withdraw their money 24 hours a day 7 days a week. It is a devise that allows
customer who has an ATM card to perform routine banking transactions without interacting with
a human teller. In addition to cash withdrawal, ATMs can be used for payment of utility bills,
funds transfer between accounts, deposit of cheques and cash into accounts, balance enquiry etc.

6) Point of Sale Terminal

Point of Sale Terminal is a computer terminal that is linked online to the computerized
customer information files in a bank and magnetically encoded plastic transaction card that
identifies the customer to the computer. During a transaction, the customer's account is debited
and the retailer's account is credited by the computer for the amount of purchase.

7) Tele Banking

Tele Banking facilitates the customer to do entire non-cash related banking on telephone.
Under this devise Automatic Voice Recorder is used for simpler queries and transactions. For
complicated queries and transactions, manned phone terminals are used.

8) Electronic Data Interchange (EDI)

Electronic Data Interchange is the electronic exchange of business documents like

purchase order, invoices, shipping notices, receiving advices etc. in a standard, computer
processed, universally accepted format between trading partners. EDI can also be used to
transmit financial information and payments in electronic form.
IMPLICATIONS

The banks were quickly responded to the changes in the industry; especially the new
generation banks. The continuance of the trend has re-defined and re-engineered the banking
operations as whole with more customization through leveraging technology. As technology
makes banking convenient, customers can access banking services and do banking transactions
any time and from any ware. The importance of physical branches is going down.

CHALLENGES FACED BY BANKS

The major challenges faced by banks today are as to how to cope with competitive forces
and strengthen their balance sheet. Today, banks are groaning with burden of NPAs. It is rightly
felt that these contaminated debts, if not recovered, will eat into the very vitals of the banks.
Another major anxiety before the banking industry is the high transaction cost of carrying Non
Performing Assets in their books. The resolution of the NPA problem requires greater
accountability on the part of the corporate, greater disclosure in the case of defaults, an efficient
credit information sharing system and an appropriate legal framework pertaining to the banking
system so that court procedures can be streamlined and actual recoveries made within an
acceptable time frame. The banking industry cannot afford to sustain itself with such high levels
of NPAs thus, lend, but lent for a purpose and with a purpose ought to be the slogan for
salvation.

The Indian banks are subject to tremendous pressures to perform as otherwise their very
survival would be at stake. Information technology (IT) plays an important role in the banking
sector as it would not only ensure smooth passage of interrelated transactions over the electric
medium but will also facilitate complex financial product innovation and product development.
The application of IT and e-banking is becoming the order of the day with the banking system
heading towards virtual banking.

As an extreme case of e-banking World Wide Banking (WWB) on the pattern of World
Wide Web (WWW) can be visualized. That means all banks would be interlinked and individual
bank identity, as far as the customer is concerned, does not exist. There is no need to have large
number of physical bank branches, extension counters. There is no need of person-to-person
physical interaction or dealings. Customers would be able to do all their banking operations
sitting in their offices or homes and operating through internet. This would be the case of
banking reaching the customers.

Banking landscape is changing very fast. Many new players with different muscle powers
will enter the market. The Reserve Bank in its bid to move towards the best international banking
practices will further sharpen the prudential norms and strengthen its supervisor mechanism.
There will be more transparency and disclosures. In the days to come, banks are expected to play
a very useful role in the economic development and the emerging market will provide ample
business opportunities to harness. Human Resources Management is assuming to be of greater
importance. As banking in India will become more and more knowledge supported, human
capital will emerge as the finest assets of the banking system. Ultimately banking is people and
not just figures.
India's banking sector has made rapid strides in reforming and aligning itself to the new
competitive business environment. Indian banking industry is the midst of an IT revolution.
Technological infrastructure has become an indispensable part of the reforms process in the
banking system, with the gradual development of sophisticated instruments and innovations in
market practices.

IT IN BANKING

Indian banking industry, today is in the midst of an IT revolution. A combination of

regulatory and competitive reasons has led to increasing importance of total banking automation
in the Indian Banking Industry. Information Technology has basically been used under two
different avenues in Banking. One is Communication and Connectivity and other is Business
Process Reengineering. Information technology enables sophisticated product development,
better market infrastructure, implementation of reliable techniques for control of risks and helps
the financial intermediaries to reach geographically distant and diversified markets.

The bank which used the right technology to supply timely information will see
productivity increase and thereby gain a competitive edge. To compete in an economy which is
opening up, it is imperative for the Indian Banks to observe the latest technology and modify it to
suit their environment. Not only banks need greatly enhanced use of technology to the customer
friendly, efficient and competitive existing services and business, they also need technology for
providing newer products and newer forms of services in an increasingly dynamic and globalize
environment. Information technology offers a chance for banks to build new systems that address
a wide range of customer needs including many that may not be imaginable today.

It is becoming increasingly imperative for banks to assess and ascertain the benefits of
technology implementation. The fruits of technology will certainly taste a lot sweeter
when the returns can be measured in absolute terms but it needs precautions and the
safety nets.
It has not been a smooth sailing for banks keen to jump onto the IT bandwagon. There
have been impediments in the path like the obduracy once shown by trade unions who
felt that IT could turn out to be a threat to secure employment. Further, the expansion of
banks into remote nooks and corners of the country, where logistics continues to be a
handicap, proved to be another stumbling stock. Another challenge the banks have had to
face concerns the inability of banks to retain the trained and talented personnel, especially
those with a good knowledge of IT.
The increasing use of technology in banks has also brought up security' concerns. To
avoid any pitfalls or mishaps on this account, banks ought to have in place a well-
documented security policy including network security and internal security. The passing
of the Information Technology Act has come as a boon to the banking sector, and banks
should now ensure to abide strictly by its covenants. An effort should also be made to
cover e-business in the country's consumer laws.
 Some are investing in it to drive the business growth, while others are having no option
but to invest, to stay in business. The choice of right channel, justification of IT
investment on ROI, e-governance, customer relationship management, security concerns,
technological obsolescence, mergers and acquisitions, penetration of IT in rural areas,
and outsourcing of IT operations are the major challenges and issues in the use of IT in
banking operations. The main challenge, however, remains to motivate the customers to
increasingly make use of IT while transacting with banks. For small banks, heavy
investment requirement is the compressing need in addition to their capital requirements.
The coming years will see even more investment in banking technology, but reaping ROI
will call for more strategic thinking.
The banks may have to reorient their resources in the form of reorganized branch
networks, reduced manpower, dramatic reduction in establishment cost, honing the skills
of the staff, and innovative ways of attracting talented managerial pool. The Government
of India and the Reserve Bank of India (RBI) on their part would strengthen the existing
norms in terms of governing and directing the functioning of these banks. Banks needs to
strengthen their audit function. They would be evaluated based on their performance in
the market place. It is in this context that we have invited the chief executive officers of
Indian banks to respond to the issues mentioned earlier

FUTURE OUTLOOK

Everyone today is convinced that the technology is going to hold the key to future of
banking. The achievements in the banking today would not have make possible without IT
revolution. Therefore, the key point is while changing to the current environment the banks has
to understand properly the trigger for change and accordingly find out the suitable departure
point for the change.

Although, the adoption of technology in banks continues at a rapid pace, the

concentration is perceptibly more in the metros and urban areas. The benefit of Information
Technology is yet to percolate sufficiently to the common man living in his rural hamlet. More
and more programs and software in regional languages could be introduced to attract more and
more people from the rural segments also.

Standards based messaging systems should be increasingly deployed in order to address

cross platform transactions. The surplus manpower generated by the use of IT should be used for
marketing new schemes and banks should form a brains trust' comprising domain experts and
technology specialists.

CONCLUSION

Indian banking system will further grow in size and complexity while acting as an
important agent of economic growth and intermingling different segments of the financial sector.
It automatically follows that the future of Indian banking depends not only in internal dynamics
unleashed by ongoing returns but also on global trends in the financial sectors. Indian Banking
Industry has shown considerable resilience during the return period. The second generation
returns will play a crucial role in further strengthening the system. The banking today is re-
defined and re-engineered with the use of Information Technology and it is sure that the future of
banking will offer more sophisticated services to the customers with the continuous product and
process innovations. Thus, there is a paradigm shift from the seller's market to buyer's market in
the industry and finally it affected at the bankers level to change their approach from
"conventional banking to convenience banking" and "mass banking to class banking". The shift
has also increased the degree of accessibility of a common man to bank for his variety of needs
and requirements. Adoption of stringent prudential norms and higher capital standards, better
risk management systems, adoption of internationally accepted accounting practices and
increased disclosures and transparency will ensure the Indian Banking industry keeps pace with
other developed banking systems.

Recent Trends in Indian Financial Services Industry

R.Neelamegam

Emeritus Professor- AICTE, Department of Management Studies, V.H.N.S.N. College, Virudhunagar

Abstract - 'Finance is the life blood of business' and

'Finance is the wheel of industry' - go the rhetoric

emphasizing the key role of finance. In fact, finance

pervades into other areas of business like production and

marketing - to keep the business going: such is the

importance of finance. Amid this backdrop, the present

paper brings to focus recent trends in financial services

sector in India.

1. INTRODUCTION

In India, the onset of globalization in

July1991, changed the financial scenes in the

realms of banking, insurance and Mutual fund.

1.1 Commercial banks

A landmark was registered in the Indian

banking sector when the major banks were

nationalized in 1969.Though nationalization was

enforced as a flashy political gimmickry by the

then government at the centre, its real gain was

reaped by the citizens of India only in 2009-when

the banks of developed nations tumbled down,

the Indian banks stood strong- there was no

public panic at all at the time of global financial

crisis which shook the world during 2008-2009.

1.2 Banks' technology driven services

Marketing is an essential economic factor

not only for production but also for research and

development. Peter Drucker has aptly remarked a

business firm has really two functions only,

namely, marketing and innovation. It is very

relevant for banking industry, which in India has

undergone sea changes, thanks to the advent of

technology, competition brought through foreign

banks, emergence of new private banks and

changes in regulations.

With more and more players expected in

the field, banks have to adapt to the new trend.

Concerted efforts have been made by banks to

improve customer service. The most important

196

ones relate to the advent of technology - ATMS,

telebanking, internet banking- banks have

adopted latest information technology to cater to

the needs of customers. For example, in a shared

payment network system (SPNS), a customer of

one bank can use hisATM card at another bank's

ATM, both being in the same network. Banks

have opened specialized branches like industrial

finance, MSME and NRI branches in order to

provide personalized services. Besides, they

have set up grievance redressal cells at major

centers to redress customers' grievances.

1.3 Cross Selling

Recently, in retail banking business, the

concept of cross selling has been introduced. If a

bank sells an asset product (housing/car/

educational loan) to its account holder, it is cross

selling. The cross selling enhances customer's

loyalty. Banks have entered into the field of

housing loan. Housing loan rates are being

slashed. The aggression by the banks in this field

is noticeable. The rate war triggered by SBI has

prompted other banks to lower their rates.SBI,

UBI, PSB along with LIC and HFC have special

offer of loan at 8% to 8.5%

1.4 Educational Loan

Asalient feature in recent trend in bank

finance is education loan. Education loans

amounting to Rs24,000 crore had been disbursed

to 16 lakh students across the country till march,

2009; and it is expected that the education loan

may touch Rs50,000 crore by 2015. The Central

Government has decided not to charge interest on

education loan granted to those whose family

income is less than Rs4.5 lakh per annum. This

will come into force during the current academic

year.197

2. REGIONAL RURAL BANKS (RRBS)

Ours is an agricultural economy .The

Father of the Nation rightly said that India lives in

villages. Still there are lakhs of villages where 60

crore people live. Against this backdrop, the

establishment of Regional Rural Bank in India is

a landmark in the Indian Banking History. The

main objective of RRB is to provide credit

especially to small and marginal farmers,

agricultural labourers, small entrepreneurs and

artisans in rural areas who need funds. At the

beginning, in 1975, five RRBS were setup. Today, we have 104 RRBS Sponsored by 29 banks.

These RRBS function in 484 districts with more

than 14,400 branches and employing about

70,200 persons. Realizing the importance of the

RRBS, Government of India has recently said

that it intends to strengthen the financial

resources of RRBS.

3. INSURANCE SECTOR
The life insurance business has come a

long way since independence, and Indian

consumers till recently had been dealing with one

life insurance player, i.e., the LIC in the public

sector. After the liberalization of the insurance

sector, a dozen companies have entered the

insurance business. The insurance sector had the

reforms with the passing of IRDA bill in

December, 1999. The privatization process

commenced by forming the Insurance Reforms

Committee. The 12 private life insurers have

already grabbed 9% of the market in terms of

premium income. The insurance premiums of

these 12 players have crossed Rs 1000 crore over

the last year. Innovative products, smart

marketing and aggressive distributition, that is,

the triple whammy combination has enabled

fledgling private insurers to sign up Indian

consumers. While the state owned companies

still dominate segments like endowment and

money back policies, the private companies have

a virtual monopoly in the unit linked insurance

schemes.

3.1 Detariffing

Recently, the IRDA has requested the

general insurance companies to initiate steps to

ensure transition from tariff regime to detariff

regime from January, 2007; accordingly, there is

full detariffing of the general insurance business

from April 1, 2008. Tariff means rigidity. It

means that not only rates are fixed, but also the

terms and conditions of policies are to be laid

down in tariff. Detariffing makes insurers free to

decide the premium rates based on their own

guidelines of pricing.

3.2 Bancassurance

The concept bancassurance is French

origin. It is an emerging concept in India .Life

assurance companies need immense distribution

strength. This distribution will undergo a vast

change when the insurance policies are available

from local bank branch through bancassurance

In India, the sign of initial success is already.

there and the success of the scheme depends on

banks ensuring excellent customer relationship.

3.3 Micro Insurance

LIC launched its first micro insurance

product, captioned Jeevan Madhur in

September, 2006. It launched its second micro

insurance product, under the caption Jeevan

Mangal in September, 2009. The policy is

targeted at factory workers, self help group

members, domestic servants, rickshaw pullers

and other low income people. The salient feature

is a low minimum premium of Rs15 per week and

the risk cover ranged from Rs 15, 000 to a

Maximum of Rs 50, 000.

4. MUTUAL FUND

In India, mutual funds play a dominant

role by mobilizing savings and investing them in

the capital market, thus establishing a link

between savings and capital market. The main

objective of investing in mutual fund scheme is to

diversify risk. Mutual funds made an opening in

1963 under the enactment of Unit Trust of India

R.Neelamegam - Recent Trends in Indian Financial Services Industry198

which launched its first scheme named US 1964,

which is continuing even to-day. In1986, the

Government amended the Banking Regulation

Act and permitted public sector commercial

banks like SBI, PNB, Canara bank and so forth to

set up mutual funds. Government allowed

insurance companies in the public sector- GIC in

1989 and LIC in 1991, to set up mutual funds. In

1993, under its New Economic policy of

liberalization opened the gates to the private

sector to set up mutual funds. In March 1991, the

government entrusted the function of regulating

mutual funds to Securities and Exchange Board

of India (SEBI) which issued guidelines in

October, 1991 for regulating the Indian capital

market.

4.1 Sectorwise Mobilization of Funds by

Mutual Funds

Mutual funds have become an important

segment of institutional investors. The total

mobilization of funds by private sector MFs

during 2007-2008 was Rs.37, 80,753 crores,

followed by UTI MFs Rs.3, 46,126 crores, and

public sector MFs Rs.3, 37,498 crores. As in the

preceding years, the private sector MFs

continued to dominate resource mobilization in

2007-2008

Now there is SIP (systematic investment

plan) method of investing in the mutual fund.

Before starting a SIP, an investor has to decide on

which fund scheme he wants to invest in dividend

or growth option? How much one wants to

invest? How long one wants SIP to go on? and so

forth.

Interest rate future was launched in

National Stock Exchange on 31st August, 2009.

It is a contract to buy or sell a debt security (10

year government bond bearing interest rate of 7%

payable half yearly) at a price decided in advance

for delivery at a future date .The contract helps to

eliminate the interest rate risk.

5. CONCLUSION
It is clear that many aspects of financial

services industry in India have changed since the

1990's. With the reforms of financial services

industry, the economy has been opened up and

several significant developments have been

taking place in all the segments of the financial

services sector. As per the survey of Central

Statistical Organization, the Indian economy has

grown at 6.1% in the first quarter of 2009-2010

against 5.8% growth in the previous quarter

despite the global financial crisis impacting

manufacturing and services sectors like trade,

hotels and communication. It is heartening to

note that finance, insurance and real estate

expanded by 8.1% against 6.9% in the previous

One of the first things to consider is decentralizing the digital infrastructure. In most banks and
FS firms, centralized IT structures hold sway. This legacy approach can be traced back to the
days of mainframes and COBOL programming, when computing power was scarce and IT was
purely a back-office function. The rationale for centralization is still the value of scale; it has
allowed banks to pool resources, consolidate data, and maintain software more efficiently. It has
also been important because having one consistent architecture has made communicating across
geographic boundaries seamless.

But those reasons for centralization are not as compelling as they used to be. In a cloud-based
world with interoperable and digital technology, diverse systems can work together more easily.
There is no longer a trade-off between global standards and local creativity, because IT
capabilities processes, practices, technology, and staff can be embedded into local business
units and operations. By dispersing IT this way, FS firms can keep the benefits of one digital
system while promoting flexibility and closeness to the customer throughout their various
businesses.

When it comes to embedding IT, the most common approaches do not always work well. For
example, some companies are introducing a bimodal setup: a traditional IT function at the core
of the enterprise, with more agile applications on the periphery, limited to specific offerings.
Those parts of the business have, in effect, their own dedicated IT staff and applications. But this
still represents business as usual, with IT departments siloed from the rest of the organization. It
means that many new endeavors must wait to be incorporated into older core systems, usually by
IT professionals who do not work directly with customers, who are charged with building and
maintaining a variety of systems all at once, and who are not necessarily prepared to move fast
enough to be competitive.

A more effective alternative is to change the entire organizational structure, embedding IT

professionals directly into the business units, and making a wider range of applications available
to them. Overall consistency and interoperability are managed by a small enterprise architecture
team, and coordinated with common application program interfaces (APIs). But most or all
individual applications are developed by people directly involved with, say, fund accounting,
over-the-counter derivatives, or mortgages. With this type of embedded IT, crucial ideas for new
offerings and competitive products can immediately generate digital development programs with
tight deadlines and budgets. They can be oriented to improve marketplace presence, gathering
and sharing data and responding quickly not just to customer feedback, but to insights gleaned
from customer activity. In addition, by shrinking the costly high-maintenance proprietary
platforms of traditional IT, financial-services firms can free up investment capital for developing
new revenue streams.

Making IT work
The idea of IT decentralization has been in the air for the past couple of years, and many FS
firms have started down this path. However, they still resist fully embedding IT in the
organization, despite being well aware of its potential revolutionary impact. That resistance will
not be tenable for long. The industry is at a tipping point. The fintech firms encroaching on the
industry all use some form of embedded IT. If established FS companies hope to compete more
vigorously, they must more fully embrace the embedded IT model in their core banking and
trading platforms. Companies that choose to continue with a centralized IT structure will lack the
necessary agility and responsiveness to stay competitive.

A fully integrated IT organization would break down the barriers between business and
technology strategies. The decision about which technology changes were most essential would
no longer be determined by their ranking in a discretionary investment scheduling queue.
Instead, the business units, working directly with their co-located IT teams, would set their own
technological priorities, in light of their capabilities, brand development needs, customer base,
market leadership, and growth agenda.

At any given moment, multiple embedded IT teams across the company might be working
simultaneously on time-sensitive new products. Some would be making updates to mobile
applications, in response to customer requests for new features or to meet account development
program goals. Others might be beta testing marketing campaigns on new social media
applications, while others implement process automation innovations.

Because embedded IT teams can work quickly compared with centralized IT, this approach
would improve customer request response time and time-to-market for innovations. It would also
lead to enhanced customer experience; professionals close to the business understand which
features are appealing and effective, and they can involve frontline leaders and customers in
interface design. And it would increase transparency, by making it easier to track and quantify
the return on investment for specific IT initiatives.

Most importantly, this approach would allow financial-services companies to focus on their most
differentiating capabilities. A bank that builds its expertise in a particular area can more easily
marshal digital technology, including data analytics and software-as-a-service (Saas), to offer
solutions and approaches that no competitor could provide as easily.

actors shaping embedded IT

The debate about the value of embedded IT teams is directly related to other trends in digital
technology that are roiling the financial-services industry. As noted in the recent PwC report
Financial services technology 2020 and beyond: Embracing disruption, pivotal areas in the
sector will be affected in the following ways:

Fintech competition: Financial technology firms with innovative products and services
have been attacking some of the most profitable elements of the financial-services value
chain among them lending, personal finance, mobile payments, and e-money. These
disrupters offer a better customer experience and much lower fee arrangements than
established financial-services companies, in part because they are online natives, and in
part because of their lean cost structure, which is not saddled with legacy technologies
and centralized IT models. One Asia-based wealth management app launched recently
with almost 1,000 products, all without commissions or fees. Traditional FS companies
need a more agile decentralized IT operating model to compete; every line of the business
must be able to think digital first and seize opportunities.
Data-driven product development: Advances in analytics and digital behavior tracking
have given businesses access to vast amounts of data about customer behavior and
preferences. This presents an extraordinary opportunity to develop products that meet or
even anticipate customer needs. Artificial intelligence (AI), machine learning, and
customer analytics will drive client engagement and product development over the next
decade; essentially, every FS offering is a form of AI software now. But before firms can
deliver the goods that customers want, they will have to gather, interpret, and draw
product strategies out of torrents of data in many versions and forms. Few financial-
services companies are ready to use their masses of data to full advantage. In a
decentralized model, each business unit can share data with others but apply it in ways
that connect directly to its customers.
Platforms and APIs: Cloud-based services go beyond replacing proprietary servers.
They make possible new types of interconnected applications. Some will be specific to
particular banks; others will be generally available, developed by the likes of Amazon,
Microsoft, Google, and nCino (a platform oriented to FS). Because of these new
platforms and the APIs that go with them, groups within FS firms can be far nimbler with
their IT infrastructure than in the past. The platforms will also increasingly incorporate
machine learning and blockchain-style forms of transaction tracking, handling the rote
aspects of FS tasks and making it more feasible to concentrate on differentiation.
 Re-shoring and localization: Over the last 20 years, financial-services firms in the West
have offshored repetitive back-office tasks to lower-cost locations, such as China, India,
and Poland, creating huge centralized IT functions to support them. However, as labor
costs rise abroad and robotic and natural language technologies improve, these tasks are
beginning to be moved back to the geographic markets that they serve. As a result, the
need to have local IT teams that can manage each regions needs will be more
pronounced.

Implementing an embedded IT operating model

If you are an executive at a financial-services firm, you probably recognize the benefits of an
embedded IT operating model. You also know that implementing it wont be easy. You will face
organizational challenges, such as the realignment of teams and new processes for investment
decisions. Your company will need to recruit and train employees to have specialized hybrid
skills: client services managers with tech expertise, service managers with business application
experience, and so on. Moreover, the firms culture will likely have to value collaboration more
than it does today. The blurring of the line between business and technology means that leaders
on both sides of the divide will be responsible for business performance and outcomes.

Here are four steps that you can take to begin the process of building an embedded IT
organization:

Step 1: Assess your current IT operating model to determine how much change the new model
will entail. Is your IT structure traditional, agile, or a combination?

Step 2: Identify key pain points. Is the business happy with ITs performance? Is IT delivering
the right set of capabilities at the appropriate cost and pace? If not, what is not working well?

Step 3: Define a case for change. Articulate the vision for the future and identify tangible
benefits, a time line, and investments required. Get buy-in from business, operations, and
technology.

Step 4: Identify five to eight key initiatives and draw up a development road map. What
initiatives are needed to transform a legacy IT organization into a next-generation IT player?

Reforms, crisis, convergence, engineering, and inclusion are the five recent trends in the
financial sector, says R. Shanmugham in Financial Services (www.wileyindia.com).

Indian financial reforms started with the Narasimham Committee recommendations, the author
traces. The Committee proposed a wide range of proposals which laid the strong foundation for
the strength and the resilience of the financial system today. Reforms were focused on the
banking sector, financial institutions (FIs), capital market, and money market.
As a result of the Committees recommendations, SEBI (Securities and Exchange Board of
India) was made a statutory body, and the Capital Issues Control Act was repealed to pave the
way for an era of free pricing, he reminisces. SEBI issued guidelines for each of the market
intermediaries and made the market micro-structures ready for a more transparent and orderly
growth of the market. Global depository receipts (GDRs) were launched in 1992, and investment
norms for NRIs (non-resident Indians) and OCBs (overseas corporate bodies) were also
prescribed. FIIs (foreign institutional investors) were permitted to invest in the Indian capital
market.

Financial crisis, the second trend listed in the book, is a topic that is fresh in the minds of most of
us. Through a timeline, therefore, Shanmugham plots the happenings of recent times, beginning
with the surfacing of the US sub-prime crisis in mid 2007, followed by the collapse of Bear
Stearns, and the avalanche of failures thereafter.

The spill-over to other economies, or the contagion effect, manifested as reverse capital flows
and non-availability of credit, leading to financial turbulence, he rues. The crisis has affected
the real economy. Growth prospects of emerging economies have been affected by the financial
crisis.

Under financial convergence, the author discusses universal banking, whereby all financial
services are made available to customers under one roof. For example, a bank, apart from its
ordinary business of accepting deposits and lending money, may also offer investment banking,
credit card services, or sell insurance policies.

Commercial banks in India also market the mutual fund schemes. India Post sells a whole range
of saving schemes, gold coins, etc. in addition to its postal services. Subtle differences in the
lines of business of different entities in the system have narrowed down, he notes.

Financial engineering, the next trend, is about the development and creative application of
financial technology for solving financial problems, exploiting financial opportunities, and for
otherwise adding value, as Shanmugham explains. The phrase, however, came under a cloud
when derivative securities such as CDS (credit default swap) and CDO (collateralised debt
obligation) were behind the excessively speculative positions that caused the downfall of many
FIs. Hence the caution sounded by Warren Buffett, that these instruments could be financial
weapons of mass destruction!

The fifth and the final trend, financial inclusion, is what has repeatedly been mentioned in
policy pronouncements of many nations. Financial inclusion is the process of ensuring access to
financial services and timely and adequate credit where needed by vulnerable groups such as
weaker sections and low-income groups at an affordable cost, reads a quote from the report of
the Rangarajan Committee (2008).

Another definition cited in the book is from the UN, and it speaks of a financial sector that
provides access to credit to all bankable people and firms, insurance to all insurable people
and firms, and to savings and payment services for everyone.
The days of old-fashioned centralized IT departments are numbered.

The rise of digital technology has dramatically altered the landscape in the financial-services
sector. Banks offer financial planning and trading applications through smartphones and social
media; cloud technologies are widely accepted, and in many cases robotics are already reducing
cost and increasing quality. Since 2011, the number of startups in fintech (technology-based
companies that often compete against traditional financial-services, or FS, firms) has risen more
than 50 percent.

All this activity has provided new opportunities (and new competitive threats) for the industry.
There is thus a significantly higher premium on the performance of the IT teams in FS
institutions. To meet the demands of the new marketplace to offer competitive, feature-laden,
well-designed digital products and services, with a much faster speed-to-market, while lowering
costs and continuing to support legacy systems an IT function has to be flexible, efficient, and
responsive. But those adjectives are not always applied to conventional IT departments. Many
financial-services firms will have to do much more than merely reexamine their go-to-market
strategies; they must also dispassionately reassess their IT operating model, and be prepared to
jettison the approaches they have used for decades.

Conclusion

The centralized IT structure that served the financial-services industry well for decades has
become a hindrance in many companies. By embedding IT teams in individual business units,
financial-services companies can make it possible for their business units to bring digital
products and services to market more quickly, while lowering costs and continuing to support
legacy systems. Realigning IT in this manner will be no easy task, but the resulting agility and
responsiveness is necessary to compete effectively against traditional rivals along with the
numerous and much more nimble fintech companies of the future.