Mumbai: In March, one of my colleagues wanted to deposit money in her public provident fund (PPF) account, kept with a large state-run bank. She was in a hurry as the office required proof of her investment in PPF by a certain date to give her income-tax benefit. Failure in producing the proof of investment would lead to a higher tax deduction at source (TDS). Under the law, one gets tax benefit for investing in PPF—among other financial instruments—up to Rs1 lakh a year.
Encouraged with the bank’s high-voltage publicity campaign on its core banking solution (CBS) that it claimed had covered many of its branches and a substantial portion of its total business, my colleague went to one branch in a Mumbai suburb to deposit the money in her PPF account.
Once a bank puts in place a CBS, its database is centralized and a customer can transact business at any of its branches. My colleague deposited the money, collected a receipt and was told to update her PPF book after a week. More than a week later, she went to update her PPF book at the branch where she had originally opened her account years ago.
But the money had not been credited to her account and the receipt was of no use. So, she had to visit the branch she’d first gone to, collect a draft against the money she had deposited and finally deposit it in her PPF account in her branch. She missed the office deadline for claiming the tax benefit, and also lost about three weeks’ interest on her account. So much for a core banking solution!
The core of CBS is a single database not confined to any branch. It captures all attributes of customers and helps them access accounts in any branch across the country. If this is true, why was my colleague not allowed to deposit money in her PPF at a different branch? Because, being unique to India, PPF and other government businesses are not captured by the CBS offered by various software firms. These firms are based in India, but largely depend on overseas markets for revenue; hence, they develop products suited to the global markets and not local needs. So, all banks are running two different softwares—one for government businesses and another for normal banking activities such as deposits, loans and the like. Some banks have been able to marry the two, but most of them in the public sector have not been able to do so.
Even for other banking activities, CBS fails most state-run banks and their customers because they have a fragmented database. Though bank accounts number about 300 million, the number of account holders could be around 200 million as many have multiple accounts. Banks tacitly encourage multiple accounts to ensure tax benefit on interest earned by their customers. Interest earned on bank deposits above certain limited amount is subjected to TDS. Bank customers normally split the high-value accounts and open them at various branches of the same bank to escape TDS. This can be done legally as banks are required to deduct TDS on interest on deposits kept within one branch and not the bank as a whole. Often, these accounts are opened with different addresses and even minor changes in names. It is extremely difficult for banks to capture accurate data on millions of existing accounts even if there is a customer identification number.
So, seamless operation across branches is a tough job. Now,?comes?the?second?part?of?the?story.?One?can?buy?a?ticket?to anywhere at any of the Indian Railways’ reservation counters. But most public-sector bank branches still needs have different counters for different businesses—because most banks have not changed their business process despite automation and CBS. If they dismantle different departments, overnight trade unions will raise alarm over redundancy of employees.
Neither banks nor their customers are enjoying the full benefit of automation. Customers continue to be harassed like my colleague; banks are seeing only limited transactional benefit. Their bookkeeping has improved and balance sheets are finalized faster, but they’ve been unable to reduce the number of people involved in branch banking and redeploy them in other businesses. They have also been unable to save on space and turn branches into smaller sales points with a centralized back office. Most importantly, they have not been able to get any strategic benefit out of automation to sell more products to their customers. This can be done only after they create a new database and stop migrating the fragmented legacy data to their system. This is easier said than done.
A typical medium-sized public sector bank has a customer base of about 25 million. Even if a bank employs an external agency to collect fresh data for its customer, it will require to spend Rs250 crore (@Rs100 per customer) and 12.5 million man hours (@half an hour per customer).
Very few banks would like to invest that kind of money and time for a cause that has no immediate impact on their profit and loss account. The banking industry has spent about Rs25,000 crore on technology but no tangible benefit is in sight yet. Meanwhile, many more digits have been added to the account numbers of customers as banks now need to identify the branch, product and even currency (all required for the CBS). It’s difficult to remember such numbers which can run into 16 digits but customers of most state-run banks are not complaining as they continue to visit their branches for banking business.
Tamal Bandyopadhyay keeps a close eye on all things banking from his perch as the Mumbai bureau chief of Mint. Please email comments to email@example.com