1. Electronic banking – Perspective on Regulation
Presentation at School of Management , IIT Mumbai
August 23, 2003

2. Bank’s Role Resource Mobilisation through Deposits
Resource Allocation through Credit Creation
Provide Payment Services for economic transactions
Financial intermediation through size, maturity and risk transformation
Information based service
Trust of Depositors is the main capital

3. Central Bank’s Role
Ensure Financial stability for orderly economic growth
Banker to Banks
Banker to Government
Debt Manager & custodian of Reserves
Apex Payment & Settlement Agency
Orderly Development of Banking and Financial Market

4. Changing Scenario
Growth in global trade in goods and services aided by technological and socio-economic developments after world war II.
Support role of financial services and banks
Bank’s role as commanding height of economy.
Movement of capital in search of better return from developed to developing economies.
Emergence of Universal Banking for catering to variety of financial services.

5. Information Technology in Banks
Evolution of Banking Technology : Book keeping -----transaction processing decision supporting substratum of banking services.
Evolution of Payment Technology : Online checking ---Cheque processing---Teller machines ----card based payments---mass payments---Automated payments---Delivery vs payment--- Real Time Gross Settlements-internet payments.

6. Focus of Technology
Retail Banking services : Any time anywhere access to funds, funds transfer, bill payments, cash management, other services for individual and corporate clients
Wholesale Banking : Short and long term investments in money, capital, debt and foreign exchange market, derivatives market, Dealing among FIs only.

7. Balance sheet of a bank Equity Capital Different Reserves Provisions
Cash & cash Reserves
Short term investments
Long term investments
Loans & Advances ( short and term loans)
Bills receivable
Other assets
Loss
Equity Capital
Different Reserves
Provisions
Borrowings
Term and demand deposits –(Domestic and Forex )
Bills payable
Profit
Contingent liabilities

8. Information Flow
Different operational units report to head office and head office deals with other institutions
Decisions at different levels
Aggregation of all transactions in balance-sheet
All entities are mutually dependent , time sensitive and depend on market forces

9. Risks in banking Credit Risk Liquidity risk Market risk
Operational risk
Systemic risk
Operational risks arise out of infirmities in internal controls & Technology based systems and lead to legal/ reputation risks.

10. Internal Controls and IT
Segregation of duties,
Delegation of authority and responsibility
Professional and trained personnel
System of authorisation
Adequate documents & records,
Physical control over assets,
Management supervision,
Independent checks on performance,
Reconciliation of assets and responsibilities

11. Role of Technology
Two Pillars of Modern banking : IT and Electronic Payment Systems.
Banking products and services getting inseperable from underlying Technology
Technology Providing Alternate Delivery channel for service delivery.
Technology needs Process redesigning and also reduce visibility to some extent.

12. Mission, work processes and IT
Regulatory Compliance, Vision/mission for Bank
Define
Accomplish
Retail and Wholesale Banking, Payment services
Execute
Guide
Pricing, Credit , Investments & Risk Management
Consider
Supports
IS Audit
Transaction processing , MIS for Fund Position
Asset Quality, DSS, EIS
Employs
Processes
IT Based Banking solutions , Payment solutions

13. Management Concerns
Will IT provide efficiency, cost reduction & improved banking services ?
Will IT help being competitive through innovation?
Will IT spending worth the money?
Will IT help in better risk management?
Will IT provide Security and safety?
Will IT be a Solution or a Problem itself?

14. Banking and currency crisis
Numerous banking and currency crisis in different parts affected national and global systems.
Focus on role of national supervisors and international financial agencies and informational infirmities.
Emergence of New Financial Architecture with focus on capital adequacy, prudential standards, –Data Dissemination standards, international standards and codes.

15. Regulatory Concerns
How to Safeguard interest of depositors and ensure credit allocation for development?
How to build Competitive Financial sector- Liberate and control at same time?
How to Integrate with global economy and insulate from adverse developments ?
How to build a sound, resilient, vibrant and competitive banking sector?

16. Mission, work processes and IT
Financial Stability for Economic Growth
Define
Accomplish
Banker to banks & Government, Regulation
Development of Financial Markets
Execute
Guide
Monetary & Credit Policy, Bank Supervision
Supports
Consider IS
Audit
Economic Indicators, banking statistics,
Employs
Processes
Banking Technology &
Payment systems

17. Characteristics and challenges of e-banking
Technological and customer service innovation reducing the time for deployment of new products.
Ubiquitous and global nature of open electronic networks like internet.
Integration of e-banking with legacy computer systems for Straight Through Processing.
Increasing dependence on third parties to provide complex IT services through alliances, partnership creating complex operational & security issues.

18. Impact on traditional risk profile
Although no new risks are created, traditional risks are increased and modified.
Traditional risks are Strategic ,Operational, Legal and reputational risk
Traditional risk management principles need to be tailored , adapted and even expanded to meet challenges.
Board and senior management have to ensure review and modify the risk management process in banks.

19. Risk Management Principles
Principles express supervisory expectations and guidance as risk management requirements could be counterproductive.
The principles need to be tailored to each bank’s risk profile.
Specific technical solutions or standards are to be addressed by institutions and standards setting bodies as technology evolves.
Principles can be used as tools by national supervisory institutions.

20. Risk Management Principles- Categories
Board and Management Oversight.
Security controls
Legal and Reputational Risk Management.

21. Board & Management Oversight
Effective management oversight of e-banking activities.
Establishment of a Comprehensive security control process.
Comprehensive due diligence and management oversight process for outsourcing relationship and third party dependencies.

22. Security Controls -I Authentication of e-banking customers.
Non Repudiation and accountability for e-banking transactions.
Appropriate measures to ensure segregation of duties.
Proper Authorisation controls within e-banking systems, databases and applications.

23. Security Controls - II
Data integrity of e-banking transactions, records and information.
Establishment of clear audit trailfor e-banking transactions.
Confidentiality of key bank information.

24. Legal and Reputational risk management
Appropriate disclosure for e-banking services.
Privacy of customer information
Capacity , business continuity and contingency planning to ensure availability of e-banking systems and services.
Incident Response Planning.

25. Indian Banking sector & Adoption of IT
Indian perspective
Indian Banking sector
&
Adoption of IT

26. Banking sector reforms
Initiated in 1991 after crisis.
Focus on promoting competition, capital adequacy, autonomy and market determined rates, adoption of prudential norms, risk management.
Technology issues identified and included as pert of reform process.
Reforms in payment system for customer service, market development & RM.

27. Challenges before Indian banks
Low productivity
Low banking penetrartion