Bank automation opens up Rs 2000cr mart for IT firms

The hustle among public sector banks for automation ahead of the Basel II norms implementation has thrown up a Rs 2,000 crore business opportunity for information technology (IT) companies in the next one year.

The expenditure will be incurred on consulting, hardware, software and networking. The estimated technology spend for a bank wanting to network about 500 branches would be in the range of Rs 12 lakh to Rs 15 lakh per branch, according to InfrasoftTech managing director Hanuman Tripathi.

The banking sector has over 66,000 branches across the country. About one-fourth of the branches are expected to be networked on the core banking platforms of the respective banks by March 2006.

Banks have to change the way they capture data and also set up data warehousing and data mining capabilities. Besides, there is a need to integrate their liabilities and assets modules for better capital allocation.

The major portion of the expenditure will be accounted for by consulting firms, hardware needs and networking. A small portion of it would be spent on software, Tripathi said.

Banks in the country are required to implement the revised capital adequacy framework envisaged under the Basel II norms from March 31, 2007.

Banks have to adopt a standardised approach for credit risk and basic indicator approach for operational risk. A parallel run of the revised capital adequacy framework will commence from April 1, 2006, in order to ensure smooth transition and to provide opportunity to banks to streamline their systems and strategies.

The expenditure for systems integration and centralised data warehousing technologies could be as much as Rs 20 crore per bank, said R K Reddy of Fractal Analytics, a analytics consulting firm.

IndusInd Bank, following the merger of Ashok Leyland Finance, has converted the erstwhile finance arm's 32 branches into its own and is opening another 20 in as many days, complete with all automation needs.

IndusInd has spent as much as Rs 40 lakh per branch on technology, including Rs 7 lakh for the ATM, said the bank's senior vice president Varghese Thambi.

Fractal's Reddy said that simply pointing the borrowers who have defaulted will not suffice in the advanced ratings-based approach for capital allocation.

Banks will need to analyse the loss-driven default probability for a customer. The data requirement would be such that banks should be able to recall the recovery mechanism adopted and the actual recoveries made.

Under Basel II, banks can take a holistic view of deposits of a corporate to arrive at the net loan exposure to the corporate. This will mean a lower capital allocation for the loans to the corporate.

When it comes to retail portfolios, banks today just capture the basic data from the application forms and the detailed customer profile is left unused.

The capital allocation under the advanced approach will be based on a loss-driven default methodology. Capital allocation under Basel II advanced approach will also be linked to the past performance of a corporate or a retail customer.

Thus, banks with loan assets of a better corporate and better retail customers will need to allocate lesser capital.