Indian banks could spend Rs 3,000 cr on IT this year

Competitive pressures and the need to get a grip on expanding business and organisation will make banks in India spend up to Rs 3,000 crore on information technology (IT) in the next financial year (2005-06), according to an "informed guesstimate" by i-flex Solutions, which sells a core banking software, Flexcube.

These pressures include the need to differentiate oneself from competitors, focus more on retail banking and follow stricter norms for regulatory compliance, says Thomas Mathew, who heads a team of business analysts at i-flex.

The return on the the banks will be looking for on the investment is "a reduction in our operational costs", says a senior official at Canara Bank. Last year the bank spent close to Rs 100 crore on its existing IT infrastructure.

This year, Canara Bank will decide on a core banking software in time for its centenary year that starts from July 1, the official said.

"Our spending on IT will be significantly higher as we aim to make strong progress on the core banking initiative during the centenary year," the official said.

While declining to name a solution or company, he said, "We are talking to all the major players including Infosys, Wipro, TCS and the IBM-i-flex alliance. Despite having a distributed IT system, we have managed to roll out several products successfully. More than 90 per cent of our branches run on a software application we built in-house and the rest run on Banks 2000, an application we built with Infosys in the early 90s," the official added.

However, "at some point the distributed system will have its limitations and we are very keen on putting the new core banking software in place before the year is out. Once the customisation and a pilot run is done, we can roll out the software across branches at our own pace."

The bank is also looking separately for a customer resource management (CRM) software application. "For all this, we are looking at an attractive total cost of ownership and expect the system integrators to deliver that, irrespective of which consortium we choose in the end," the official said.

With the regulatory frameworks likely to allow foreign banks to play a greater role in the economy, many of them will be eyeing the retail banking opportunity.

Thus, competition will be fierce and technology will play a key role in the way banks deal with their customers, says Mathew, explaining why this will probably be a turning point for banks in India.

Spending on technology will be dominated by expenditure on hardware, followed by network links, says Sathyan P Gopalan, regional sales director for south Asia, at i-flex. Banks will be spending large amounts on getting bandwidth from vendors such as Tata Indicom or Reliance. Core banking software per se, such as i-flex's Flexcube, would be some 15 per cent of the IT budget of a bank, Gopalan says.

To put it in perspective however, globally banks will spend some $155 billion (Rs 700,000 crore) on IT in 2005, estimates analysts firm Tower Group. Total spending by the entire financial services industry will be some $365 billion, the firm says.

The big difference is, banks in the US and Europe were going about the painful transition from the "siloed product-centric business model to the customer-centric model" in a more determined fashion, Mathew says.

In India, "I have a credit card from HDFC Bank, but still people from the bank call me asking me if I want a card. If that is the situation with HDFC, considered one of the most forward thinking private banks in the country, you can imagine what the rest of the pack are doing," he says.

Customer focus entails giving a customer a one-stop banking opportunity. Hence, new entities like Kotak Mahindra Bank are aggressively going after and retaining valuable customers. For this they are setting up dedicated teams to build products "" be it insurance or wealth management or retirement plans "" and acquiring the robust IT support needed both at the front and the back end.

Banks, estimates another analyst group Celent, are spending up to 70 per cent of their annual IT budgets on nothing more than maintenance with only the rest aiding business development.

Indian banks have a chance to leverage IT spending for business generation, which they would not have been able to do had they been burdened with large recurring legacy costs.

To add to all this are the mergers and acquisitions that everyone is talking about. Such deals will bring their own problems of integration of operations and human resources. The winners will have two attributes.

They will typically go in for mergers keeping one eye on the compatibility of IT systems. Oriental bank of Commerce and Global Trust Bank, which merged, used the core banking solution Finacle.

They will also have the agenda of giving customers a single, consistent and convenient banking experience to promote customer stickiness.