Quaternion, September 15, 2005
A Colossus transforms
State Bank of India is a great story of transformation in the making. The implementation of TCS’s centralized banking solution in nearly 14,000 branches of the group will play a major role in it, reports Shivanand Kanavi.
If you ask Arun Kumar Purwar, Chairman, State Bank Group, about Operation Vijay, ("Operation Victory"), you will not get much in return other than a question shot back, "Where did you hear about it? That is still under wraps." But when strategy is being discussed with branch managers, who number in five figures, it would be difficult to keep it a secret. Apparently, it is a plan to transform the banking colossus in a tangible, quantifiable way. "It would be tall talk now. When we are close to achieving the targets, we will talk about it," says he.
Simply put, while the bank's position in Indian banking is unassailable, it wants to be number one in other financial services as well, be it credit cards, mutual funds or investment banking. "We have the fourth largest life insurance company of our country, the third largest merchant bank, the seventh largest mutual fund, the fourth largest credit card company, and the third largest factoring company. We have strategic interests in the credit information business and in an asset reconstruction company. We also run, within the group, 40-plus regional rural banks. Thus, State Bank's presence in the economy - in the financial sector - is very strong," adds Purwar.
Operation Vijay wants to take it to the next level. When stock market analysts call State Bank of India (National Stock Exchange: SBIN) as a 'play' on the Indian economy, in their own frenetic lingo, they are reflecting what SBI stands for. The bank, with its massive network of nearly 14,000 branches, is rivaled by none for its reach,
except a couple of Chinese banks. However the numbers cited by the Chinese are a little suspect because they list points of sales, including extension counters, as branches.
SBI controls an enviable 25% of the entire banking business in the country and services a whopping 100 million accounts. The bank has a wide network of 5,400 automatic teller machines (ATMs) in nearly 1,800 centers, and another 1,000 are being added this year. It includes an ATM at the highest altitude, at over 12,000 ft above sea level, in Leh, Ladakh, south of Tibet. At the other extreme SBI has an ATM on a river boat in Kerala. "Mind you, it is not a cash dispensing machine, but a fully networked ATM," assures Purwar. In January 2004, the total number of transactions from the ATMs was 6 million, and the total money drawn, between $138 million and $149.5 million (Rs 6 billion and Rs 6.5 billion). ATM usage is growing at 12% to 15% per month, according to Purwar. In fact, by Jan 2005, the total number of transactions on ATMs increased to 270 million, and money drawn amounted to over $ 644 million (Rs28 billion).
The largest competing network has less than 2,000 ATMs. Thus market analysts are justified in calling it a proxy for the Indian economy. That is, if the bank is doing well, then the Indian economy is doing well and vice-versa. (See box: The Bank)
The Bank
It is said that three organizations touch vast majority of the people of India: India Post, the Indian Railways and the State Bank of India.
The State Bank of India (established in 1806) is one of the oldest banks in the world and predates many well known names in the banking world: Citibank (established in 1812), Chemical Bank (established in 1823), ANZ (established in 1830), Standard Chartered (established in 1853), HSBC (established in 1865}, and the Bank of America (established in 1874).
Today, the State Bank of India, along with its nine associate banks form the State Bank Group, which does over 25% of all banking business in India through a network of 13,767 branches in India and 54 overseas, and over 5,400 ATMs in India's metros, and urban and rural areas. The group serves over 100 million accounts and, in the last four years, deposits have grown with a compound annual growth rate (CAGR) of 12% from $72.01 billion (Rs3,514 billion) in 2001 to $115.72 billion (Rs5,061 billion) in 2005. It was the only Indian bank to be listed among the top 100 banks of the world by The Banker in July 2005.
The shares of the banks are listed in the Indian stock exchanges and its global depository receipts are listed in Europe. SBI has a market capitalization of about $10 billion (Rs.441 Billion) on the Indian bourses (as of September 7, 2008). The Government of Indian owns 59.73% of the shares, through the country’s central bank, the Reserve Bank of India. It is the only bank in Asia, other than the Bank of Japan, to have a rating, from international agencies, above the sovereign.
The State Bank is a financial powerhouse with its arms in Insurance, mutual funds, investment banking, etc, and owns:
• SBI Capital Markets Ltd.
• SBI Mutual Fund (a trust)
• SBI Factors and Commercial Services Ltd.
• SBI DFHI Ltd.
• SBI Cards and Payment Services Pvt. Ltd.
• SBI Life Insurance Co Ltd – Banc assurance (Life Insurance)
• SBI Funds Management Pvt. Ltd.
The bank came under pressure in the late 1990s, with the opening up of the economy and competition from private banks. These new banks have no legacy issues, are lean and mean and could build themselves on hitech platforms and thus provide highly competitive services to both corporate and individual customers. But they lack reach and have largely confined themselves to the metros and large cities.
A Bicentennial
This year, SBI began celebrating it 200 years of existence. It traces its origin to the Bank of Calcutta, started in 1806 with the active participation of the British East India Company as a joint stock company. From it founding until 1936, the Bank acted as a central bank and currency issuing authority. In 1809, the bank received it charter and was re-designed as the Bank of Bengal. The Bank of Bombay (founded on April 18, 1840) and the Bank of Madras (founded on July 1, 1843) followed the Bank of Bengal. These three banks remained at the apex of modern banking in India. They came into existence as a result of the compulsions of imperial finance and the felt needs of local European commerce. They were amalgamated as the Imperial Bank of India on January 27, 1921.
When India attained freedom in 1947, the Imperial Bank had deposit of $ 63.273 million (Rs2.751 Billion), a network of 172 branches, and more than 200 sub-offices all over the country.
The commercial banks of the country, including the Imperial Bank of India had, till then, confined their operations to the urban sector and were not equipped to respond to the emergent needs of the rural areas, in order to serve the economy, in general, and the rural sector, in particular, the State Bank of India was created by taking over the Imperial Bank of India and integrating with it the former state-owned or state-associated banks. An Act was passed in Parliament in May 1955, and the State Bank of India was constituted on July1, 1955.
The Bank’s museum in Kolkata is a treasure house for economic historians, with detailed balance sheets and minutes of board meeting dating back two centuries.
"It was clear to us that either we transformed, or perished," says Purwar. But transforming is easier said than done. After all, it had 300,000 employees, systems that were not standardized, and some practices that are peculiarly Indian. The advantages of introducing advanced IT solutions with centralized databases, good networks, 'anytime, anywhere' banking through ATMs and so on, were clear to the leadership. "New technology would lower our transaction costs by 15%-25%," says Purwar. The bank's service level would rise with core banking. Its ability to monitor funds would dramatically improve with management information systems and daily reports. The available funds could thereby be deployed better in the money market, and the NPAs (short for non-performing assets, or bad accounts) could also be tracked in time, and action taken. New financial product-could be developed with what-if analyses, test marketing and deployment in record time. Technology would also enable the bank to enter new businesses and fee based services as the economy entered a low interest rate regime, with decreasing spreads for banks.
When old habits resist change, it takes leadership to drive change. The story is far from over but the signs of change are visible and indicate the potential this institution has. Today, over 4,800 branches are networked in a dedicated network called SBI Connect. Besides data communication, the network has vastly reduced the bank's telecom bills, as all these branches are using Voice Over IP phones for inter-branch communication. Over 5,400 fully networked ATMs in nearly 1,800 centers are bringing modern banking to even small towns and rural areas. Over 5100 branches of the SBI Group have gone live on core banking (a centralized database system). "In Belapur, we have our core banking systems, where over 800 officers are working hard to meet deadlines for the rollout," says Purwar. "A village may not have regular electricity and proper telecommunications, but our branch there will be computerized and connected to core banking," adds he.
And all this has been achieved with no downsizing! The number of branches on core banking in October 2004 was hardly 250. If the number today stands at 4,300, it works out to roughly 400 branches going live per month!
That is a truly amazing number by any standards. No wonder The Banker magazine, in London, honored SBI with its Technology Awards 2005, for the core banking project, and as the Best Outsourcing Project of the Year.
The project was outsourced to TCS as the prime system integrator. TCS developed a customized solution for SBI's needs. The implemented solution includes B@NCS from Financial Network Solutions (FNS), and Eximbills from China Systems interfacing with each other and the existing legacy system.
The building in Belapur, which houses the core banking servers in the data center and training facilities for the bank's staff, also has 300 TCS engineers working day and night.
That is where Krishnan Ramanujam, of TCS, who is the Director of the Core Banking project, sits. The blackboard outside his office tells it all. The numbers scrawled on it seem to change every time you visit him. If you did not know better, you would think he was running an illegal numbers racket out of his office. On closer inspection, however, they look more like the production figures of a shopfloor foreman. In fact, the latter would not be too far from the truth. He runs a virtual factory that is customizing the solution, testing code, fixing bugs, and training. He sits in meetings with SBI officers to set standard operating procedures and suggest any changes, if necessary. After a year and a half of hard toil, he is smiling today. "I have been in several large projects in 14 years at TCS but this has been the most challenging one," he says. What started as a trickle is now a roaring river, with dozens of branches going live every day.
Core banking gives tremendous power to the bank’s leadership to be nimble in the market but it also imposes a lot rigor on the employees. For example, how do you open an account? What information do you need to input? And who double checks each step and signs off? All this seems cumbersome initially, but the people who have used the system for three months and longer are getting the hang of it and enjoying the benefits.
“We are only training the trainers but State Bank’s HR is doing a wonderful job of evangelizing and letting the knowledge percolate through the bank, despite difficult condition,” says Ramanujam. When you are short staffed, it puts tremendous pressure on others if you have to send 25% of the employees for training by turns. But the staff has risen to occasion, and the benefits have ripple effect.
Despite an environment that was not friendly to computerization in the banking sector for three decades (1960s-80s), SBI has had a tradition of experimenting with new technology. According to Uday Shankar Roy, currently Chief General Manager of SBI, Kolkata who, till recently, headed the core banking project, SBI was one of the first banks globally to use the IBM 1401 mainframe for interoffice transactions an reconciliation, back in the early 1960s. "In the '70s, as load increased, we brought in brand new Burroughs machine, which was cutting edge at the time. Branch computerization started in the ‘80s and '90s, and a clear cut IT strategy was put in place in the late '90s. It started with local area network and branch automation, along with a massive interbranch networking project to connect over 4,000 branches. This laid the ground for taking up core banking two year ago," adds Roy.
Though the B@NCS solution chosen has been implemented elsewhere, the State Bank project involved a scale that was an order of magnitude larger and which demanded a high performance solution. "After all, the largest core banking project implemented in the world so far involves three different systems in different countries and a total of 2,400 branches. Here, it was 9,000 branches of SBI and 5,000 branches of its associate banks, all on one system. Scalability was a prime issue. It was only because we demonstrated it that TCS won, despite tough competition," says Jagdish Bhandari, head of the financial services practice at TCS.
Did they have to change the code significantly to customize it for State Bank's needs? “Of course. It is almost a new package now. The original package had about 3 million lines of code. Now it has 6 million!" says Ramanujam.
Why was such drastic change needed? What were the challenges? The original product, in its basic form, was a simple online transaction processing system, which was scalable. But, in this case, the customer made demands that created conflicts in the system. Basically, scalability depends on the product doing only one or two things in an efficient manner. Secondly, it has to adhere to some basic principles of databases. Scalability and maintainability require that all the information required should be stored at only one place. However if the system is expected to generate reports that involve data from different tables, this pulls down performance of the system. High performance requires normalized databases and puritan view of database design. But that would not meet branch requirements in SBI because such a system would not generate reports in the required format.
An online transaction processing system typically does not have a database designed to suit report generation. However, the branches felt that, unless reports were easily generated, their daily operations would not be complete. Yet even if the system did generate reports, it could still not handle 100 million accounts!
“We had a monumentally difficult time doing the correct tradeoffs,” says Ramanujam.
N chandrasekharan, EVP at TCS and Head, Global Operations adds, “The key to our success were the right design for the database and the program. It was a combination of and in depth knowledge of technology and banking business. We have demonstrated our competence to build large scale high performance systems.”
But at what cost? “Oh, we are building probably the lowest cost system in the world. In China the cost per branch for this technology is $25,000. In other developed countries, it has been $50,000-plus. But, in India, we spent only $11,000-$12,000 per branch. This is a very big advantage to us,” says Purwar.
How was that achieved? It is said that TCS reduced SBI's costs by not going for a mainframe based system. But Ramanujam disagrees. "Cost is not a function of just the hardware or infrastructure that you put in. The total cost involves hardware cost, software cost, maintenance and modification cost, and so on," says he.
"Just like a car. If it costs $11,500 but 'breaks down every 10 days, then we end up spending a lot more. We might as well buy a better car that costs more up front but needs less maintenance. Similarly, if software is poorly designed and cannot make the modifications required in a dynamic business environment, then it will prove expensive. For example, the Finance Minister may declare a new Cash Withdrawal Tax. But if the code cannot quickly absorb it, then it is poorly designed. Moreover, new product introductions should be very quick. In fact, recently, State Bank came up with four new product ideas in record time. One of them was rated as the quickest product that the bank had brought into the market ever.
Subramaniam Ramadorai, CEO & Managing Director, TS says, “The challenges in the implementation of a solution in a large banding group are manifold. It is due to great teamwork and hard work form the SBI and TCS teams that we have, to say, reached a stage of aggressive solution rollout across branches. SBI is truly a ‘bank that the nation banks on.’ We are privileged that it is banking on us for this unique project, which will tremendously impact the operations of the entire SBI group.”
All who doubted the capacity of this giant to change are now watching it transform itself rapidly. When complete, it would make for a great case study in change management for global managers. Clearly, in five years, India will have a new financial powerhouse.
Our aim is to provide ‘Class Banking for the Masses’, proclaims Purwar. That would indeed revolutionize banking in India as never before.
We say Amen.
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