Friday 4 July 2014

The need for core banking for Post Office Savings Bank (POSB)

The need for core banking for Post Office Savings Bank (POSB) arises out of many reasons:
1. Cost of operations: The cost of operations in core banking is less than those of the present system. The remuneration we get from the Ministry of Finance for Post Office Savings Bank  work is based on an average of five transactions per account per year. If we take out the back office work, this would mean that we spend roughly Rs. 30 per transaction. (Surprisingly, banks’ counter transaction costs are around Rs. 45-50 per transaction.[3] Are our costs hidden? Is it because of our low-cost GDS model? Is it due to economies of scope? We do not know.) On the other hand, the transaction cost of withdrawal from an ATM is Rs. 15-18. For net banking, the cost is Rs. 4 per transaction.[4] With the advent of core banking, the unique duplicating process in post offices from BO to SO to HO suddenly appears to be an operational nightmare. A process that has led to the creation of SOSBs seems out of place and time, when compared to the centralised process of core banking.
2. Anti–money laundering (AML) norms: It is easy to comply with anti–money laundering norms through core banking. The AML norms require the post office to detect when a customer has opened multiple accounts. This is not possible in Sanchay Post, the current software that is used for POSB operations. Moreover, unless we comply effectively with the KYC norms, we will not be able to issue debit cards to our customers, as effective compliance to KYC is a precondition for participating in an inter-operable payment network that facilitates withdrawing money from any ATM or transact from any point-of-sale (POS) machine in shops.
3. Erosion of competitive advantage of POSBs in rural areas: The business correspondent (BC) model and the UIDAI authentication through Aadhaar may make the presence of POSBs in rural areas irrelevant. The BC model is a direct threat to our GDS model. The problems of  principal – agent and information asymmetry that the banks suffered in the BC (agent) model is eliminated by the use of Aadhaar. Today the bank knows instantly that the money that is withdrawn through its BCs (agent)  is done so by the account holders—through UIDAI authentication—and not by the BCs themselves. The loosely structured BC model seems effective through the use of technology. The BC model seems to be as good as our GDS model. The information asymmetry that has helped POSB maintain a competitive advantage over banks is in the process of being eroded. Suddenly, the Postmaster’s knowledge of the neighbourhood becomes irrelevant. Aadhaar has replaced the local knowledge of the Postmaster helping the bank identify the account holders. Aadhaar also makes the customers, particularly in villages, less vulnerable to local power structures, and lowers the risk of being exploited by BCs.[5] This, along with the advantage of quicker MIS in core banking and the facility to integrate with NEFT (National Electronic Fund Transfer), has made the state governments and central government increasingly choose banks, rather than POSB, for benefit transfers. And yet there is still hope for POSB, as the BC model has not progressed well; it suffers from other problems, including that of lower remuneration paid to agents.
4. Changing customer preferences: The number of debit cards has grown from 5 crore in 2005 to around 29 crore today.[6] This is an increase of nearly 6 times in a span of 7 years. In India Post, we constantly talk about retaining our existing customers; what about those customers who have never visited a POSB in the last decade? Those 29 crore debit card holders have the option to transact in 7 lakh outlets (1 lakh ATMs and 6 lakh POS machines in shops) and in e-commerce portals—so why should they come to the post office?
Core Banking Project
The core banking project is part of the IT project, 2012 that aims to bring in various IT solutions with the required IT infrastructure to the post offices. India Post plans to implement core banking in all departmental post offices (around 25,000) by 2014. The 1.3 lakh branch offices will also be covered by deploying the CBS (Core Banking Solution) mobile application in hand-held devices that are to be supplied to these offices. The only difference is that these branch post offices will initially start working in an off-line mode and depending on availability of network connectivity, will move to an online mode.  120 post offices in six circles (Assam, Karnataka, Maharashtra, Rajasthan, Karnataka, Tamilnadu and Uttar Pradesh) have been identified for rolling out the pilot.  ATMs are to be installed in all Head Offices and in around 200 MDGs/SOs. India Post has already signed the contract with M/s Infosys Ltd, the Financial Services System Integrator (FSI), for implementing Core Banking Solutions and for installing ATMs. 
Challenges Faced and Mitigation Plans
The major challenges faced by India Post are listed here:
1. Large number of offices and aggressive timelines: The large number of post offices makes the project the largest CB implementation attempted in India. See the table below:
Name of Bank
Number of Branches under CBS
Post Office Savings Bank
State Bank of India
17,000 +
Punjab National Bank
Bank Of India
Canara Bank
Bank of Baroda
Union Bank of India
Syndicate Bank
UCO Bank
Central Bank of India
                         * By 2014
 However, the pace of implementation of CB system in banks has picked up in the last few years. In some banks, even 50 bank branches have gone live on the CB system in one day. India Post’s decision to go for a proven solution and an experienced vendor is also expected to mitigate the problem of implementing CB systems in a large number of offices over a shorter period of time.
2. Skill levels of staff: The existing staff’s skill levels in computers have definitely improved in the last few years. Today in Project Arrow, more than 12,000 offices are reporting daily. This shows that we are moving ahead in our skill levels, which enables us to work more effectively in a computerized environment. However, the CB system brings in new process changes that require training. This is planned to be mitigated by requiring the vendor to train around 15,000 staff, including around 2,000 as trainers under the Train the Trainer model. The change management vendor (M/s TCS Ltd) will devise training strategies to manage the change in a smoother way.
3. Migration of legacy data: The large amount of legacy data to be migrated both in electronic and manual format poses a serious challenge. The existing process of duplicating data from BO to SO to HO is making the data unreliable unless agreement and related work is done. Many activities have been undertaken, in the last few years, to digitize and cleanse the data, and these activities are expected to mitigate the problems of legacy data migration.
4. Integrating with an inter-operable network: Another challenge is how we would put in place systems and processes to participate in an inter-operable electronic payment network run by the National Payments Corporation of India, specifically the National Financial Switch that connects all ATMs in India. This would mean that India Post complies with the Prevention of Money Laundering Rules, 2005, and the Payment and Settlement Systems Act, 2007. Eventually, in order to participate in this inter-operable electronic payment system, India Post has to fall under the regulatory supervision of RBI. India Post has received RBI’s approval to install ATMs and issue ATM cards. Its successful performance in a closed system of ATM networks (i.e., ATM cards) will eventually lead to RBI’s approval for issuing debit cards. Successful performance requires changes in our existing process and developing accounting and operational procedures.
Migration of Legacy Data:
Migrating data from Sanchay Post to the new CBS (Core Banking Solutions) software will be a major challenge while implementing core banking in post offices. The data that is to be migrated from Sanchay Post to core banking software has to be  up-to-date and reliable. Data can be made up-to-date by posting of all transaction data and by updating master data and standing instructions. Data can be made reliable by settling minus balance, SBCO objections and DB Analyzer discrepancies.
This is illustrated below:
Steps Taken towards Migrating Legacy Data
Many steps have been taken, right from Project Arrow, to digitize accounts and carry out account holder signature scanning. More than 14 crore accounts have been digitized. Roughly 12 crore signatures have been scanned. 
Pre-data migration activities that are monitored through fortnightly Project Arrow VCs have proceeded as given in the table below:
Key Parameters monitored
Date from which monitored
Data authentication Activity  - 1
Pending Interest posting in SB accounts
All offices
Pending minus balance
All offices
31 12.10
Pending number of SBCO objections beyond 6 months
All offices
Data Authentication Activity  - 2
Stage - I Online Monitoring of 34 Parameters in 4000 offices –focus on digitization, settling SBCO objections, clearing minus balances and database discrepancies (DB Analyzer)
Pilot - 120 offices
Phase- 1 A - 701 Head Offices
Phase- 1 B - 1509 Sub Offices of Pilot circles
Phase- 2 A - 1679 Sub offices of rest of the  16 circles
Data Authentication Activity - 3
Stage - II Online monitoring of additional parameters for 120 Pilot offices – focus on work on agreement
Pilot - 120 offices
1.9.12 (Test)
Data Authentication Activity-  4
Visit by Circle/Regional level team - percentage checks and completion of pending work.
All circles
Parallel activity from Stage- 1.
These activities are showing results. The amount of negative balance (minus balance) has reduced from Rs. 640 crore to Rs. 64 crore since 2010. An online CB system pre-migration monitoring website is now in place, from which 4,000 offices are reporting their progress every day. The online website has a scoring system to grade the post offices. These scores and data are analyzed at various levels (and ultimately in Project Arrow VCs every fortnight). Project managers and executives of the National Institute of Smart Government (NISG) are training our postal staff in pre–data migration activities. In the last six months, more than 1,200 post offices have been visited by the NISG team. The data quality of many of the 4,000 offices has improved and is now almost ready for migration to the CB system. This online monitoring system will be expanded to the remaining departmental post offices.
The core banking project doesn’t bring incremental improvements to the existing process; rather, it overturns existing processes, specifically the BO to SO to HO process that post offices currently follow. It opens up the post office 24-7 through its ATMs. It enables POSB customers to perform transactions 24-7 in around 1 lakh ATMs and to perform transactions in 6 lakh POS outlets. It enables people to transfer money, sitting at home, from their account to any bank account through NEFT. Eventually, core banking will help change the perception of the post office in people’s minds and once again make the post office relevant to their needs.