ABSTRACT OF THE THESIS

ON
Impact of Core Banking System implementation on Business performance
and Profitability of selected Urban Cooperative Banks in Pune City

Introduction and rationale of the study

Performance of service sector is a major contributing factor in overall growth and
development of a country. Service sector which was contributing only 20 per cent
during the year of independence of India in 1947, now contributes over 50 per cent
of GDP. Decline in this contribution has always been major concern of
Government of our country. Performance of the Banking sector, being part of
service sector is an indicator of overall economic development of country.

Banking has changed over the years and evolved with the needs of the Indian
economy. This transformation was primarily due to deregulation and globalization
policies of Government of India in 1991, which led to the entry of multi-national
and private sector banks. These banks being most techno-savvy, were in position to
offer technology based services such as ATM, Internet Banking, Mobile Banking,
Tele Banking etc. from day one. Amongst all the ICT initiatives of these banks,
CBS implementation was the most important, as it formed foundation on which all
the e-delivery services were built.

Banking organizations, being commercial entities, are expected to earn sufficient

profits. Huge investments made by banks in their ICT initiatives are surely
expected to yield better profits and improvement in other business performance
parameters, including their reach to non-banked area. Considering small business
of UCBs compared to that of commercial banks, it is equally important for them to
ensure that investments made in various ICT initiatives yield desired results in
terms of offering customer friendly services, reducing cost of business operations,
increasing business volume, complying with regulatory norms, having sound
management information system and thus improving overall business performance.

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It is therefore important to study whether the huge investments made by the banks
are justifiable and are in position to yield desired results in terms of improving
overall business performance and also whether they can survive today without
CBS?

Objectives of the study

1. To study the present status of CBS implementation in selected UCBs
2. To study the cost of investment for procuring infrastructure required to
implement Core Banking System in terms of Technology (Hardware,
Software, Networking, Setting-up of Data Centre etc) and technically
skilled manpower
3. To compare and analyze business growth, efficiency and profitability in pre
and post CBS implementation period of sample banks
4. To identify and analyze various issues faced by the sample banks w.r.t.
implementation of CBS and suggest feasible measures to minimize them
5. To study the use of CBS platform in introducing technology based
customer friendly services and innovative products

Hypotheses
The research work was based on following hypotheses
1. CBS implementation enhances performance of banks through efficient
banking operations
2. CBS implementation enables banks in enhancing financial growth and
Profitability
3. CBS implementation enables banks to introduce technology based direct
banking channels

Methodology
Sample design
Present study pertains to only those UCBs which have implemented CBS. As the
desired population for the study was rare and to recruit for the study, purposive
sampling was used. Out of 60 UCBs in Pune during the year 2008, there were 5
UCBs which had ventured into CBS implementation. All these banks have been
chosen as sample for this study, applying convenience sampling technique.
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As the present study is of pre-post type, it was necessary to select those banks
which had implemented CBS at least 3 to 4 years on or before the year 2008.
Further, the literature reviewed revealed that projects such as CBS yields monetary
results only in the third year or latter, from the year of implementation.

It was for these reasons that all the 5 banks have been selected which fulfill the
requirement of the study. Therefore, though the sample size is small and study is
confined to Pune, it is expected to represent Urban Cooperative Banking sector of
Maharashtra and that of India. Moreover, since the sample group of bank is
homogeneous, it certainly represents universe i.e. all the UCBs which have
implemented CBS in India.

Sources of Data
Both primary and secondary data have been used for fulfilling the objectives of the
study. Structured questionnaire was designed to collect data pertaining to status of
CBS implementation, customer friendly, technology based services introduced by
the banks, complementary software being used, cost of investment for the CBS
project etc.

Primary data
Data pertaining to basic information about the bank, year of establishment, year in
which CBS was introduced, process followed for implementation, cost involved,
availability of specialized manpower etc. were collected through a structured
questionnaire. Data related to customer friendly, technology based services
introduced after implementation of CBS were also collected with the help of same
questionnaire along with data pertaining to complementary software modules
introduced by the bank based on the CBS platform and details pertaining to
investment made by the banks in introduction of the same. To enable collecting the
data which can supplement the data being collected in written format and to gather
experiences of the bank in implementation of CBS, issues faced etc. separate
questionnaire were designed to interview Board of Directors, Project Manager, IT
manager and two employees from three branches of each bank.

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Secondary data
Financial data to find out improvement in business performance and profitability
were collected through secondary source. Annual reports of all the 5 banks were
collected for a period of 4 years prior to CBS implementation and 4 years / up to
current year post CBS implementation year. A period of 4 years from year in
which CBS got implemented was selected because the literature reviewed revealed
that projects such as CBS yields monetary results only in the third year or latter,
from the year of implementation.

In order to assess performance of the sample banks as against the performance of

other urban cooperative banks in Pune District, annual data published by Pune
District Urban Banks association was collected for a period of 10 years, from
2000-01 to 2010-11.

Data available in various publications by RBI such as Trend and Progress report,
various committee reports etc also have been used wherever found appropriate.
Further, the relevant information were collected from libraries of Vaikunth Mehta
National Institute of Cooperative Management (VAMNICOM), Pune, College of
Agriculture Banking (CAB), RBI, Pune, Jaykar Library, Pune, National Institute of
Bank Management (NIBM), Pune Pune District UCBs Association, Internet, etc.

Time period of the study

While analyzing performance of selected individual banks, data for period of 4
years prior to CBS implementation and 4 years / up to current year after CBS
implementation have been used. Since the year of CBS implementation is different
with respect to each of the sample bank, there is a variation in time period.

Data processing, analysis and statistical tools employed

The primary data collected from respondents and secondary data collected from
sample banks from their annual reports were classified and tabulated with the help
of MS-Excel, in light of the laid objectives. The financial data was analyzed by
using various statistical tools widely used in evaluation and financial appraisal,
comprising of percentage, averages, ratios, growth rates, coefficient of variation
etc. Various types of graphs also have been used at appropriate places.
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Further, the present study uses ratio and trend analysis which help to summarize
large data to draw qualitative judgments about the banks’ performance, to compare
profitability and productivity of sample banks during Pre-CBS and Post-CBS
period.

Linkage between IT and business performance is indirect and ambiguous, on the

grounds that contributions of IT have both tangible and intangible components.
Data envelopment analysis (DEA) is a widely accepted and proven technique to
locate ways to improve service not visible with other techniques. Present study has
used DEA to find out efficient units with the help of data collected from Pune
District Urban Banks’ Association.

A paired two-sample student's t-test has also been used to determine whether a
sample's means are distinct to test the research hypothesis. This t-test is used, as it
does not assume that the variances of both populations are equal and when there is
a natural pairing of observations in the samples, such as when a sample group is
tested twice - before and after an experiment (Core Banking implementation).

With all these statistical tools the researcher has made sincere efforts to establish
the relationship between variables and inferences drawn.

Limitations of the study

1. In the present study, only the quantitative aspects of efficiency, productivity
and profitability have been examined. Qualitative aspects such as professional
management, motivation level of employees, quality of physical infrastructure,
modern communication facilities, customer satisfaction, brand image of the
bank etc have not been considered which play a definite role in performance
improvement of bank.
2. Despite best efforts of the researcher, all data pertaining to cost aspects of
various components of CBS could not be gathered from sample banks. Mahesh
Sahakari Bank Ltd., Pune, Janata Sahakari Bank Ltd., Pune and Seva Vikas
Cooperative Bank Ltd., Pimpri shared such data formally, to certain extent.
Other banks did not provide the necessary data formally on the questionnaire

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 provided to them either due to unavailability of the same or on account of
confidentiality.

Despite of these limitations and even though the present study is pertaining to only
five UCBs in Pune, findings derived through critical analysis are expected to be
useful in designing appropriate policies for other UCBs from Pune, Maharashtra
and the entire country.

Important observations on field research

i. Entire banking operations of all the sample banks have been centralized and
these banks have completed three or more than three operating cycles under
CBS environment. Even though the application software used by banks is
different, all these software provide Centralised Banking environment to
sample banks.
ii. CBS has been introduced most systematically by JSBL and then followed
by CCBL, VSBL, MSBL and SVCBL.
iii. During the field research it has been revealed by the officials and non-
officials of the selected banks that no major problem has been faced by
their banks while implementing the CBS. In fact it is a matter of surprise
that none of the selected banks have come across any major problems while
implementing CBS.
iv. While on one hand few commonalities are observed with respect to
infrastructural facilities available with the sample banks, on other hand
significant variation is found with respect to investments made for setting-
up CBS infrastructure in place by the sample banks, their area of operation,
number of branches, business size etc.
v. It is observed from the data for the Post-CBS period that all the sample
banks have improved their performance and fulfilled the criteria of
Financially Sound and Well Managed (FSWM) bank, except JSBL.
vi. Growth of the sample banks in terms of branch expansion, business
comprising of deposits & advances, net profit, net owned funds and
membership is satisfactory.
vii. Further, the study has revealed that majority of the technology based
services and para-banking services have been introduced by the sample
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 banks during the Post-CBS period. In terms of introducing technology
based services and para-banking services CCBL and JSBL are far ahead of
other sample banks, which are followed by VSBL, SVCBL and MSBL.
viii. Among all the selected banks, except CCBL and JSBL, the remaining
banks have not yet introduced complementary software such as Risk
management, Assets and Liability Management, Anti Money Laundering,
Customer Relationship Management, Business Intelligence, Trade Finance,
Treasury, Workflow management, Intranet etc. CCBL and JSBL have
implemented few of such software.
ix. Improvement is clearly evident in performance of individual banks while
comparing selected productivity and profitability parameters during Pre-
CBS and Post-CBS period.
x. Results of DEA analysis for year 2002-03 have shown that when none of
the UCB in Pune was under CBS, only CCBL amongst the selected banks
was in the list of most efficient unit. However, there is significant
improvement in efficiency score of all the sample banks during the Post-
CBS period and results for the year 2010-11 show that along with CCBL,
other sample banks JSBL and SVCBL also have become most efficient
banks. MSBL and VSBL were found very close to be considered as
efficient units.

Recommendations for the sample banks

i. Though there is considerable improvement in Productivity and Profitability
performance of sample banks and also improvement in efficiency, the
sample banks must strive to perform better to remain competitive and to
achieve further growth.
ii. Being stable in CBS environment for more than three years, the sample
banks need to concentrate upon providing technology based services such
as ATM, ATM network, Internet Banking, Mobile Banking, IMPS,
Electronic payment system (ECS/NEFT/RTGS etc). Introduction of such
services would certainly help banks in enhancing the productivity and
efficiency of their operations and in turn improve profitability. It would
also enable the banks to retain their existing customers, provide better

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 service to customers visiting branches and concentrate on business
development.
iii. Sample banks should immediately plan implementation of various
complementary software such as Risk management, Assets and Liability
Management, Anti Money Laundering, Customer Relationship
Management, Business Intelligence, Trade Finance, Treasury, Workflow
management etc. True benefits of CBS will accrue to the bank through
implementation of such software.
iv. In order to make process of sanctioning loan proposal more efficient,
sample banks may implement Loan documentation and Loan appraisal
software. Such software no doubt shall help in removing duplication of
work and bring in accountability at various levels of management involved
in sanctioning of loans.
v. CBS is expected to reduce work load of employees. Time saved due to
automation is expected to increase business of the bank. Banks also need to
utilize such time for effective marketing of services and products offered by
the bank. Banks also need to introduce additional para-banking activities to
enhance their non-interest income.
vi. Sample banks need to take-up exercise to understand information required
by front office employees in order to take quick decisions for improving
customer service. Banks need to introduce business application such as
Customer relationship management software to take care of such
requirements.
vii. Sample banks require to maintain comprehensive record relating to volume
of transactions generated through electronic delivery channels and business
generated through such channels in order to closely monitor business
generated through these channels and to bring in further improvements in
services offered. Format for maintaining such record is suggested
through this research work (Annexure I)

Recommendations for UCBs planning to introduce CBS

In the light of overall economic developments, technological developments and
enormous increase in tele-density during last few years, it is inevitable for UCBs to
adopt CBS to survive in competitive business environment and meet regulatory
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requirements. Due to huge cost involved and considering complexity of the project,
CBS implementation needs to be handled in most diligent way. UCBs not only
need to ensure successful implementation of CBS but also that investment made by
them for CBS implementation results into improved performance of the bank.
Following suggestions are therefore offered based on the research work undertaken
i. UCBs which are yet to implement CBS, need to urgently initiate project of
CBS implementation
ii. Services of consultants having expertise in banking domain and
Information technology may be hired from initial stage of the project and
continued even after successful introduction of CBS. This will certainly
enable banks to keep abreast with developments happening in the industry
and continue remain competitive.
iii. Various options such as outright purchase, Application Service Provider
(ASP), leasing etc. available as a part of CBS implementation, need to be
carefully evaluated while taking final decision.
iv. UCBs may adopt systematic procedure for implementation of CBS, as
suggested through present research work (Annexure IV).
v. Banks must undertake important exercise of Business Process Re-
engineering (BPR) prior to implementation of CBS. BPR will help banks to
overcome age-old inefficient business procedures, if any and also to take
advantage of well established and universally accepted business
procedures.
vi. UCBs in the vicinity must come together and set-up common data centre.
This will enable banks to share hardware, software, networking, manpower
resources in true cooperative spirit. Banks will also be in position to save
cost of investment.
vii. In absence of such arrangements, banks can at least come together and
negotiate with respective vendors to get benefit of volumes.
viii. Smaller banks which cannot afford setting-up own DC and DR must share
Data centre and Disaster Recovery Site with other UCBs having spare
resources.

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Recommendations for the regulatory agency

i. RBI had set deadline for introduction of CBS for Scheduled Commercial
Banks and even for Regional Rural Banks. On the similar lines RBI should
set a deadline for adoption of CBS by UCBs.
ii. National Bank for Agriculture and Rural Development (NABARD) has
been asked by Ministry of Finance, GOI to provide financial assistance to
about 400 small urban cooperative banks (UCBs) under Financial Inclusion
Technology Fund (FITF) to create infrastructure for core banking solutions
(CBS). Banks, which could not introduce CBS due to scarcity of funds,
must grab this opportunity to introduce CBS as quickly as possible.
iii. As most of the small UCBs do not have technical know-how and
specialized manpower to look after technology, RBI should provide a set of
comprehensive guidelines prescribing procedure to adopt CBS.
iv. Institutions of national repute such as IDRBT, VAMNICOM, CAB,
NABCONS, NIBM, BIRD, IIBF etc. can be appointed as agencies to
provide technical support. RBI may decide charges for providing such
support and direct all the cooperative banks to avail benefit of such
arrangement.

Contribution to the subject and body of knowledge

UCBs have traditionally played an important role in mobilizing resources from
lower and middle-income groups and in providing direct finance to small
entrepreneurs and traders. UCBs are playing a vital role in development of urban
economy, by financing the downtrodden class of urban people, small scale
industries, small business, retail trade, self employment, transport business,
housing, consumption, etc. By being local in nature and intricately interwoven with
the local community, the UCBs have a clear advantage over commercial banks.
Though they form a tiny part of the banking system, they have been regarded as
one of the main instruments for growth and development of urban and semi-urban
poor.

Adoption of Information and Communication Technology (ICT) based solutions

on large scale has been one of the major factors for performance improvement of
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banking sector in India and abroad. This fact has been revealed through the number
of research studies undertaken by several researchers in India as well as other
developing and developed countries. No comprehensive research work has taken
place during last 5 to 7 years relating to impact of ICT in general and particularly
CBS, on business performance and profitability of Urban Cooperative Banks
which are important part of Indian economy.

Generic details such as how CBS helped banks in improving their business,
customer services, customer retention and management information system are
available in form of article, case studies. However, there is a dearth of literature
enlisting and highlighting performance improvements achieved by banks based on
Scientific methods / Research work.

Present research has sincerely attempted to address these gaps and contributed to
existing knowledge base.

Based on the empirical analysis, the study provides important details such as
investments made by the sample banks, procedure followed by them for CBS
implementation, issues faced by them and benefits as perceived by their employees
at branch level. Study has also enlisted technology based services introduced by
the respective banks, especially after introduction of CBS.

Based on these details, sample banks shall be able to introspect themselves with
respect to their performance as compared to peers with respect to various banking
products and service offerings. Details presented through this research work are
expected to help them formulate strategies to further improve their performance by
offering innovative banking products and services.

Attempt has been made through the present study to compare performance of each
of the sample bank prior to and post CBS implementation period. Further, it has
attempted to cross compare performance of sample banks with respect to
productivity, efficiency and profitability in pre and post CBS implementation
period amongst the sample banks.

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The analysis done in this research work is expected to provide insights to
management of sample banks with regard to fruitfulness of their decision to
introduce CBS in their respective organization and whether their banks were in
position to outperform competitors due to CBS implementation.

Findings and recommendations of present study would no doubt be immensely

useful for UCBs planning to introduce CBS to formulate their policies and future
strategies.

Based on suggestions made through this research work, regulatory agency can
issue directives to UCBs which are yet to introduce CBS, about future course of
action required by them and need to introduce technology based delivery channels.
Procedure suggested through this research work should help UCBs to implement
CBS more systematically.

Present study concludes that there is improvement in performance of banks during

post-CBS period. However, due to unavailability of necessary data it was not
possible to address “how much” improvement is due to CBS. If banks maintain
data as per the format suggested through this research then it would be easier to
derive such information. It will also help management to decide which of the
delivery channel is more preferred by customers of the bank and accordingly
further future investments can be made.

Areas of future study and research

i. Subject to availability of data, future research can be undertaken on similar
lines, for different types of banks such as commercial banks comprising
foreign banks, private sector, public sector banks along with state
cooperative, district central cooperative banks. Such work can help in
documenting experiences of different types of banks and decide which
amongst them has introduced it more professionally and have been able to
derive maximum benefits.
ii. In the present study, only the quantitative aspects of productivity and
profitability have been examined. A study can be taken up to consider
qualitative aspects such as professional management, motivation level of
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 employees, quality physical infrastructure, modern communication
facilities, customer satisfaction, brand image of the bank etc which would
definitely play important role in performance improvement of bank to find
out how much percent improvement is due to each of these important
factors along with that of technology.
iii. If data pertaining to time required per transaction, number of transactions
per employee, time saved due to process re-engineering / centralization of
routine procedures, time saved in generating MIS, opportunity cost due to
effective and proactive decisions to mitigate business risks etc in pre and
post implementation period of CBS is made available by the banks then
study could be undertaken to measure progress in operational efficiency in
post-CBS environment.

Conclusion
The broad objectives of the study have been achieved by the researcher.

The hypotheses formulated for the research have been tested and statistically
validated. The broad conclusions drawn based on the study undertaken are as
follows
i. All the sample banks are fully CBS compliant and have completed over
three operating cycles successfully under CBS environment.
ii. Sample banks except that of one bank have done reasonably well in
systematic implementation of CBS.
iii. Banks did not come across any major issue while implementing CBS.
iv. Sample banks preferred to customize various software features to suit to
their existing procedures rather than accepting standard procedures
available in application software. The banks should have taken-up business
process re-engineering exercise to accept some of the efficient procedures
already available in the application software.
v. Performance of the sample banks in terms of productivity, operational
efficiency shows significant improvement in post-CBS period as compared
to pre-CBS period. Profitability has also improved but not as significant as
productivity parameters. This performance improvement is clearly due to
introduction of CBS.
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 vi. There is further scope for improvement in performance of the sample
banks.
vii. All the selected banks have not yet implemented other technology based
solutions such as intranet, work flow management and risk management
software such as ALM, AML, Treasury, Trade Finance etc. which can help
banks in improving their performance to a large extent.
viii. With respect to multi channel servicing, sample banks need to aggressively
move forward to remain competitive.
ix. Banks are still relying upon in-house developed information security
procedures. In order to provide confidence to customers, banks must adapt
internationally accepted information security standard such as ISO 27001
and have their BCP/DR policy in place.
*****

Dr. D. Mahal Devdatta A. Divekar

Research Guide Research Scholar

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