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India's banking sector is booming at a great pace in spite of its relatively small size in comparison of its counterparts in other leading economies. Indian banking sector has been found lucrative by eminent players from the international world. For e.g., In India, Citibank and Standard Chartered Bank has more than half of all credit card receivables and personal loans, which has generated more than Rs. 200 crore of profit for both banks. In 2003, Oriental Bank of Commerce was listed by Forbes magazine in its 'Global 200 Best Companies' list. In 1990s, after a long gap of more than 20 years, the apex bank, Reserve Bank of India (RBI) has issued licenses to 9 new private banks. In this, Times Bank got merged with the HDFC Bank. The RBI also allowed Kotak Mahindra Finance Company to become a bank. These banks have shown their edge over each others with the introduction of new products and technologies. Most of the banks paid their focus on the retail sector and provide internet banking, phone banking and mobile banking services to their customers and have cornered one of the largest segments of the India's banking sector by targeting the India's growing middle income class. The Indian banking sector has seen a proliferation of new services which has shown an improvement in customer service.
What is a Bank?
A banker or bank is a financial institution whose primary activity is to act as a payment agent for customers and to borrow and lend money. In other words, an institution where one can place and borrow money and take care of financial affairs.
Function of Banks
Lending money to public (loans) Transferring money from one place to another (Remittances) Acting as trustees Keeping valuables in safe custody Government business
Types of Banks
Public sector Banks Private sector Banks Co-operative Bank Development Bank/Financial institutions
An Overview
The countrys middle class accounts for over 320 million people. In correlation with the growth of the economy, rising income levels, increased standard of living, and affordability of banking products are promising factors for continued expansion.
The Indian banking Industry is in the middle of an IT revolution, focusing on the expansion of retail and rural banking. Players are becoming increasingly customer-centric in their approach, which has resulted in innovative methods of offering new banking products and services. Banks are now realizing the importance of being a big player and are beginning to focus their attention on mergers and acquisitions to take advantage of economies of scale and/or comply with Basel II regulation. "Indian banking industry assets are expected to reach US$1 trillion by 2010 and are poised to receive a greater infusion of foreign capital. The banking industry should focus on having a small number of large players that can compete globally rather than having a large number of fragmented players."
Not long ago, an account holder had to wait for hours at the bank counters for getting a draft or for withdrawing his own money. Today, he has a choice. Gone are days when the most efficient bank transferred money from one branch to other in two days. Now it is simple as instant messaging or dial a pizza. Money has become the order of the day. The first bank in India, though conservative, was established in 1786. From 1786 till today, the journey of Indian Banking System can be segregated into three distinct phases. They are as mentioned below: Early phase from 1786 to 1969 of Indian Banks Nationalization of Indian Banks and up to 1991 prior to Indian banking sector Reforms. New phase of Indian Banking System with the advent of Indian Financial & Banking Sector Reforms after 1991.
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To make this write-up more explanatory, I prefix the scenario as Phase I, Phase II and Phase III.
Foundation Phase
The General Bank of India was set up in the year 1786. Next were Bank of Hindustan and Bengal Bank. The East India Company established Bank of Bengal (1809), Bank of Bombay (1840) and Bank of Madras (1843) as independent units and called it Presidency Banks. These three banks were amalgamated in 1920 and Imperial Bank of India was established which started as private shareholders banks, mostly Europeans shareholders. In 1865 Allahabad Bank was established and first time exclusively by Indians, Punjab National Bank Ltd. was set up in 1894 with headquarters at Lahore. Between 1906 and 1913, Bank of India, Central Bank of India, Bank of Baroda, Canara Bank, Indian Bank, and Bank of Mysore were set up. Reserve Bank of India came in 1935. During the first phase the growth was very slow and banks also experienced periodic failures between 1913 and 1948. There were approximately 1100 banks, mostly small. To streamline the functioning and activities of commercial banks, the Government of India came up with The Banking Companies Act, 1949 which was later changed to Banking Regulation Act 1949 as per amending Act of 1965 (Act No. 23 of 1965). Reserve Bank of India was vested with extensive powers for the supervision of banking in India as the Central Banking Authority. During those days public has lesser confidence in the banks. As an aftermath deposit mobilizatio n was slow. Abreast of it the savings bank facility provided by the Postal department was comparatively safer. Moreover, funds were largely given to traders. Expansion Phase Government took major steps in this Indian Banking Sector Reform after independence. In 1955, it nationalized Imperial Bank of India with extensive banking facilities on a large scale especially in rural and semi-urban areas. It formed State Bank of India to act as the principal agent of RBI and to handle banking transactions of the Union and State Governments all over the country. Seven banks forming subsidiary of State Bank of India was nationalized in 1960 on 19th July, 1969, major process of nationalization was carried out. It was the effort of the then Prime Minister of India, Mrs. Indira Gandhi. 14 major commercial banks in the country was nationalized.
Second phase of nationalization Indian Banking Sector Reform was carried out in 1980 with seven more banks. This step brought 80% of the banking segment in India under Government ownership. The following are the steps taken by the Government of India to Regulate Banking Institutions in the Country: 1949: Enactment of Banking Regulation Act. 1955: Nationalization of State Bank of India. 1959: Nationalization of SBI subsidiaries. 1961: Insurance cover extended to deposits. 1969: Nationalization of 14 major banks. 1971: Creation of credit guarantee corporation. 1975: Creation of regional rural banks. 1980: Nationalization of seven banks with deposits over 200 crore.
After the nationalization of banks, the branches of the public sector bank India rose to approximately 800% in deposits and advances took a huge jump by 11,000%. Banking in the sunshine of Government ownership gave the public implicit faith and immense confidence about the sustainability of these institutions.
Consolidation Phase
The phase started in 1985 when a series of policy initiatives were taken by RBI which saw marked slowdown in the branch expansion. Attention was paid to improving house-keeping, customer service, credit management, staff productivity and profitability of banks. Measures were also taken to reduce the structural constraints that obstructed the growth of money market.
Reforms Phase
This phase has introduced many more products and facilities in the banking sector in its reforms measure. In 1991, under the chairmanship of M Narasimham, a committee was set up by his name which worked for the liberalization of banking practices. The country is flooded with foreign banks and their ATM stations. Efforts are being put to give a satisfactory service to customers. Phone banking and net banking is introduced. The entire system became more convenient and swift. Time is given more importance than money. The financial system of India has shown a great deal of resilience. It is sheltered from any crisis triggered by any external macroeconomics shock as other East Asian Countries suffered. This is
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all due to a flexible exchange rate regime, the foreign reserves are high, the capital account is not yet fully convertible, and banks and their customers have limited foreign exchange exposure.
There are 71,177 bank offices spread across the country, of which 43 % are located in rural areas, 22% in semi-urban areas, 18% in urban areas and the rest (17 %) in the metropolitan areas. The major bank groups (as defined by RBI) functioning are State Bank of India and its seven associate banks, 19
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nationalised banks and the IDBI Ltd, 19 Old Private Sector Banks, 8 New Private Sector Banks and 29 Foreign Banks.
Allahabad Bank Andhra Bank Bank of Baroda Bank of India Bank of Maharashtra Canara Bank Central Bank of India Corporation Bank Dena Bank Indian Bank Indian Overseas Bank Oriental Bank of Commerce Punjab & Sind Bank Punjab National Bank Syndicate Bank UCO Bank Union Bank of India United Bank of India Vijaya Bank
Bank of Punjab Bank of Rajasthan Catholic Syrian Bank Centurion Bank City Union Bank Dhanalakshmi Bank Development Credit Bank Federal Bank HDFC Bank ICICI Bank IDBI Bank IndusInd Bank ING Vysya Bank Jammu & Kashmir Bank Karnataka Bank Karur Vysya Bank Laxmi Vilas Bank South Indian Bank United Western Bank UTI Bank
Source: Indian Banks Association/ Reserve Bank of India. * Includes Industrial Development Bank of India Ltd.
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computerization work of more than 774 branches. It has also set up 25 ATMs in throughout the India and has signed agreement with other banks of the public sector for ATM sharing. In some of its branches, it has already started doing tele-banking and mobile banking.
Earlier the Indian mortgage market was minuscule- less than 1% of GDP. But after the introduction of economic reforms by the government, tremendous development has been seen in the mortgage market, getting an impetus from the declination of the interest rates. Many banks like HDFC, SBI and ICICI has put the housing finance on their priority list. As per an estimate, India's mortgage assets have reached to nearly 2% of the India's GDP, Which could heightened to the 20%. Credit card has emerged out as another important product of the personal finance which is growing rapidly. Personal loan is another area which is growing rapidly. HDFC Bank is quick enough in providing new products like car loans, personal loans, debit cards etc. The bank is also engage in loan pricing in various innovative ways for building healthy customer relationship.
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a position to compete for business internationally in terms of funds mobilization, credit disbursal, investments and rendering of financial services essentially because of their relatively small size. It is said that the only Indian bank that could compete internationally would be the State Bank of India, that too if consolidated with some mergers. In this background, one needs to know the why mergers and their impact. But the decisions about mergers would require that a view be taken of the optimal number of banks in the country in the context of the opening up of the financial sector for foreign banks to acquire, and amalgamate with banks in the foreign bank category as well as with Indian banks. Before dealing with these issues, let us have a bit of contemporary history of mergers in India. Mergers of banks took place in India in the 1960s under the direction of the Reserve Bank of India. From 566 reporting commercial banks (of which non-scheduled banks were 474) at the end of 1951, the number came down to 292 (of which 210 were non-scheduled) at end 1961, to 100 (27 non-scheduled) at the end of 1966; and to 85 (14 non-scheduled) by the end of 1969. The number of bank offices increased sharply during this period: From 4151 in 1951 to 5012 in 1961, to 6593 in 1966 and to 9005 in 1969. The branch offices of scheduled commercial banks increased over this period while those of non-scheduled commercial banks declined. Unviable banks were weeded out, as recommended by the Travancore-Cochin Banking Inquiry Commission (1956). This meant either closure or amalgamation with other, relatively strong banks. This process was accelerated when two scheduled banks failed in 1960. The 1960 episode was essentially an exercise for preserving banking stability. Much of the general literature on mergers in banking relates to private banking. The complexities involved in mergers of public sector banking are rarely discussed. In the early 1990s when the then National Bank of India was merged with Punjab National Bank, problems of personnel integration cropped up. After this experiment, public sector bank mergers were not contemplated. On the other hand, there were private banks mergers since about the late 1990s for diverse reasons including building up financial strength, capturing larger portion of the growing retail business and securing better regional presence. Mergers of ICICI Bank and Bank of Madura, as well as HDFC Bank and Times Bank are important examples. These mergers, mooted by the merging banks in the first instance and approved by the authorities, were not entirely for reasons of banking stability as such. There were also mergers of private banks with public sector banks, the prominent among them being the mergers of Benares State Bank with Bank of Baroda in 2002; Nedungadi Bank with
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Punjab National Bank in 2003; and, more recently, Global Trust Bank with Oriental Bank of Commerce. But these mergers were at the initiative of the authorities, undertaken for preserving banking stability. The merger of ICICI with ICICI Bank and the reverse merger of IDBI Bank with IDBI served multiple objectives. First, the institutions were strengthened financially. Second, they helped to avoid the complex processes of restructuring the weaker of the units and to foster financial stability. Finally, they have opened the possibilities of actively promoting universal banking. The above examples of mergers have been facilitated to a large extent by banking sector reforms that helped relax some of the restrictions on asset portfolio distribution. Also, to an extent the advances in information technology have given banks the incentive to consolidate to scale up operations. However, they are not meant, at least in the short term, to cut costs, improve efficiency or raise profits. Implied is the argument that efficiency and profits would be assured once the economies of scale operate. On the other hand, mergers could lead to charging of higher fees for the services rendered, especially if there is no `effective' competition or if smaller banks exhibit `herd behaviour' in imitating the bigger entities. This negative aspect of mergers may not, however, be as serious as when mergers lead to loss of availability of or access to credit or to lower employment, especially of female labour. Unfortunately, there is little of published empirical literature on the impact of mergers in banking in India. The general literature on the subject views the impact from two angles: One based on accounting data and the other based on stock price reaction. Till almost the mid-1990s, studies in the US suggested that mergers based on former did not lead to significant gains either in efficiency or cost-saving. More recently, however, empirical data supported the view that banks significantly improve their profit and operational efficiency following mergers. Studies that use stock market data did not show gains from consolidation. They, in fact, suggested that bidders often suffer negative returns partly because of high offer prices and partly because markets revise downward their expectations from the merger.In the present context of global financial market integration, Indian banks seeking international presence by exploiting the economies of scale and if possible of scope is an appealing argument. But this alone cannot be a good ground for consolidation. Banking stability is much more important. What is also important is that it should not lower the number of banks to levels that
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destroy competition. The proposition that banks would be `too large to fail' is pass as the 1990s financial crises experience shows. The question about the optimal number of banks in the country, and the associated issues of their capital adequacy and their capacity to help universalisation of banking are matters to be yet settled.There is no official view about the optimal number of banks in a country. The Banking Commission recommended in 1972 that national banks be reorganized into two or three all-India banks and six other entities, each specializing in developing services in a broad region. This was not pursued. But there is need for intense research on the issue, before one takes a judgmental view about the number of Indian banks that could have international presence and could compete for international banking business. While such a view would obviously be based on their financial strength, that by itself would not be enough. Good internal governance mechanisms and transparency practices need to be also in place. Besides the authorities should resist the temptation of taking a proactive stance in determining which Indian bank should have international presence. Instead they should allow banks to grow into international entities on their own internal dynamic impulses. The issue however could become complex if foreign banks are allowed to buy out Indian banks. The RBI has done well to be transparent by going in for public views on ownership and governance. One only hopes that political considerations do not influence the final view on the matter.
Exceeds Expectations:
(Rs crore) April-June 2008 Interest income Other income Total income Interest paid Total expenses Operating profit Non-tax provisions 20224.08 3523.35 23747.43 13509.96 18578.47 5168.96 2640.28 2009 24641.11 8491.59 33132.70 17524.15 28238.18 4894.52 394.40 21.84 141.01 39.52 29.71 51.99 (5.31) (85.06) % Change
Net profit Gross NPA Net NPA Gross NPA % of advances Net NPA % of advances NPA data is for SBI standalone
The banks net interest income was affected due to a rise in interest payments that went up 38.5 per cent due the deposit mobilization under the 1,000 day scheme, under which the bank was paying 10.5 per cent interest in October. The scheme had resulted in a mop up of around Rs 1,000 crore on a daily basis for a few months.
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3. Acceptance of Deposit
A bank accepts money from the people in the form of deposits which are usually repayable on demand or after the expiry of a fixed period. It gives safety to the deposits of its customers. It also acts as a custodian of funds of its customers.
4. Giving Advances
A bank lends out money in the form of loans to those who require it for different purposes.
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9. Connecting Link
A bank acts as a connecting link between borrowers and lenders of money. Banks collect money from those who have surplus money and give the same to those who are in need of money.
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Economics of Scale : Universal banking results in economic efficiency. That is, it results in lower costs, higher output and better products and services. In India, RBI is in favour of universal banking because it results in economies of scale.
Resource Utilisation : Universal banks use their client's resources as per the client's ability to take a risk. If the client has a high risk taking capacity then the universal bank will advise him to make risky investments and not safe investments. Similarly, clients with a low risk taking capacity are advised to make safe investments. Today, universal banks invest their client's money in different types of Mutual funds and also directly into the share market. They also do equity research. So, they can also manage their client's portfolios (different investments) profitably.
Profitable Diversification : Universal banks diversify their activities. So, they can use the same financial experts to provide different financial services. This saves cost for the universal bank. Even the day-to-day expenses will be saved because all financial services are provided under one roof, i.e. in the same office.
Easy Marketing : The universal banks can easily market (sell) all their financial products and services through their many branches. They can ask their existing clients to buy their other products and services. This requires less marketing efforts because of their well-established brand name. For e.g. ICICI may ask their existing bank account holders in all their branches, to take house loans, insurance, to buy their Mutual funds, etc. This is done very easily because they use one brand name (ICICI) for all their financial products and services.
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ne-stop Shopping : Universal banking offers all financial products and services under one roof. One-stop shopping saves a lot of time and transaction costs. It also increases the speed or flow of work. So, one-stop shopping gives benefits to both banks and their clients.
3. Effect of failure on Banking System : Universal banking is done by very large banks. If these huge banks fail, then it will have a very big and bad effect on the banking system and the confidence of the public. For e.g. Recently, Lehman Brothers a very large universal bank failed. It had very bad effects in the USA, Europe and even in India.
4. Monopoly : Universal banks are very large. So, they can easily get monopoly power in the market. This will have many harmful effects on the other banks and the public. This is also harmful to economic development of the country.
5. Conflict of Interest: Combining commercial and investment banking can result in conflict of interest. That is, Commercial banking versus Investment banking. Some banks may give more importance to one type of banking and give less importance to the other type of banking. However, this does not make commercial sense.
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Case Study: State Bank of India, World's Largest Centralized Core Processing Implementation
Analyst Author: Robert
Hunt
TowerGroup Take-Aways The State Bank of India (SBI), the largest and oldest bank in India, had computerized its branches in the 1990s, but it was losing market share to private-sector banks that had implemented more modern centralized core processing systems. To remain competitive with its private-sector counterparts, in 2002, SBI began the largest implementation of a centralized core system ever undertaken in the banking industry. The State Bank of India selected Tata Consultancy Services to customize the software, implement the new core system, and provide ongoing operational support for its centralized information technology. Although SBI initially planned to convert only 3,300 of its branches, it was so successful that it expanded the project to include all of the more than 14,600 SBI and affiliate bank branches. The State Bank of India has achieved its goal of offering its full range of products and services to all its branches and customers, spreading economic growth to rural areas and providing financial inclusion for all of India's citizens.
Report Coverage
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The implementation of the Tata Consultancy Services (TCS) BaNCS Core Banking at the State Bank of India (SBI) and its affiliate banks represents the largest centralized core system implementaion ever undertaken. The overall effort included the conversion of approximately 140 million accounts held at 14,600 domestic branches of SBI and its affiliate banks. This TowerGroup Research Note is a case study that overviews the history of the State Bank of India and details the effort to modernize the bank's core processing systems. It also identifies the drivers to modernization, the critical success factors, and the conversion methodology. For a broader overview of the Indian core systems market, see TowerGroup Research Note V47:13R, Looking for State-of-the-Art Core Banking? Try India. Background The State Bank of India is the oldest and largest bank in India, with more than $250 billion (USD) in assets. It is the second-largest bank in the world in number of branches; it opened its 10,000th branch in 2008. The bank has 84 international branches located in 32 countries and approximately 8,500 ATMs. Additionally, SBI has controlling or complete interest in a number of affiliate banks, resulting in the availability of banking services at more than 14,600 branches and nearly 10,000 ATMs. SBI traces its heritage to the 1806 formation of the Bank of Calcutta. The bank was renamed the Bank of Bengal in 1809 and operated as one of the three premier "presidency" banks (the presidency banks had the exclusive rights to manage and circulate currency and were provided capital to establish branch networks). In 1921, the government consolidated the three presidency banks into the Imperial Bank of India. The Imperial Bank of India continued until 1955, when India's 2002 - 2009 The Tower Group, Inc. May not be reproduced by any means without express permission. All rights reserved. TowerGroup is a wholly owned subsidiary of MasterCard Worldwide and operates as a separate business entity with complete editorial independence. MasterCard Worldwide is not responsible for and does not necessarily endorse any opinions, statements, or other content presented by TowerGroup.
1 c central bank, the Reserve Bank of India, acquired the majority interest in the bank and
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hanged its name to the State Bank of India (SBI). In 1959, the Indian government passed the State Bank of India Act, resulting in the acquisition (majority shareholding) of eight state-affiliated banks and the creation of the State Bank of India Group (SBI Group). The SBI itself is now majority owned by the Indian government, which purchased the shares held by the Reserve Bank of India. The State Bank of India and its affiliate banks are profiled in Exhibit 1.
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Given the success of the initial project and SBI's desire to offer new products to all of its customers, a new IT plan was created that would encompass all branches. TCS and the bank would have to demonstrate the capability to process 100 million accounts in a single processing environment. TCS and HP then conducted another scalability test in September 2006 to determine if the system could process SBI's entire base of 100 million accounts (excluding the affiliate banks, which use a separate processing environment) with sustained peak online throughput of 1,500 transactions per second. They conducted the test at HP Labs in Cupertino, California, using two 32-CPU HP 9000 Superdome application servers and two 32-processor Itanium Core HP Integrity servers for the database. The test achieved a sustained peak real-time transaction rate of more than 1,575 transactions per second, meeting the projected processing demands of SBI. Additionally, batch tests were run for both deposits and loan account processing. The month-end batch process for loans required 1 hour and 5 minutes, and deposit processing was completed in 2 hours and 27 minutes. These benchmarks were audited by Ernst & Young, and the test results are highlighted in Exhibit 3.
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Exhibit 3 State Bank of India Scalability Test of TCS BaNCS System for Full Branch Conversion Source: Tata Consultancy Services (TCS) Based on the successful scalability test, SBI decided to convert the approximately 6,700 remaining SBI branches to the BaNCS system. The conversion of the remaining branches began in June 2006, with the stated goal of completing the conversion by year-end 2008. Utilizing the assembly line conversion approach established in the initial phase, the bank converted 1,400 of these branches by March 2007.
2002 - 2009 The Tower Group, Inc. May not be reproduced by any means without express permission. All rights reserved.
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Because the conversion methodology and BaNCS system were thoroughly proven and stable, the assembly line conversion approach allowed the bank to complete the conversion ahead of schedule. Between April 2007 and March 2008 (the bank's fiscal year end), SBI converted 4,600 branches to the new system. The remaining branches were converted between April and July 2008.
The bank has achieved its goal of offering its full range of products and services to its rural branches. It delivers economic growth to the rural areas and offers financial inclusion for all of India's citizens. Implementation of the TCS BaNCS system has provided the bank with the ability to consolidate the affiliate banks into SBI. In fact, the bank recently completed the consolidation of State Bank of Saurashtra into SBI. The bank has reversed the trend of customer attrition and is now gaining new market share. Completion of the core conversion project has also allowed the bank to undertake several new initiatives to further improve service and support future growth. These initiatives include the deployment of more than 3,000 rural sales staff, redesign of over 2,200 branches in the last fiscal year, opening of more than 1,000 new branches, establishment of a call center, and an active plan 2002 - 2009 The Tower Group, Inc. May not be reproduced by any means without express permission. All rights reserved.
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to migrate customers to electronic delivery channels. The improvement in productivity and growth of business for the SBI Group is reflected in Exhibit 4. Exhibit 4 Selected Business Results for State Bank of India Group (200207) Source: State Bank of India Group
conclusion
The implementation of the Tata Consultancy Services (TCS) BaNCS system at the State Bank of India (SBI) represents the largest core systems project ever undertaken. The success of this project should encourage other large banks to begin projects to modernize their core systems. The use of a UNIX-based platform to process more than 100 million accounts daily demonstrates that tier 1 banks can use a mainframe alternative for their core processing. Although TowerGroup expects that the majority of these banks will continue to rely on the IBM mainframe for core processing, they can fully consider the benefits of utilizing a UNIX-based platform. SBI's achievement demonstrates that attention to critical factors is crucial in implementing new core systems. The bank's senior management commitment, business line involvement, project team staffing and empowerment, and extensive employee training were all key contributors to the success of the project. Management also recognized the need for a proven systems integrator that possessed in-depth expertise in both business and technology. Core systems modernization has allowed the State Bank of India to centralize computer processing and operations functions, offer new banking products to all the citizens of India, reverse a trend of customer attrition, and consolidate its affiliate banks. Additionally, the bank can now further expand its product offerings and improve customer service.
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BIBLIOGRAPHY
Books:
1. Malhotra N.K., (2005), Marketing Research- An applied orientation, New Delhi, Prentice Hall of India Private Ltd 2. Shaw Robert, Merrick David (2005), Marketing Payback, Financial Times/Prentice Hall Books. 3. Kothari, C.R, New age publication, Research methodology, second edition 2009.
2. 3.
India page of HT paper (june. 27,2013) The Business world (april 2013)
News paper:
1. Economics times.
2. Times of India.
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