Indian lenders will need to invest $1 billion in the next five to 10 years to upgrade legacy core banking systems, according to Vipin V, managing director and partner at Boston Consulting Group (BCG).
Historically, Indian financial institutions have allocated a lower percentage of their revenue to IT spending compared to global peers. Global banks typically invest seven to nine per cent of their revenue on IT costs while Indian banks allocate only up to five per cent, Vipin said while elaborating on BCG’s report on Cloud-based Core Transformations.
Indian banks have primarily directed their IT budgets toward front-end engagement systems, overlooking the core systems. This has resulted in legacy backend infrastructure that is inadequately equipped to support faster go-to-market for new product launches and the growing volume of transactions.
Most of the IT budget (about 80 per cent) is spent on Run the Bank (RTB) as compared to Change the Bank (CTB), with a focus on keeping the lights on. “There is a need to increase spending on CTB initiatives, preferably with a ratio of 60/40 vs RTB.” Furthermore, even within CTB initiatives, the focus is much more on low-hanging fruits such as enhancing customer experiences and offering omni-channel services,” BCG added.
The global consultancy firm said legacy core systems used by banks suffer from various problems. First, they entail high costs for running and maintenance. The core banking infrastructure of Indian banks, mostly set up in the 1990s, used monolithic architectures, helping to unburden themselves from the inefficiencies of mainframe architectures meant for managing large banks with branch networks. However, this resulted in tightly coupled systems, built on a single tech stack, and unsuitable for horizontal scaling.
Second, there is a lack of scalability and resilience for increasingly high workloads. The added burden of handling real-time transactions and advanced technologies is increasing the downtime of banks. The RBI ombudsman recorded a total of over 40,000 mobile and internet banking complaints in both FY23 and FY22.
Third, core systems lack flexibility and agility in launching new products. It is difficult to integrate with legacy systems as they use old API interfaces which are not supported by new age applications and need much more effort to run and maintain, BCG added.
First Published: Aug 01 2024 | 8:58 PM IST
