Well, obviously there is a lot of excitement these days around technology in Indian banking space. However, how did this process actually start?
Here is a nice article which looks at this history of introducing computers in banking. It was a process that started around 1982, contrarian to most who would think it started post 1991. Actually, much of changes in Indian economy started around 1980s (s0me say 1970s around Emergency) and 1991 is just that time when all these things came together and became more reinforced.
Coming back to the article:
A few months after Manmohan Singh took over as RBI Governor in September 1982, in a reshuffle of portfolios, one of his deputy governors, C Rangarajan, who had joined a little earlier during the previous governor IG Patel’s tenure, was assigned the responsibility of some of the major operational departments within the central bank, including monetary policy and exchange rate management. Rangarajan, who had taught at IIM Ahmedabad for long, had virtually little to do during the Patel days, with no core functional responsibilities in the first half of 1982.
But that changed when Singh took over. One of the primary issues Singh took up was the computerisation of banking operations. He knew that there would be resistance to the change from unions and staff and so, told them that given the pace of global growth and technological advancement, mechanisation was inevitable.
Those were the days of enormous delays in cheque clearances, with money taking weeks to get credited to the accounts of customers, defeating the objective of moving away from currency to paper-based transactions. Worryingly, there were lots of issues relating to reconciliation or tallying of transactions at the end of the day. There were instances of funds being set aside in separate accounts to handle these discrepancies. Singh told the bankers and the unions that the process of computerisation was not just about boosting productivity in the industry, as was evident in many other parts of the world, but also involved public interest in providing better services.
There was a sequencing here as well:
Prior to that, a few computers were installed in the bank with the staff being told that it was for data collection and analysis, not for transactions. By 1982, a decision had been taken to computerise cheque clearing operations. Slowly, it was extended to the central bank’s clearing houses and for its own transactions. Singh then appointed a committee headed by Rangarajan to consider mechanisation in the banking industry. The trade unions, especially those in West Bengal, were fiercely opposed to this change because they feared mechanisation would lead to job losses. Singh met with then West Bengal chief minister Jyoti Basu without much success. Deputy Governor Rangarajan then went to meet Basu, who told Rangarajan to first convince his ministers. Rangarajan is known to have responded politely, saying he thought that was the chief minister’s job!
That was the time Basu had just returned from a trip to Germany and may have found merit in Rangarajan’s arguments but persuading workers wasn’t an easy task. The resistance of unions and workers in Calcutta, as the city was known then, was so high that handling of payments and settlements, which involved computerisation or mechanisation, had to be done out of another office and not the main regional office of the RBI in that city. Commercial banks too were loath to adopt these changes given the internal resistance. But slowly, as resistance thinned, a National Clearing Cell was created in 1983. A new technology for sorting cheques mechanically was introduced to ensure clearing of outstation cheques at the national level. As collection of cheques became faster, over the next few years, computerisation of clearing operations was taken up in key metros and other cities. Slowly, government payment receipts and transactions were also covered and soon, by the end of the ’80s, the central bank was able to clear high-value transactions.
Around that time, another government undertaking, the Indian Railways, had switched to computerisation in ticketing, with huge benefits to its commuters.
And then 1991 happened:
With the opening up of the economy in 1991-92, the process of computerisation gained pace. What further propelled the change was the securities scam of that period which exposed the chinks in the system then on clearing, payments and settlement. Based on a report of a Joint Parliamentary Committee, the central bank started looking at evolving a modern communication network for the banking industry, reflected later in electronic funds transfer and upgradation of technological systems. The other major driver of change then was private banks. By 1994-95 and in the years that followed, the newly licenced private banks in India leveraged technology in a big way, differentiating themselves from state-run banks. That forced banks who had resisted such changes a few years ago to follow suit, transforming the banking landscape in the next decade. Well over two decades later, India has moved to new forms of banking with licensing of payment banks, electronic fund transfer and seamless transfer of money.
The general wisdom is that private sector banks brought technology into banking. Well, they surely leveraged it much better than public sector banks as they were just staring afresh. This sort of choice was not there for public sector banks who had to balance both old with the new. Infact, most people who shaped all these private sector banks came from trained from the public sector…