Indian Banks expected to invest $1 Billion over next 5 to 10 years to Upgrade their Core Banking Systems
Indian banks are expected to invest one billion dollars over the next five to ten years to upgrade their legacy core banking systems, according to Vipin V, Managing Director and Partner at Boston Consulting Group (BCG).
IT Spending in Indian Banks vs. Global Banks
Historically, Indian financial institutions have allocated a smaller portion of their revenues to information technology (IT) compared to their global counterparts. Global banks typically invest 7-9 percent of their revenue on IT, while Indian banks invest up to 5 percent, as highlighted in BCG’s report “Cloud-based Core Transformations.”
Allocation of IT Budgets
Indian banks predominantly use their IT budgets for front-end engagement systems rather than core systems. This focus has led to legacy backend infrastructure that struggles to support high transaction volumes and rapid product launches. About 80 percent of the IT budget is spent on “run the bank” (RTB) activities, aimed at maintaining existing systems, compared to “change the bank” (CTB) initiatives. BCG suggests a shift in this spending ratio to 60/40 in favor of CTB to foster innovation and adaptability.
High Costs and Maintenance
The legacy core systems in Indian banks, established in the 1990s, are expensive to run and maintain. These systems, built using “monolithic architectures,” were designed to move away from the inefficiencies of mainframe architectures used for large banks with extensive branch networks. However, this resulted in tightly coupled systems based on a single technology stack, which are not suitable for horizontal scaling.
Lack of Scalability and Resilience
These systems also lack the scalability and resilience needed to handle increasing workloads. The added pressure of managing real-time transactions and advanced technologies has led to increased downtime. The Reserve Bank of India’s ombudsman recorded over 40,000 complaints related to mobile and internet banking in FY23 and FY22.
Inflexibility in Launching New Products
Another significant issue is the inflexibility and lack of agility in launching new products. Integrating new applications with these legacy systems is challenging due to outdated API interfaces, requiring considerable effort to maintain and run efficiently, according to BCG.
Conclusion
To address these challenges, there is a pressing need for Indian banks to increase their investment in upgrading core banking systems, focusing more on transformative initiatives to ensure scalability, resilience, and agility in their operations.
