Core Banking Systems: Notes (Part - 1) | Financial Management & Strategic Management for CA Intermediate PDF Download

 Page 1


 
LEARNING OUTCOMES 
CORE BANKING 
SYSTEMS 
After reading this chapter, you will be able to - 
? Understand components and architecture of CBS and impact 
of related risks and controls.
 
? Appreciate the functioning of core modules of banking and 
business process flow and impact of related risks and controls.
 
? Comprehend regulatory and compliance requirements 
applicable to CBS such as Banking Regulations Act, RBI 
regulations, Prevention of Money Laundering Act and 
Information Technology Act.
 
 
 
 
 
 
CHAPTER 
5 
Page 2


 
LEARNING OUTCOMES 
CORE BANKING 
SYSTEMS 
After reading this chapter, you will be able to - 
? Understand components and architecture of CBS and impact 
of related risks and controls.
 
? Appreciate the functioning of core modules of banking and 
business process flow and impact of related risks and controls.
 
? Comprehend regulatory and compliance requirements 
applicable to CBS such as Banking Regulations Act, RBI 
regulations, Prevention of Money Laundering Act and 
Information Technology Act.
 
 
 
 
 
 
CHAPTER 
5 
 
 
ENTERPRISE INFORMATION SYSTEMS 
5.2 
 
Architecture 
Components 
Working of CBS 
Risk Assessment and 
Risk Management 
Process 
Related Risks 
and Controls 
Banking Services 
CASA
Credit Cards 
 Business Process 
Flow of key bank 
products 
Loans and Trade 
Finance 
Data Analytics and 
Business 
Intelligence 
Treasury Process 
Mortgages 
Applicable 
Regulatory & 
Compliance 
Requirements 
Internet Banking 
Process 
e-Commerce 
Transaction 
Processing 
CORE   BANKING   SYSTEMS (CBS) 
Page 3


 
LEARNING OUTCOMES 
CORE BANKING 
SYSTEMS 
After reading this chapter, you will be able to - 
? Understand components and architecture of CBS and impact 
of related risks and controls.
 
? Appreciate the functioning of core modules of banking and 
business process flow and impact of related risks and controls.
 
? Comprehend regulatory and compliance requirements 
applicable to CBS such as Banking Regulations Act, RBI 
regulations, Prevention of Money Laundering Act and 
Information Technology Act.
 
 
 
 
 
 
CHAPTER 
5 
 
 
ENTERPRISE INFORMATION SYSTEMS 
5.2 
 
Architecture 
Components 
Working of CBS 
Risk Assessment and 
Risk Management 
Process 
Related Risks 
and Controls 
Banking Services 
CASA
Credit Cards 
 Business Process 
Flow of key bank 
products 
Loans and Trade 
Finance 
Data Analytics and 
Business 
Intelligence 
Treasury Process 
Mortgages 
Applicable 
Regulatory & 
Compliance 
Requirements 
Internet Banking 
Process 
e-Commerce 
Transaction 
Processing 
CORE   BANKING   SYSTEMS (CBS) 
5.3 
 
 
CORE BANKING SYSTEMS 
 
 
 
 5.1 OVERVIEW OF BANKING SERVICES 
5.1.1 Introduction 
Today India’s banks compete globally at one level and at the same time provide 
various banking services to citizens of India staying even at the remotest location 
in India. All this has been built over period of time and many factors have helped 
this happen.  
Key factors that helped banks reach this level of service delivery being: 
1. Information Technology (IT) is an integral aspect of functioning of 
enterprises and professionals in this digital age. This has now made banking 
services increasingly digital with IT playing a very critical role. The rapid 
strides in IT and the rapid adoption of technology by banks have 
empowered banks to use it extensively to offer newer products and services 
to its customers.  
2. India as a country could not left behind from global business opportunities. 
Ushering of reforms by successive governments led to huge growth in 
India’s global business. Customers also sought banks to provide services 
that enabled them to compete in global economy as well as create new 
business opportunities in India.  As business grew so the need of customer 
also grew.  
3. Successive governments focus to have financial inclusion for all Indians. 
Banks were found to be most capable of helping government achieve this 
goal.  
4. Growth of internet penetration across India. 
To be able to meet the requirements of its customers, to be able to meet the 
global challenges in banking and to enhance its service delivery models; banks in 
India adopted CORE BANKING SYSTEMS (CBS). CBS are centralized systems 
allowing banks to scale up operations, better service delivery and improved 
customer satisfaction thereby improving the overall efficiency and performance of 
its operations. 
Banking is the engine of economic growth specifically in a rapidly developing 
country like India with its diverse background, practices, cultures and large 
Page 4


 
LEARNING OUTCOMES 
CORE BANKING 
SYSTEMS 
After reading this chapter, you will be able to - 
? Understand components and architecture of CBS and impact 
of related risks and controls.
 
? Appreciate the functioning of core modules of banking and 
business process flow and impact of related risks and controls.
 
? Comprehend regulatory and compliance requirements 
applicable to CBS such as Banking Regulations Act, RBI 
regulations, Prevention of Money Laundering Act and 
Information Technology Act.
 
 
 
 
 
 
CHAPTER 
5 
 
 
ENTERPRISE INFORMATION SYSTEMS 
5.2 
 
Architecture 
Components 
Working of CBS 
Risk Assessment and 
Risk Management 
Process 
Related Risks 
and Controls 
Banking Services 
CASA
Credit Cards 
 Business Process 
Flow of key bank 
products 
Loans and Trade 
Finance 
Data Analytics and 
Business 
Intelligence 
Treasury Process 
Mortgages 
Applicable 
Regulatory & 
Compliance 
Requirements 
Internet Banking 
Process 
e-Commerce 
Transaction 
Processing 
CORE   BANKING   SYSTEMS (CBS) 
5.3 
 
 
CORE BANKING SYSTEMS 
 
 
 
 5.1 OVERVIEW OF BANKING SERVICES 
5.1.1 Introduction 
Today India’s banks compete globally at one level and at the same time provide 
various banking services to citizens of India staying even at the remotest location 
in India. All this has been built over period of time and many factors have helped 
this happen.  
Key factors that helped banks reach this level of service delivery being: 
1. Information Technology (IT) is an integral aspect of functioning of 
enterprises and professionals in this digital age. This has now made banking 
services increasingly digital with IT playing a very critical role. The rapid 
strides in IT and the rapid adoption of technology by banks have 
empowered banks to use it extensively to offer newer products and services 
to its customers.  
2. India as a country could not left behind from global business opportunities. 
Ushering of reforms by successive governments led to huge growth in 
India’s global business. Customers also sought banks to provide services 
that enabled them to compete in global economy as well as create new 
business opportunities in India.  As business grew so the need of customer 
also grew.  
3. Successive governments focus to have financial inclusion for all Indians. 
Banks were found to be most capable of helping government achieve this 
goal.  
4. Growth of internet penetration across India. 
To be able to meet the requirements of its customers, to be able to meet the 
global challenges in banking and to enhance its service delivery models; banks in 
India adopted CORE BANKING SYSTEMS (CBS). CBS are centralized systems 
allowing banks to scale up operations, better service delivery and improved 
customer satisfaction thereby improving the overall efficiency and performance of 
its operations. 
Banking is the engine of economic growth specifically in a rapidly developing 
country like India with its diverse background, practices, cultures and large 
  
 
ENTERPRISE INFORMATION SYSTEMS 
5.4 
geographic dispersion of citizens. Banking has played a vital and significant role 
in the development of the economy. The changes in the banking scenario due to 
moving over to Core Banking System and IT-based operations have abled banks 
to reach customers and facilitate seamless transactions with lesser dependence on 
physical infrastructure. This has resulted in all the core functions at the branches, 
such as loan processing and sanctioning, safe keeping of security documents, 
post sanction monitoring and supervision of borrower’s accounts, accounting of 
day-to-day transactions, receipts and payments of cash/cheques and updating 
passbooks/statements, being either centralized or made online or with the use of 
ATMs. The accounting transactions and all services of the banks are being done 
from a central server using core banking solutions. This is changing the modus 
operandi of how banking services are delivered to customers by using alternate 
delivery channels such as ATM, Internet Banking and Mobile Banking. 
5.1.2 Overview of Banking Services 
The core of banking functions is acceptance of deposits and lending of money. 
Further, specific services such as demand drafts, bank guarantees, letter of credits, 
etc. are also provided. The key features of a banking business are as follows: 
• The custody of large volumes of monetary items, including cash and 
negotiable instruments, whose physical security should be ensured. 
• Dealing in large volume (in number, value and variety) of transactions. 
• Operating through a wide network of branches and departments, which are 
geographically dispersed. 
• Increased possibility of frauds as banks directly deal with money making it 
mandatory for banks to provide multi-point authentication checks and the 
highest level of information security. 
Some of the major products and services provided and rendered by commercial 
banks which constitute core banking services are briefly explained here in the  
Fig 5.1.1. 
I. Acceptance of Deposits 
 Deposits involve deposits made by customers in various schemes for pre-
defined periods. Deposits fuel the growth of banking operations; this is the 
most important function of a commercial bank. Commercial banks accept 
Page 5


 
LEARNING OUTCOMES 
CORE BANKING 
SYSTEMS 
After reading this chapter, you will be able to - 
? Understand components and architecture of CBS and impact 
of related risks and controls.
 
? Appreciate the functioning of core modules of banking and 
business process flow and impact of related risks and controls.
 
? Comprehend regulatory and compliance requirements 
applicable to CBS such as Banking Regulations Act, RBI 
regulations, Prevention of Money Laundering Act and 
Information Technology Act.
 
 
 
 
 
 
CHAPTER 
5 
 
 
ENTERPRISE INFORMATION SYSTEMS 
5.2 
 
Architecture 
Components 
Working of CBS 
Risk Assessment and 
Risk Management 
Process 
Related Risks 
and Controls 
Banking Services 
CASA
Credit Cards 
 Business Process 
Flow of key bank 
products 
Loans and Trade 
Finance 
Data Analytics and 
Business 
Intelligence 
Treasury Process 
Mortgages 
Applicable 
Regulatory & 
Compliance 
Requirements 
Internet Banking 
Process 
e-Commerce 
Transaction 
Processing 
CORE   BANKING   SYSTEMS (CBS) 
5.3 
 
 
CORE BANKING SYSTEMS 
 
 
 
 5.1 OVERVIEW OF BANKING SERVICES 
5.1.1 Introduction 
Today India’s banks compete globally at one level and at the same time provide 
various banking services to citizens of India staying even at the remotest location 
in India. All this has been built over period of time and many factors have helped 
this happen.  
Key factors that helped banks reach this level of service delivery being: 
1. Information Technology (IT) is an integral aspect of functioning of 
enterprises and professionals in this digital age. This has now made banking 
services increasingly digital with IT playing a very critical role. The rapid 
strides in IT and the rapid adoption of technology by banks have 
empowered banks to use it extensively to offer newer products and services 
to its customers.  
2. India as a country could not left behind from global business opportunities. 
Ushering of reforms by successive governments led to huge growth in 
India’s global business. Customers also sought banks to provide services 
that enabled them to compete in global economy as well as create new 
business opportunities in India.  As business grew so the need of customer 
also grew.  
3. Successive governments focus to have financial inclusion for all Indians. 
Banks were found to be most capable of helping government achieve this 
goal.  
4. Growth of internet penetration across India. 
To be able to meet the requirements of its customers, to be able to meet the 
global challenges in banking and to enhance its service delivery models; banks in 
India adopted CORE BANKING SYSTEMS (CBS). CBS are centralized systems 
allowing banks to scale up operations, better service delivery and improved 
customer satisfaction thereby improving the overall efficiency and performance of 
its operations. 
Banking is the engine of economic growth specifically in a rapidly developing 
country like India with its diverse background, practices, cultures and large 
  
 
ENTERPRISE INFORMATION SYSTEMS 
5.4 
geographic dispersion of citizens. Banking has played a vital and significant role 
in the development of the economy. The changes in the banking scenario due to 
moving over to Core Banking System and IT-based operations have abled banks 
to reach customers and facilitate seamless transactions with lesser dependence on 
physical infrastructure. This has resulted in all the core functions at the branches, 
such as loan processing and sanctioning, safe keeping of security documents, 
post sanction monitoring and supervision of borrower’s accounts, accounting of 
day-to-day transactions, receipts and payments of cash/cheques and updating 
passbooks/statements, being either centralized or made online or with the use of 
ATMs. The accounting transactions and all services of the banks are being done 
from a central server using core banking solutions. This is changing the modus 
operandi of how banking services are delivered to customers by using alternate 
delivery channels such as ATM, Internet Banking and Mobile Banking. 
5.1.2 Overview of Banking Services 
The core of banking functions is acceptance of deposits and lending of money. 
Further, specific services such as demand drafts, bank guarantees, letter of credits, 
etc. are also provided. The key features of a banking business are as follows: 
• The custody of large volumes of monetary items, including cash and 
negotiable instruments, whose physical security should be ensured. 
• Dealing in large volume (in number, value and variety) of transactions. 
• Operating through a wide network of branches and departments, which are 
geographically dispersed. 
• Increased possibility of frauds as banks directly deal with money making it 
mandatory for banks to provide multi-point authentication checks and the 
highest level of information security. 
Some of the major products and services provided and rendered by commercial 
banks which constitute core banking services are briefly explained here in the  
Fig 5.1.1. 
I. Acceptance of Deposits 
 Deposits involve deposits made by customers in various schemes for pre-
defined periods. Deposits fuel the growth of banking operations; this is the 
most important function of a commercial bank. Commercial banks accept 
5.5 
 
 
CORE BANKING SYSTEMS 
 
 
 
deposits in various forms such as term deposits, savings bank deposits, 
current account deposits, recurring deposits and various other innovative 
products like saving-cum-term deposits, flexi-deposit accounts and various 
other products. 
 
Fig. 5.1.1: Banking and Finance Services 
II. Granting of Advances 
 Advances constitute a major source of lending by commercial banks. The 
type of advances granted by commercial banks take various forms such as 
cash credit, overdrafts, purchase/ discounting of bills, term loans, etc. Apart 
from granting traditional facilities, banks also provide facilities like issuance 
of commercial papers, ECB (External Commercial Borrowing) on behalf of 
Risk Management 
Specialized Services 
BANKING AND FINANCE
Acceptance 
of Deposits
Granting of 
Advances 
Remittances 
Collections 
Clearing 
Letters of Credit & 
Guarantees 
Credit Cards 
Debit Cards 
Other Banking 
Services 
Back Operations 
Retail Banking 
HNI 
Life 
Insurance  
Claims Underwriting Non-Life 
Insurance 
Insurance 
Broking 
Loans