IT Adoption in BFSI Sector in India

Zinnov Management Consulting IT Adoption in BFSI Sector in India 2012 This report is solely for the use of Zinnov Client and Zinnov Personnel. No Part of it may be quoted, circulated or reproduced for distribution outside the client organization without prior written approval from Zinnov.

India is a fast growing IT market; BFSI vertical constitutes a significant share of the overall spending USD billion FY12 FY11 Distribution of IT Spending in India, FY12 $13.7 Energy Hardware 17.1% $11.7 15.7% Government 15.4% IT $12.6 BFSI 14.4% 11.1% Services $11.0 Manufacturing 28.8% Telecom 7.2% Consumers Education Software $4.2 11.9% 1.5% Products 19.5% $3.5 Healthcare Others1 Retail 1.0% Total domestic IT market FY12 7.0% 0.4% ~ USD 30.4 billion Overall, BFSI vertical is contributing significantly to the growth of the Indian economy; its share in Indian GDP is estimated at ~8%Source: Company Annual Reports and Press Releases; Dataquest; Primary Interviews with Stakeholders in the Indian IT Ecosystem; MOSPI; Zinnov AnalysisNote: 2

The rapid diversification of the sector including Banks, NBFCs and Insurance presents huge IT opportunity Scheduled Banks in India Over 97,000 (235) Unscheduled Banks Commercial Co-operative Banks (166) Banks (69) Public Sector Foreign Banks Private Sector Regional Rural Urban Co- State Co- Banks (26) in India (33) Bank (21) Banks (82) operatives (53) operatives (16) Nationalized SBI and its Old private New Private Banks (20) Associates (6) Sector Banks (14) Sector Banks (7) NBFCs (12,409) Insurance Sector (49) Registered and Regulated by Exemption from RBI Not registered but regulated RBI regulations and registration by RBI* Mutual Benefit Finance Life Insurance (24) Loan Company Insurance Companies Cos. (notified nidhis) Stock Exchange, Stock Mutual Benefit Cos. Investment Company brokers, etc. (potential nidhis) Non Life Insurance (24) Equipment Leasing Housing Finance Misc. Non-Banking Cos. Company Companies (chit funds) Hire Purchase Finance Micro Finance Company Companies Reinsurance (1) Residuary Non-Banking CompanySource: RBI, IRDANote: *Not registered with RBI, but the RBI issues direction relating to deposit acceptance policy 3

After a slow growth phase during the economic downturn, the banking industry has started growing rapidly again Banking – Key Trends Rapid geographic Innovative products and expansion plans (SBI, platforms (virtual debit Indian Overseas Bank, cards, RuPay, etc.) Performance Indicators for Indian etc.) Scheduled Commercial Banks, USD billion 1,141 Focus on Financial New banking licenses Inclusion (RBI, SBI, Punjab 948 from RBI (Maharashtra & Sind Bank) 830 864 State Cooperative Bank) 794 685 587 601 Foreign banks opening Single view of customer; branches in India (Woori single point of access for Bank, FirstRand Bank, all Information Westpac) 2007-08 2008-09 2009-10 2010-11 Branchless banking via Aggregate Deposits Bank Credit Regulation and mobile, internet kiosks, compliance (IFRS, Basel etc. (SBI, Union Bank) III, etc.) Expansion into Consolidation/ investment banking and recapitalization of RRBs* other advisory services across India (Axis Bank)Source: RBI; Company Websites; Zinnov AnalysisNote: *Regional Rural Banks 4

Financial Services and Insurance sectors are following suite and have shown promise • Growth of Micro-credit Financial • Need for real-time processing in capital markets Services • Focus on wealth management • Introduction of new financial products (CDS for Total Assets of Non-Bank Finance Companies corporate bonds, securitized debt, fund products) in India (end-March), USD billion • Government focus on increasing investor base for 25 26 the capital market 24 19 16 Gross Premium Underwritten by Insurers, USD billion 64 56 2007 2008 2009 2010 2011 52 48 36 • Statutory automation as per IRDA • Growth of Micro-insurance • Collaboration with banks: the Bancassurance model 7 7 9 6 7 • Targeted customer approach • Increasing competition (no. of players increasing) • Delivery channels like mobile, internet, distance 2007 2008 2009 2010 2011 marketing in addition to agent model Insurance • Portability of health insurance policies Life Non-life • E- insurance accountsSource: RBI, IRDANote: 5

The growing business needs of BFSI players have led to a rapid adoption of IT in the BFSI vertical… Key Drivers for IT Adoption in BFSI Vertical Meet Regulatory Regulatory authorities like RBI, IRDA and SEBI release regular Requirements/ mandates necessitating IT adoption for better services and security Security Customers are investing in IT Improve Internal applications which help them better Efficiencies align their business processes and improve internal efficiencies Key IT investments are targeted at Support Growth supporting the business growth plans of Strategies BFSI customers Customers are looking for IT solutions which can help them Develop Customer differentiate Experience themselves from their competitors IT is helping BFSI players in extending New Channels for their reach to the unbanked population of Furthering Reach IndiaSource: Zinnov AnalysisNote: 6

…as a result, the IT market has been growing at 13% YoY, with key adoption across all domains IT Spending in BFSI, USD billion IT Spend Distribution IT Budgets as a Percent of Revenues Hardware ~53% for BFSI: ~1.5-2.0% 2.7 Software ~15% Services Percentage Outsourcing in BFSI: 2.4 ~32% ~60% FY11 FY12 Key Recent IT Deals in BFSI Vertical Customer IT Service Provider Description IDBI Bank deployed Oracle Hyperion Planning to create budgets and rolling IDBI Bank Oracle forecasts that are linked to its balance sheet and profit and loss models Bank of Baroda HP Assessment and refresh of the banks applications and IT infrastructure ICICI Securities Microsoft Enabling an online trading platform for ICICI Transfer of bank’s non-core banking applications to Hitachi USP VM which Dhanlakshmi Bank Hitachi allowed it to adopt virtualization and reuse old storage boxes NABARD Wipro End-to-end solution to computerize four co-operative banks A 10-year deal to manage entire IT infrastructure in the areas of finance, Mannapuram Finance IBM HRM, BI, collaboration and document management Deployment of Cisco’s wide area network optimization solution across all of Union Bank Cisco; Wipro 1,600+ branches of Union BankSource: Nielsen Domestic IT-BPO study 2010; Primary Interviews with Stakeholders in the Indian IT Ecosystem; News Updates; Company Websites; Zinnov AnalysisNote: 7

Compliance requirements and guidelines by governing bodies have played a key role in driving IT adoption in the vertical Recent Regulations & Guidelines Influencing IT Adoption• In Oct-11, RBI instructed all NBFCs to gradually phase out use of checks and shift to electronic payment system Encourage• In Apr-11, RBI allowed co-operative banks and RRBs to transfer funds electronically through RTGS and NEFT Digital • RBI mandated that all the banks should automate the• RuPay, India’s domestic card payment network was Transactions process of filing regulatory reports (ADF Regulations) introduced by NPCI in early 2012 • In 2011, RBI issued draft guidelines on implementation Compliance of Basel III capital regulations Regulations • In 2011, RBI issued guidelines on CDS*, directing market participants to report such trades within 30• RBI has mandated that corporates seeking banking minutes to the Clearing Corporations online licenses will have to commit to having 25% of their bank Financial repository branches in rural unbanked areas Inclusion• In 2011, RBI mandated adoption of CBS by all RRBs across Initiatives India• SEBI’s nod on SME exchange • An RBI committee earlier issued recommendations to banks to enhance cyber security and has also Security• In order to encourage mobile transactions, RBI removed threatened actions against those who would not the limit cap for transactions of INR 50,000 in Dec-11 comply• In Oct-11, IRDA allowed health insurance portability for Encouraging policy holders Customer• IRDA has also asked LIC to complete all claims-related Friendliness investigations within the stipulated time-frame of six months• SEBI allowed mobile trading for equities in 2010 In April 2011, RBI released Guidelines on Information security, Electronic Banking, Technology Risk Management and Cyber Frauds detailing guidelines to its affiliates under nine subject areas including: IT Governance, Information Security, IT Operations, IT Services Outsourcing, IS Audit, Cyber Frauds, Business Continuity Planning, Customer Education and Legal IssuesSource: RBI; News UpdatesNote: *Credit Default Swap 8

There has been a marked growth in maturity of IT adoption by the BFSI customers over the past few years IT Adoption Evolution in BFSI 9.4 4.3 Year-wise Number 2.7 1.6 1.0 of Deals Tracked (indexed to 2007) 2008 2009 2010 2011 2012* 2008 & Earlier 2009-10 Present 0% 7% 4% 32% 31% 19% Key Solutions in 47% 31% 11% 31% 4% Demand 27% 35% 11% (Level-wise) 10% Modern IT Modern IT Modern IT Complete Outsourcing/ Managed Services Core Modern IT Non-core Security/ System Solution/ Networking • Mobility solns./ online payment • Replacements of legacy systems Large Banks/ FSI • Gradual IT adoption around core • Use cases of solns. like BI/ cloud (e.g. CBS, collab.) Firms applications like CBS starting to emerge • Focus solns. (e.g. Treasury soln.) • Continued investments in CBS Regional Banks/ • RRBs (sponsored by larger banks) • Minimal IT adoption observed • Increasing traction for public Smaller FSI Firms starting to adopt CBS cloudSource: Press Releases, News Updates, Zinnov AnalysisNote: *2012 deals tracked till April; based on pro-rata value 9

A host of key focus areas is driving the adoption of IT in the vertical Core Banking Solution 1 9 2 Services Driven Market Business Enabling Solutions 8 3 IT Social Networking/ Online Solutions Adoption Peripheral Applications/ Solutions Trends in BFSI 7 Vertical 4 Mobile Banking/ Mobility Solutions Security and Compliance 6 5 Business Intelligence Cloud and VirtualizationSource: Zinnov AnalysisNote: 10

While CBS continues to be a key area of focus, players are investing in solutions which can help them in solving targeted business issues 1 2 Core Banking Solutions Business Enabling Solutions Regulatory Guidelines and Growth Driving CBS Adoption Indian BFSI players are looking for solutions which can help among RRBs and Co-operative Banks them in better aligning their business processes • The Regional Rural Banks and co-operative banks (driven by larger entities like Canara • Axis Bank implemented the Microsoft Bank and NABARD) have emerged as an EPM* soln. to help manage its project attractive segment for CBS adoption in past workflow, improve project reporting, and few quarters – Wipro to implement Finacle resource forecasting for Canara Banks RRBs (900 branches) • 11 Co-operative Banks in Gujarat partner with TCS for core • FedBank and NABARD adopted Loan banking solutions Management Solns. to manage loan • Nawanagar Co-operative Bank adopted CBs services (FedBank: IBM server and on cloud (IBM Implements OMNIenterprise) Nucleus Software, NABARD: Polaris) • ICICI Prudential and IndusInd Bank have adopted BPM and Workload Automation Larger Banks Adopting CBS 2.0 respectively to automate their processes - Newgen • Kotak Mahindra has replaced its existing CBS with a newer version to become future • Cosmos Co-operative Bank has adopted a ready – Infosys Finacle solution help it in reducing NPAs and keep a check on them – IndiSoft worked • IndusInd bank recently implemented with Cosmos to conceptualize the Infosys Finacle CBS product as Infosys Finacle was not efficient for NPASource: Press Releases, News Updates, Zinnov AnalysisNote: *Enterprise Project Management 11

Non-core applications and security/ compliance solutions are expected to continue witnessing demand in the sector 3 4 Peripheral Applications/ Solutions Security and Compliance F&A Solutions Compliance • IDBI Bank deployed Oracle Hyperion RBI guidelines such as enabling Automated Data Flow in the Planning to create budgets and rolling banks are driving key IT investments to be made/ planned forecasts that are linked to its balance sheet and profit and loss models • A Japanese banks Indian arm deployed WKFS FRSGlobal ADF soln. to meet the ADF regulations – Wolters Kluwer • HDFC Bank deployed a treasury solution to help manage the transaction • While Yes Bank is planning to pilot ADF processing systems – TCS Bancs soln., 4 Indian banks have already adopted WKFS ADF Soln. Collaboration Security • Aditya Birla Services replaced its old Lotus Domino Platform for collaboration with • Bajaj capital adopted solutions from Microsoft® Exchange Server 2010 and Juniper to improve network efficiency as Microsoft Office SharePoint® Server 2007 well as increase security standards • Axis Bank has deployed SatNavs a- CRM • ICICI Securities deployed a CRM solution for mantra FM Product to map all its offices the management of Sales and Lead in great detail to capture property Management requirements across its information, the layouts of each location, various business divisions - CDC etc.Source: Press Releases, News Updates, Zinnov AnalysisNote: 12

New technologies such as cloud/ virtualization and Business Intelligence (as a result of ADF) are picking up 5 6 Cloud and Virtualization Business Intelligence Virtualization BI is emerging as an attractive proposition for BFSI players to develop targeted customer insights • Players like Kotak Mahindra life Insurance, Reliance General Insurance, IndiaFirst Life Insurance have adopted VMware based virtualization solutions to help improve efficiencies of their data centers • IndusInd Bank has selected iCreate’s Biz$core Business Intelligence (BI) solution as a key component of its • Dhanlakshmi Bank has opted to move all of enterprise Business Intelligence strategy its non-core banking applications to Hitachi • Similar adoption by HDFC bank, USP VM which allowed it to adopt Dhanalaksmi Bank etc. virtualization and reuse old storage boxes Cloud Computing • Nawanagar Cooperative Bank has engaged with IBM to deploy CBS on a hosted cloud • Yes Bank has built an in-house BI services model solution for better understanding of • ShamRao Vithal Bank partnered with customers and their behavioral NetApp to offer cloud based solutions to patterns other co-operative banks in its region • Some larger banks like Yes Bank has shown their inclination towards adopting private cloud for their organizationsSource: Press Releases, News Updates, Zinnov AnalysisNote: 13

Need for mobile banking and social networking have emerged as essential for the next generation services in the vertical 7 8 Mobile Banking/ Mobility Solutions Social Networking/ Online Solutions Mobile Banking Social Networking • Union Bank of India and SBI have BFSI players are looking at connecting with their customers introduced mobile payment services in through popular social media portals such as Facebook partnership with players like Nokia and Reliance Comm. • ICICI Bank launched a Facebook • HDFC Bank partnered with Vodafone to get application enabling its customers to access to telco’s select retailers to act as directly perform banking transactions HDFCs sub-agents through which customers can deposit and withdraw cash • Many banks including HDFC Bank and through their mobile phone without having Axis Bank have created pages on to go to bank branches Facebook to understand their fans as well as promote their banking products Mobility Solutions Online Solutions • Reliance General Insurance adopted a mobile insurance POS platform which • Reliance Securities partnered with Atom equips the RGICL affiliated insurance agents Technologies to deploy an enhanced to sell policies directly at the customers payment system to enable traders to doorstep – GoDB Tech make online payment via debit card to their brokerage accounts • United Bank of India pull-based SMS • ICICI Securities partnered with Microsoft enquiry services using Sybase 365 to to launch an online trading portal on automate customer enquiry processes Microsoft’s Silverlight 4.0 platformSource: Press Releases, News Updates, Zinnov AnalysisNote: 14

9 Services Driven Market BFSI vertical continues to offer significant opportunities for IT Services providers in India IT Services Earning Opportunities from BFSI Customers Product License to Services Split Rational/ Other Insights The longer the client is engaged, vendor makes money on multi-site roll out, upgrades, feature CBS 1:2 to 2.5 customization etc. CRM 1:1 One time implementation 1:1. With CRM there is very limited cross or up-sell opportunities If the client enters into a services agreement with the partner the upsell could be 100% for services Collaboration 1:0.25 revenue Virtualization 1:1 Complete stack opportunity could go up to 1:12 (including hardware, software, services, network, etc.) MW/ Platform 1:0.5 Professional services cost varies with choice of tier 1/ tier 2 SI. Also heavy discounts on licenses in India System Mgmt. 1:0.6 Current adoption in mature industries. Extremely critical jobs. Lack of internal expertise Heavy need of customization/ backend integration. OPEX models getting popular – might reduce the Mobility Apps 1:1 to 2 one time license cost Complete IT Infrastructure Management Upgradation • Mannapuram Finance engaged IBM for 10 years to build and • Players are engaging their existing IT partners for new projects manage the entire IT infrastructure including all applications For instance, Bank of Baroda engaged its existing IT partner, HP, • RBI signed a USD 55 mn, 10 year deal for CBS with Polaris for the assessment and refresh of the banks applications and IT which included SI and maintenance services infrastructure Recent Deals ATM Managed Services Software Testing • Axis Bank signed an ATM managed services deal with Diebold • SBI General Insurance contracted Maveric Systems to provide under which the IT vendor will support the bank with services Software Testing and Validation services such as ATM incident monitoring, vendor management, cash • RBI engaged with ThinkSoft for software testing of its financial forecasting and replenishment services, caretaker services, etc. services applicationsSource: Interview with Key Ecosystem Stakeholders; Press Releases, News Updates, Zinnov AnalysisNote: 15

9 Services Driven Market Differentiated pricing structures provide impressive margins for IT services players Enterprise IT Spend Business as Usual New Technology Adoption (70%) (30%) Hardware Software Services Hardware Software Services Product + AMC (~70%) ~30% Product + System Integration/Consulting Margin Range = Product Margin SI/Consulting 5-10% Range = 5-10% Margin 25-40% IS Outsourcing Support and Customer Application IT Consulting Application System Training Development Management Integration Shared Resources Deployed Margin Range = 15-20%Source: Company Annual Reports; Press Releases & Shareholder Presentations; Zinnov Interactions with Senior Stakeholders Across Vendors; Zinnov AnalysisNote: 16

However, a variety of challenges are currently restraining the adoption of IT Key Industry Challenges for IT Adoption Lack of standardization of processes and change management in public sector banks Regulatory compliance around data sharing and privacy Limited internal IT talent and constrained budgets for smaller BFSI players Increasing security threats with the consumerization of IT Fragmented industry amongst a number of service providers Lack of success stories for emerging technologies like cloud computing, Big Data etc.Source: Zinnov AnalysisNote: 17

The supply side ecosystem is gradually evolving to meet the requirements from the demand side Supply Side Ecosystem in India Percentage Large Annual domestic revenues > contribution to ~60 per companies INR 10 billion total domestic IT- cent Large Mid-size Annual domestic revenues BPO revenues 20 players companies INR 1 billion to INR 10 billion Smaller Annual revenues < INR 1 Mid-sized companies billion ~25 per cent 55-60 players ~5-6 per cent Large and Mid-sized BPOs ~200 Mid and Small size Software Products ~1,100 players ~2 per cent MNCs ~150 Indian Product Companies ~400 Startups ~500-550 Smaller Firms Providing IT Services and BPO ~11,000 players ~5-8 per cent Web-development firms and freelancers ~5,000 Value added resellers ~4,000 Individual app-developers and freelancers ~1,600 Small & Micro BPO service providers ~500Source: Zinnov Database of IT-BPO Companies in India; Primary Interviews with Stakeholders in the Indian IT Ecosystem; Zinnov AnalysisNote: 18

Foreign companies continue to dominate the domestic IT market • HP Indian Indian • Dell Foreign 16% 37% • IBM Foreign 84% 63% • HCL Infosystems • Acer • Cisco Domestic Market Share by Revenues • IBM • Microsoft • Wipro Infotech Foreign Indian • SAP 32% 16% • TCS • Oracle • HCL Technologies Indian Foreign • Vmware • 3i Infotech 68% 84% • Tally • CMS Infosystems • Ramco A Number of Key Players are Actively Focusing on the BFSI Vertical:Source: Zinnov AnalysisNote: 19

Peer group companies focused on BFSI vertical are undertaking a host of initiatives to penetrate the Indian BFSI market Channel Partner Strategies Organizational Focus on developing efficient IT Alliances by Peer Alignment channel partner network Companies Aligning organizational Forging alliances to launch structure as per industry’s relevant solutions for BFSI needs customers Key Initiatives by Target Customer Expanding Presence Segments the Suppliers Expand organizational Renewed focus on SMB/ presence in India Tier-II level customers Keeping Pace with Next Generation Compliances Products Launch products to cater to new Mobility solutions; cloud regulatory compliances computing; BI; data analyticsSource: Press Releases, News Updates, Interview with Key Ecosystem Stakeholders, Zinnov AnalysisNote: 20

Going forward, the IT market in BFSI vertical is continue to grow IT Spending in BFSI, USD billion 3.5 3.1 2.7 FY12 FY13E FY14E Cloud Computing and Virtualization Social Computing Banking 2.0 IT-enabled Business Transformation Enhanced Security & Compliance Solutions & Services Adherence New Payment and Settlement Solutions Simplified Banking Service Accessibility and SystemsSource: Primary Interviews with the CIOs; Zinnov AnalysisNote: 21

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IT Adoption in BFSI Sector in India

by Zinnov on Jun 21, 2012

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