In layman’s language, a core financial system is simply an application that every financial institution, uses to ease its processes and improve the effectiveness of services. ‘Core’ here refers to a centralized back-end system that is expected to process daily transactions for a Financial Institution and post the updates to accounts and financial records.
It is supported by advanced technologies and comes with services like seamless management of loans, the ability to process credits and create interfaces for financial accounting systems. A core financial system is also important from the perspective of product creation, loan cycle management, statutory reporting, audit Log and record keeping.
There are several questions about core financial systems which I have commonly come across.
Stakeholders want to understand what a Core Financial System should look like or may be how it should be designed?
The NBFCs and MFIs are largely benefitted in terms of ease of use, ease of management and enlarging the scope of operations. With various encounters and years of experience in the MFI and NBFC operations, here is a list of the six must have for a core financial system:
1. Centralized systems to manage all branches:
The issues with different branches operating individually and not connected with a central hub or head office are diverse, extending to chances of errors, lack of updated records and huge stakeholder inconvenience. Using a core financial system enables the centralized control approach, thereby improving the uniformity in the sector.
2. Complete life cycle management:
The process of financial management and services in MFIs and NBFCs may appear to be a one-page activity, created for ease of beneficiaries, but remains a tedious process with different stages beginning with loan origination, leading to Disbursement, Collection, Accrual, Penalty, Provisioning, Write-off and so on. In order to simplify these processes, using core financial systems enables these institutions to create a life cycle management process and increases the control and monitoring of each activity.
3. National regulatory Mandates:
Reports about mandatory implementation of core financial systems across MFIs and NBFCs are making rounds. Using these systems is not only a mandate of the industry but also improves simple processes such as Daily Asset Classification and Integrated Accounting. The idea remains to ensure that transparent and ethical processes are applied!
4. Centralized Customer (Borrower) information system:
The number of borrowers in the MFIs and NBFCs is expected to increase further. Imagine the chaos if centralized systems are not applied! Frauds, unmanaged lending, multiple borrower identities and fake records are some of the immediate issues I can identify! In such cases, core financial systems create the ability to centralize the customer information systems. Risks and threats to integrity of the industry are clearly reduced!
5. Service enablement:
The lending institutions are fast making the shift towards service enablement. Using the core financial systems, in my experience, improves the service enablement. I can quote examples such as those of e-Signatures, e-Authorizations, e-NACH and digital collections.
6. Centralized reporting and control:
With varying levels of interest and abilities, using core financial systems increases homogeneity when reporting protocols and systems are used. It is easier to collect and analyze reports on PAR, POS, disbursement, credit bureaus, collections, NPA etc.
Core financial software assists the overall operation of a Financial Institution. It provides a standardized process for receiving customer information, posting transactions, and making changes to an account. Statutory compliance and changes are easy to apply within the whole institution from the head office. Moreover, accessibility to the information is in real time which streamlines the operation and reduces the overall cost.
I hope this listicle has shed sufficient light on the main features that should be included when you choose your core financial system.
Author: Vinish Shah | CBO
Vinish has over 20 years of experience working with BFSI, IT, Telecom and System Integration companies. With Craft Silicon since 2015, Vinish is an experienced leader in Service Management, Business Development, Service Delivery and Operations. He currently drives the company’s expansion strategies, business development and customer engagement. Craft Silicon has a flagship Core Financial System – Bankers Realm Core Microfinance Solution (BR.Net) runs on a modern enterprise platform with robust architecture and easy-to-use technology designed for high volume transactions to deliver superior performance.