The Hindu Business Line : Down opportunity lane

For the information technology czars, Rural India has seldom kindled interest. With its staid image of farmers and barefooted schoolchildren, there has only been sympathy and patronage, with some firms donating outmoded desktops to schools.

But that image is fast changing. Some are beginning to realise that there is a `Golden Goose' out there. And it is the global IT vendors, both hardware and software, who appear to have recognised this opportunity.

This comes at a time when the largest IT market, the US, is seen headed towards a slowdown.

IT watchers now believe a whole new market in Rural India is developing. The boom is generated by the banking and financial services sector. The boom engine comes from the ambitious project initiated by the Finance Ministry — Financial Inclusion (FinInclusion). The project aims at providing banking coverage over the entire length and breadth of the country, and envisages that every individual has access to banking/financial services.

But what is in it for the IT hardware and software sectors?

Says H.N. Sinor, Chief Executive, Indian Banks' Association, "Financial inclusion will create a big demand for the IT sector. That will be part of the multiplier effect. But at this stage it is difficult to quantify the demand. It will be huge."

At the Bankers Conference (Bancon) held in Hyderabad in November last, the theme of one of the meetings attended by top bankers, public, private and foreign, was `Financial Inclusion.' One IT or the only IT company conspicuously present there was `Big Blue' or IBM. The company has already anticipated the demand from the sector. IBM was in closed-door sessions with banks and banking/financial regulators.

Telecom - for starters

But any boom is unlikely to be confined to just the IT hardware. It could start with telecommunication lines. As Sinor points out, "a lot of branches in the rural and semi urban regions will have to be networked." This means that the demand will automatically start from the telecommunications hardware, mostly by way of carrier capacity.

Backbone capacity is concentrated with Bharat Sanchar Nigam Ltd (BSNL). India's current domestic backbone (fibre plus microwave, including leased capacity) is estimated at around 9 lakh route km. The bulk of this accounted by BSNL is about 6.7 lakh route km. Another 50,000 km is available with infrastructure operators, mostly by way of optical-fibre cable (OFC) network. This includes the spare capacity available with the Railways and power entities such as the Power Grid Corporation of India Ltd.

Yet even this capacity, despite being the second largest in Asia, is unlikely to be sufficient. Already carrier capacity is now becoming overcrowded, given that data traffic is set to increase. However, private backbone providers are not seen making any fresh investments. The current low numbers are simply not viable to make private sector investments lucrative. This is because at the current level of Average Revenue Per User (ARPU) of about Rs 350 per annum, at least 140 subscribers would be needed to make the OFC viable in India.

But that is poised to change: The reason — the numbers to be covered by Financial Inclusion are huge. At least another 600 million people in the country are likely to be brought within banking coverage, through the current network of about 55,000 branches that may rise close to 60,000 over the next five years. For this new crop of bank account holders, financial services would be electronically served. Credit/Debit cards, remote account operation, electronically activated payment mechanisms and a whole suite of services. This is bound to increase data traffic in financial services. Data traffic, after project FinInclusion is complete, is likely to be immense. And the data traffic shift would give the ARPU numbers a complete makeover. This holds out much promise for backbone operators.

`Exploding market'

The Telecom Equipment Manufacturers' Association estimates that telecom manufacturing could rise to $100 billion in the next three years from the present $26 billion. A substantial portion of this is likely to meet domestic demand, including for high-value networking equipment.

Domestic hardware vendors, on the other hand, have not been as aggressive as the `Big Blue'. But they admit that the markets could very well explode.

"There's a lot of action in the banking sector," says Suresh Vaswani, president, Wipro Infotech, leading systems integrator and hardware vendor. "The demand for IT services is coming from all areas of banking, including micro-finance."

IT vendor benefits are mostly derived from supplying end-to-end solutions (client-specific, involving hardware and software integration) and providing support services. In fact most of them are at the middle/low-end of the IT value chain and are now shifting slowly towards offering high-end services such as consulting.

For consultancy firm Trianz that has just relocated its headquarters from Santa Clara in US to Bangalore, the timing could not have been more opportune. Trianz's Chief Executive Officer, Srikant Manchala, says, "We see at least 25 per cent of our future revenues coming from India and from the financial inclusion project."

For the hardware vendors, the benefit for these entities is that the setting up of networks, installation of Automatic Teller Machines and automation is moving to rural areas. Ledger posting is shifting from manual entries to keyboard-driven entries. Data storage at the centralised locations, in the zonal, regional and head offices, is becoming electronic for easy and quick access. This allows rural account holders to graduate from branch to bank customers.

Trigger for software

But the reverse is also necessary, as urban customers move into the rural and semi-urban regions. Already ATMs have sprung up along the major national highways along with petrol pumps. Bankers now want them located in the cooperative banks, in the post offices, where there are at least 15,000 to 20,000 users a year. This, in turn, also translates into demand for software. Software makers realise that FinInclusion will be a volume-driven business. Consequently software vendors see their revenue models shifting from the past mix of royalty and the number of branch licences to a predominantly royalty revenues per account basis.

Traditionally, Indian banking software vendors have charged their global clients on royalty basis. For users in India, where the royalty rates are relatively lower, the charges are a combination of both per account and the number of branch licences.

"We are looking at revenues based on the number of accounts that get opened here. One can imagine that if the accounts become 60 million or 100 million, the kind of revenues they show will be much higher," says Deepak Ghaisas, CEO of i-flex solutions' India operations.

i-flex is part of the initiative that ICICI has taken up, along with IBM, to address the micro-finance segment. ICICI recently floated a new entity called FINO (Financial Information Network and Operations Pvt Ltd) that would provide technological solutions as well as services to finance providers to reach the underserved in the country.

FINO expects to target 300-400 million people who do not have access to basic financial services. Micro-finance institutions, NBFCs, Regional Rural Banks and Co-operative Banks would directly or indirectly tie-up with FINO to use services for which it would charge Rs 25-30 per account every year.

vishwa@thehindu.co.in

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Down opportunity lane