Back-end issues in financial inclusion

R. V. Panchapakesan | Updated on November 16, 2017


The market for financial inclusion services is in its infancy, but has huge potential.

The Financial Inclusion Plan drawn up by RBI envisages bringing more than 3.5 lakh villages into the formal banking network by March 2013. The count achieved till now is approximately 1.2 lakh villages. In view of the massive scale of rollout targeted, banks have been permitted to outsource part of the technology and manpower requirements of their FI projects from competent technology services providers (TSP). Further, RBI having permitted corporate entities to be enlisted as banking correspondents, eligible TSPs can also undertake BC services, thus participating end-to-end in the FI delivery process.

The TSPs are selected by banks through a competitive bidding process. From October 2009 till January 2012, more than 70 requests for Proposals (RFPs) were floated by various banks, including a sizeable number of Regional Rural Banks, and contracts for the relative FI projects have been awarded to successful TSPs. The tenure of these FI projects varies from three to five years.

The FI services market, in its infancy now, holds huge potential. Assuming conservative pricing of the services, upon coverage of all unbanked villages, the FI domain could generate a gross revenue of Rs 40-50 billion annually for the TSPs. There are more than 30 TSPs active in the domain, vying for the FI pie. The TSP community comprises of several IT majors, micro finance institutions, NGOs, smart card manufacturers, professional BC organisations, besides niche technology solution providers and system integrators.

The FI mission envisages the accomplishment of three essential dimensions — outreach, availability, and usage of basic banking services. The focus of all banks is currently on achieving the outreach targets by deploying BCs covering the villages allotted to them. Data from progress reviews by the State Level Bankers' Committees indicate that most PSU banks are close to achievement of the outreach targets, for March 2012, on this yardstick.

However, feedback emanating from banks and the TSPs at the structured interactive forums and peer-level meetings indicate that the progress with regard to the availability and usage factors, as reflected by new accounts acquisition and transaction activity levels respectively, have been well below the expectations of the banks.

The major qualitative concerns surfacing in the present outsourcing model and systemic improvements desirable towards strengthening the approach are presented below, for collective consideration of the stakeholders.


Most of the banks have opted for the smart card platform. In a number of projects, where the TSP and the bank's CBS vendors are different entities, the end-to-end technology interface between the TSP's proprietary FI solution and the Bank's Core Banking Solution is yet to stabilise, mainly due to the complexities involved in integrating the dynamic customer transaction processes.

There are instances of multiple TSPs having been engaged by the banks, each offering their own proprietary interfacing solutions, leading to complications at the bank's CBS end. The banks desire the FI solution to be interoperable across the three technology platforms, viz, smart cards, mobile phone and the micro ATMs, while the solutions are at present mostly confined to smart cards.

The Aadhar-Enabled Payment System (AEPS), being developed by the National Payments Corporation of India, would necessitate the FI technology solutions to be inter-bank compatible. The present FI solutions are bank-specific. The scalability of the current FI solutions for coping with the large volume of transaction flow expected from electronic benefit transfers, MNREGA payments, RSBY transactions and the State sector social welfare schemes remains to be established.


A multiplicity of FI solutions being offered by TSPs is bound to render the technology environment fragmented, impeding coordinated implementation of the FI programme. The technological inadequacies need to be addressed and the scope of the solutions enlarged suitably to meet the intended convergence and scalability requirements.

The ideal response would be to put in place a Universal FI Solution (UFIS), standardising the interface with the CBS, coupling it with a standard common FI-CBS, the set of which can be prescribed for adoption by all banks and the TSPs uniformly. At the bank level, data could be ported from FI-CBS into the Bank's internal CBS, and vice versa. The proposed UFIS would address all the future requirements, such as inter-operability through some other technology platforms and inter-bank connectivity through AEPS. The diagram appended depicts the present and proposed approach.

The task of developing the proposed UFIS and FI-CBS could be entrusted to a central technological agency, preferably, the National Informatics Centre Services Inc. (NICSI), who have, on behalf of the respective Ministries, developed and standardised operating systems for e-governance applications and for the RSBY projects.

The support software components of the FIS suite, needed for enrolment, card management and BC Cash Management etc, could also be similarly standardised and approved by NICSI, so that the entire FI solution architecture would be uniform across the banking system. All banks and TSPs may be advised to migrate to UFIS from the current solutions in due course. Reservations remain in banking quarters regarding commercial banks relying on proprietary FI solutions of the TSPs. Adoption of officially-approved UFIS would address this concern conclusively.


The TSP compensation is determined based on the number of customers enrolled and the number / quantum of transactions conducted. The responsibility for achievement of targeted business levels should primarily rest with the banks. The role of the TSPs / BCs could only be supportive. The variable pricing method is hence inappropriate. It could also turn out to be counter-productive.

The TSPs, having incurred capital and fixed costs, could be at a disadvantage if the targeted numbers/quantum aren't eventually achieved, resulting in hesitancy on their part to commit further resources to the projects. The TSPs would like to be assured of a reasonable return on their outgo in the projects. Given the long tenure of the projects, the banks, would like the costs to be pegged with reasonable certainty. Adopting a fixed pricing model, as proposed below, would be beneficial for both banks and TSPs.

In respect of future projects, the banks may realistically work out the estimated project cost, grouped into one-time and recurring costs, including BC costs, and invite competitive bids from TSPs, to quote their profit margin over their estimated costs.

The bidder quoting the lowest profit margin in both the segments and emerging as the L1 bidder may be awarded the contract. The banks shall pay the TSPs respective estimated costs at monthly intervals, subject to the costs being actually incurred by the TSPs, and satisfaction of the Service Level Agreements entered into.

The profit margins shall be paid by the bank at quarterly rests. In addition, with a view to hedging inflation, the recurring costs may be indexed to the inflation rate, and revised by the banks annually.

(The author is a former General Manager of SBI and a freelance Consultant on FI projects.)

Published on March 29, 2012

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