(1) The viability gap that arises due to the fact that the cost of servicing the cost

of providing these services (or social or holding costs) involves. In an era when the banking sector is concerned as much as profitability and growth, it is unlikely that the banks will be willing to go make a substantial departure from their current practices, without an implicit or explicit subsidy from the government.

(2) Recovery, especially in the rural areas will be an issue and unless the institutional framework is more efficient, it may not be an attractive business proposition. The social dynamics of a village compound the risks for a large institution such as a bank.

(3) Financial inclusion for the banks is a miniscule part of the portfolio in the present juncture and compared to their growth rates possible in other sectors. Therefore, this segment (financial inclusion) is unlikely to be a focus area in the near future. Credit to the excluded sectors or even deposits mobilised from the poor invariably consists of only a small part of the overall portfolio of the banks. This is unlikely to change in the near future. Hence, for the banks, which have an obsession for growth, it is difficult to make a substantial shift from current policy that would accommodate financially inclusive policies beyond a point. Banks like most of the formal institutions are not willing to spend inordinate amounts of time and resources in order to create a market. Historically, the large formal financial institutions have found it more convenient to move into a market that has been assiduously built and nurtured by either the smaller companies or by informal players.

No-Frill Accounts (NFA) The major challenge for the banks was that the villagers could not provide the minimum cash balance which was otherwise required to open a bank account. To address this bottleneck, the NFA were provided which had a minimum balance requirement of Rs. 67 and also had a provision for overdraft. The NFAs hurt the bottom-line of the banks because the profits they could earn by lending the deposits in the NFAs suffered due to 1) miniscule minimum balance requirement which was far below the viable limit of Rs. 2000-3000 2) the overdraft provision. It was estimated that the banks lost amount to the tune of Rs. 13.4 for every transaction, Rs. 50.45 for opening the account. Thus, the services provided by the banks were unsatisfactory. In 2011, the number of NFA accounts counted 50.6 million amounting Rs. 53,860 million. But only 20% of these accounts were actually in use while majority of them were inactive.

Electronic Benefit Transfer (EBT) This was under the state Governments mandate as a part of the NREGA and Pension Scheme programme. This was also a measure to check the pilferage of the money. Under this, the EBT accounts were provided that were used by State Government to directly transfer the amount into

the beneficiaries account. The EBT, unlike NFA had just the function of cash withdrawal available for the account holders. The issue here was that of flat fee. The banks were not paid enough by the state government (only 2% of the amount transferred) and the effect was further cascaded with banks paying lesser to the BCs (generally 1.75%). So the margins left with the banks were very small.

The BC Model This model suffered from many loopholes which affected the overall economics of this sector. The flat fee (or the revenue) for this segment was limited to 1.75% and also had no reasoning for the figure set forth. The low earnings showed upon the services delivered by them. To keep their margins, the BC companies reduced the employee force which led to infrequent services as the beneficiaries per BC increased. Due to delayed showing up of the BCs, the villagers refrained to keep money with them as it became an unreliable source to park money. The Attrition rate of BCs is around 70-80%. This simply means that till a new agent is not appointed, the village loses the access to the financial services. This also had an adverse effect on the associated Government welfare programmes. For example: The payments under NREGA were supposed to reach the beneficiary within the stipulated period of 15 days but these were intentionally delayed by the BCs to earn interest on the payments. To check these malpractices, the government ordered the payments of pensions within first 4 days of the month. That meant huge employee requirements in the beginning of the month. So many of the BCs started to outsource these activities to meet the workload, which in turn meant further cost elevation.

ICT Problems

For the success of the ICT-based models, resolving technology related issues is the key. One of the major constraints of the ICT based BC model has been the technical problems associated with the model. It has been reported that devices, such as, hand held machines, smart cards, PoS terminals and utilities which are crucial to the functioning of the model are not properly functioning in many areas of the country. Limited number of technology service providers to cover the unbanked villages of all banks as well as limited service centres for servicing devices has resulted in banking operations coming to a halt in many villages. Given the literacy level of the rural population, availability of trained manpower in the villages to ensure that transactions are carried out in a user friendly manner in the local language and that the customers smoothly transit from assisted model to self-service model in using technology, wherever feasible (e.g. use of ATMs/mobile/internet banking). This could lead to erosion of confidence on the ICTbased BC model. Technical glitches, therefore, need to be addressed quickly. Banks also have to

ensure that the turnaround time between account opening and account operationalization has to be minimised so as to gain confidence of the customers in such models. Security concerns Given the increasing reliance on technology to deliver banking services to customers, it is essential to that adequate attention is paid to security, especially IT security. Security related issues resulting in frauds have the potential to undermine public confidence in the use of electronic payment products. Further, they could also lead to reputation risks. While preventing fraud through robust security measures, one should not lose sight of the fact that the ease and efficiency in operations for the customers is not unduly eroded. Cumbersome security procedures would deter customers from using the product and carrying out electronic transactions. Accordingly, a proper balance should be struck between such apparently conflicting objectives. The Reserve Bank has been taking several measures to strengthen the security for electronic transactions to prevent their misuse. For instance Second Factor Authentication has been made mandatory for all Card Not Present (CNP) transactions (e.g. requirement of PIN in addition to CVV while putting through the transactions). Similar measures are going to be implemented for Card Present (CP) transactions (e.g. use of chip and PIN or Aadhaar cards) over a defined time period. SMS alerts now made mandatory for all card related transactions is another added security feature. Encryption of transactions for value above `5,000/- has also been mandated for all mobile based transactions as a better security protocol. Infrastructural limitations 27. Power supply and network connectivity are issues in most parts of the country, especially, so in the rural/remote areas. While banking transactions are enabled on a real-time basis in urban centres, it often takes more time to complete a transaction in remote areas due to poor internet connectivity and frequent power failures. To overcome this in the North Eastern states, the Reserve Bank had launched the Satellite Connectivity Scheme in 2009 to provide 100% subsidy to bank branches in the North-East Region (NER) subject to a maximum of ` 12,000/- per month or the actual expenditure incurred by the bank, whichever is less, subject to the condition that the branches would offer services of electronic funds transfer free of charge to their customers. Of the total 1756 branches in the North-East region, 762 branches (43.4 per cent) had taken satellite connectivity after the launch of the scheme. The scheme has since been extended by another year and Sikkim has also been brought under the ambit of the Scheme. Multiplicity of models 28. Multiple technologies and delivery models could be used based on the geographical peculiarities, infrastructure availabilities, etc. Too many disparate technologies, however, may prove counter-productive as there will be several challenges like integration with CBS, support issues and people at the operating level (i.e. at the level of BFs and BCs) may not fully apprehend all the products and technologies. So it may be a better idea to narrow down to a few stable and scalable technologies and delivery channels and build the financial inclusion products around them with inter-operability being the key theme.