Department of Payment and Settlement Systems

Satellite Connectivity to facilitate penetration of banking services –
Need for financial incentives to banks: Discussion Paper

1. Introduction:

1.1 Prof.U.R.Rao, member of the Board for Regulation and Supervision of the Payment and Settlement Systems (BPSS) had prepared a paper on the use of satellite communication technology to facilitate penetration of payment services to the rural areas which are presently denied of the facility due to non availability of reliable communication links. The proposal was considered by a Technical Group.  The Group supported Prof. U.R. Rao's view point that satellite connectivity is the appropriate mode of connecting the branches in the areas not connected by terrestrial links and as a fallback system.

1.2 The Reserve Bank has been taking a number of initiatives for upgradation of technology and bringing the masses under the banking system. Towards this, banks are being encouraged to computerize their operation and connect the branch under the core banking solution so that the branch can provide efficient services by participation in all India funds transfer network like RTGS / NEFT / ECS, etc. But the rural branches have remained largely outside core banking due to connectivity problem. The problem is more for the bank branches in the North Eastern Region.

1.3 There is an uneven distribution of banking services in the country. Of the total 611 districts in the country, 375 districts (list in the Annex) are under-banked. The total districts include 82 districts of the North-Eastern Region of which 54 districts are under-banked. The under-banked district is the district where the Average Population per Branch Office (APPBO) is more than the national average. There is a need for banks to open branches at these locations and establishing connectivity with the core banking solution.

1.4 The Reserve Bank, while playing its developmental role is considering a proposal to provide incentive to banks to provide network connectivity to their existing branches in the under banked districts. There is also a proposal to incentivise the banks to open new branches at these locations and bring them under core banking solution right from the beginning.

2. Satellite Connectivity

2.1 As opposed to terrestrial link, satellite connectivity involves use of transponder space on the satellite and communication equipment called Very Small Aperture Terminal (VSAT) at the place being connected for data communication. VSAT is particularly useful in the regions where leased line connectivity cannot be established like hilly areas, ocean, and desert. VSAT technologies ensure link security and reliability. The benefits of VSAT are (i) faster relocation; (ii) quick establishment of new sites; (iii) rapid installation of equipment at the customer's premise with limited infrastructure; (iv) reduced Network implementation time; (v) availability (99.9%) is far better than the availability of ground networks - reliability of data network; (vi) lowest TCO over terrestrial for multistage applications; (vii) highest uptime; (viii) security - VSAT networks are very secure and the ideal option for confidential, business sensitive data transfer; (ix) bandwidth on demand - the bandwidth channels can be regulated Independence from earth networks and infrastructure; and (x) reduced operational cost.

3.  Recommendations of the Technical Group

3.1 The Technical Group studied the various aspects of satellite connectivity including cost benefit analysis. Some of the major recommendations are as under:

1. Banks should extend connectivity to rural branches through use of latest technology VSATs and other modes of terrestrial or fiber communication, wherever available.
2. While limited connectivity for the purpose of fast money transfer could be taken up as an immediate goal, the banks should plan for full-fledged branch connectivity to core banking or similar systems, in order to provide all services including mobile banking in future.
3. For VSATs, banks should explore between VSAT ownership or rental model, based on the cost. The Group provided detailed analysis for both these models so that the banks can take informed decision in the matter.
4. The report provides bandwidth requirements and cost estimates under various scenarios based on informal inquiries with a few VSAT service providers.
5. The central hub could be connected to the data centers through a terrestrial leased line with high bandwidth VSAT as a backup (on demand). Therefore, it may not be necessary to set up central servers at the hub site.
6. Satellite Communications being the most disaster-proof, can be used as a back-up for major centers, where a disaster can otherwise knock out terrestrial connection. Even satellite connection may be disrupted, but if the antenna is small, it can be quickly put back (as satellite, up in the sky, continues to function).

3.2 The recommendations made by the Technical Group were examined and it was felt that the following options need to be examined further

1. The option of leasing vis-à-vis ownership VSATs;
2. Using VSAT as a backup to the terrestrial link;
3. Creating sufficient incentives so that individual banks take initiatives.

3.3 RBI could play the developmental and advisory role. The Standards, Quality and Model Service Level Agreement, Safeguards could be some of the parameters which could be prescribed by Reserve Bank. For better price, IBA may consolidate the requirements from banks and negotiate with the service providers. IBA would only have this one time role and thereafter operational responsibility may be with individual banks.

4. Option of leasing vis-à-vis ownership

4.1 For implementing VSAT based communication link, the user can either acquire the VSAT on ownership basis or take on lease rental basis from the VSAT service provider. The Technical Group examined the cost of ownership vis-à-vis leasing it. The Group estimated the number of VSATs required for this rural connectivity and worked out that average cost per VSAT on rental model as well as ownership model.

4.2 The increasing pace in technology development has increased the pace of technology obsolence. Considering this aspect as also the cost consideration, the lease model would be better option which could be adopted. This is also usually adopted by the banks. Besides, there would be an option available to move to another service provider, if the service is not found satisfactory from the vendor from whom the VSAT has been leased.

5. VSAT as backup to terrestrial link

5.1 Presently, the bank branch connectivity is primarily through the use of landlines, particularly leased lines from telecom operators with ISDN connectivity acting as a backup wherever available. The leased line connectivity with higher bandwidth requires laying of fiber connectivity. However, fiber networking is not available in many semi-urban and rural areas due to the large cost involved in creating such network as also the lack of large customer base in these areas, for high-speed network requirements.

5.2 Satellite Communications being the most disaster-proof, can be used as a back-up for major centers, where a disaster can otherwise knock out terrestrial connection. Even satellite connection may be disrupted, but if the antenna is small, it can be quickly put back (as satellite, up in the sky, continues to function).

6. Suggested Incentive Structure

The incentive structure may broadly be as under:-

a. for branches in the North-East and – upto 100% of the lease rentals to be reimbursed;

b. branches in rural areas in other under-banked districts  - upto 75% of lease rentals to be reimbursed;

c. for branches of under banked districts in semi-urban areas – about 50% of the lease rentals to be reimbursed.

Incentives may be provided by the Reserve Bank of India by way of reimbursement of the leased rentals on a half yearly basis on a certificate of satisfactory service for 3 years. A review on the need for continuing with the incentive structure would be carried out after 3 years.

7. Safeguards

The banks would need to put in place proper safeguards to ensure that the systems are optimally used. The banks going in for this incentive programme would have to put in place an appropriate Information Security (IS) and access policy. The access policy should at the minimum cover: (i) monitoring the operations of the system; (ii) access to authorized users, the roles and access rights of each of the authorized users are well defined; (iii) ensuring that the system is used for the purpose for which it has been provided.

Annex

List of Underbanked Districts (based on 2001 Population census)