The Reserve Bank of India has opened a discussion in its website to see if there is a case for allowing banks to engage ‘for-profit’ companies as well as NBFCs as their Business Correspondents. We bring you some of the highlights of the discussion paper:
Business Correspondents (BC) help expand a bank’s outreach and are integral to achieving greater financial inclusion. The BC model started off in 2006 with entities like MFIs/NGOs set up under Societies/Trust Acts acting as BCs and then slowly was expanded to include other type of entities. After the report of Committee on Financial Inclusion chaired by Dr. C Rangarajan, the model included individuals like retired government employees and various other types of agents.
Internationally, the BC model has emerged as an alternative to the brick and mortar branch to reach out to unbanked areas. In Brazil, until last year the Central Bank of Brazil had to authorize the agents, but not any longer (read more about the Brazilian BC model here). Countries like South Africa, Mexico, and Philippines also permit various agents under proper legal framework.
In India, though many banks have taken steps to adopt the BC model, not many have been able to scale up. Banks face difficulty because of the credit, operational and reputation risks in engaging the BCs, aggravated by the difficulty faced by them in assessing the integrity and the general lack of professionalism among the BCs.
Examining ‘for-profit’ companies
Unless there is commercial viability for the stakeholders viz. banks and their BCs, financial inclusion initiatives will be unsustainable. India being a vast and diverse country, no single entity can ensure this viability. Flexibility within the general regulatory principles is necessary to allow local models to emerge. RBI has received suggestion to consider corporates, telecom companies and NBFCs as potential BCs. The RBI says,
“The BC model may evolve into two distinct patterns, viz. (a) banks could enter into a separate agreements with corporates for using their retail network with specific responsibilities and functions to be performed by the corporate for a fee while the retail outlet is directly appointed as agent of the bank and (b) banks could make the corporate itself as the BC with no direct privity of contract between the retail outlet and the bank – in this model the retail outlet is a sub agent of the corporate BC.”
Let’s see some of the pros and cons of appointing corporates as BCs
Pros
1. Corporates with large retail network can bring in a lot more resources (organisational and financial) to the table.
2. Companies have developed efficient cash management and retail outlet monitoring systems that could be a big advantage.
3. Retail agents may be comfortable dealing with companies they are already familiar with than with banks.
4. Large companies have a reputation to live up to and can be relied upon to ensure that their agents don’t jeopardise it.
5. Companies can ensure continuity of the services more than the individuals.
Cons
1. Banking and financial services are “pull” products and so have to be available at affordable costs, but companies in the interest of revenue maximisation may tend to “push” these products, especially to uninformed and illiterate customers.
2. A corporate BC may provide the services only to customers that patronise its products, leading to a conflict of interest.
3. Companies may misuse customer information for commercial benefits.
4. Unfair practices for marketing financial products may lead to reputation risk for the banks, affecting the confidence of the public in the banking system.
5. In case a corporate decides to discontinue its retail business in a region, replacement of BC may be a problem without affecting the continuity in service. Replacement of individuals, on the other hand, may not be a significant task.
Should NBFCs and especially MFIs be allowed to carry on the BC agent business? Some pros and cons for this case are also discussed in the paper
Pros
1. The Committee on Financial Inclusion, chaired by Dr. C Rangarajan had observed that NBFC-MFIs could provide only savings and remittance services.
2. NBFCs would have their own infrastructure, network of outlets, manpower trained in all the services such as loan, insurance and mutual funds that could be leveraged.
3. NBFC-MFIs already have a large borrower base that do not have easy access to bank services such as payments, bank accounts, remittance services and deposits. Engaging such MFIs as BC could further enhance the objective of financial inclusion.
Cons
1. In case of deposit taking NBFCs, there would be a conflict of interest as they are in the same business.
2. Apart from the risk of co-mingling of funds, there is also a conflict of interest if an NBFC provides its own loan product as principal and bank’s loan as agent.
3. NBFCs use field officers and the branches are at a different location from where transactions take place. Using these branches of NBFCs as retail outlets would be impractical.
4. If non deposit taking NBFCs are engaged only for deposit products and payments / remittance services, the objective of providing affordable credit as a major component of financial inclusion could be defeated. It is reported that currently NBFC –MFIs charge between 20 and 35 per cent per annum for micro loans which is much more than what banks charge for small loans.
Can corporates play a key role in taking financial access to the millions of unbanked people? How can NBFCs balance the tight rope of avoiding conflict of interest and yet utilise their expertise in handling financial services with their local clients to further the objective of financial inclusion?
The RBI accepts comments and feedback till August 20, 2010.
Read the complete Discussion Paper here.
3 Responses
This in my view would be the real game changer. Permitting corporates and NBFC-MFIs will infuse the much needed "business proposition" into the model. Apart from allowing people to save their money, a Savings Bank account also forms the backbone of all other investment/payment solutions like mutula funds, Govt Payments etc. This regulation if and when approved would open up a lot of avenues in providing sustainable access to various forms of financial services
If we consider both pros and cons, appointing for profit companies as BC will definitely accelerate the implementation of Financial Inclusion as the transaction cost will be lower, accessibility will be easier and the Banks will have lesser operational, reputational and financial risks.But there should be a strict agreement between the corporate BC and the Bank clearly defining the DOs and Donts with srtrict penalty clause.
Regarding appointing NBFC/MFIs as BC, it may not serve the real cause of Financial Inclusion. Apart from the clear clash of interest, the real purpose of providing cheap credit to the poor will not be served.