BUSINESS

CORRESPONDENT
MODEL
In India

Name: Pooja Nayyar

Roll No. A3104616016
Programme: B.com (H)
Semester: 5
Section: A
INTRODUCTION

Financial inclusion refers to providing access to adequate and timely credit, as well as other
financial services in an affordable and hassle-free manner. It is of the utmost importance for
socio-economic development of the poor and backward sections of society. It enables them to
alleviate their level of poverty through employment generation, and strives to include them into
the purview of the rural banking system.

To fulfil this vision, the Indian Government has initiated various financial measures in the
banking sector, and different microfinance models have been playing an active role in
providing financial services to the rural poor. However, despite these efforts, a large number
of social groups remain excluded from the basic opportunities and services provided by the
formal financial sector. In India, a large section of the adult population does not have access to
formal financial services. A World bank FINDEX survey estimated that only 53% of the Indian
population is financially included.

In 2006, the Indian Government along with the Reserve Bank of India (RBI), came up with a
new model in the realm of the banking sector, called the “Business Correspondent (BC)
Model”, with the objective of enabling greater financial inclusion and increased outreach of
the banking sector.

The BC Model primarily aims at providing affordable banking facilities to the un/underbanked
population of India, with the help of Information and Communication Technology (ICT) based
application and capacity building. It is viewed as an alternative banking structure to branch-
based banking services, enabling public sector banks to use the services of Non-Governmental
Organisations (NGOs), Self-Help Groups (SHGs), Microfinance Institutions (MFIs) and other
Civil Society Organizations (CSOs) as intermediaries in providing financial services.

BCs are seen as intermediates for providing banking services. As per the RBI guidelines, they
are permitted to carry out transactions on behalf of the banks as agents (branchless banking),
and can refer clients, pursue the clients’ proposal and facilitate the bank in carrying out its
transactions, but cannot transact on behalf of the bank. They are identified as institutional
agents, organizations and other entities for supporting the specified bank in extending Financial
Services, operating from different locations away from the bank branches.

The model primarily intended to reach out to the geographically diverse population,
particularly rural areas and the portion of the population that remained financially excluded
from the mainstream banking system. The significant feature of this model is to enable doorstep
delivery of financial and banking services to the above-mentioned sections of society.

Thus, the BCs or bank agents have the advantage over bank branches as they can deliver
banking services at clients’ doorstep across the geographical landscape. It also helps people to
overcome regional barriers such as language and culture, and inadequate infrastructure in rural
areas. BCs act to bridge the gap between the service providers (the banks) and the service
seekers (clients) who are under-served and unbanked; and this model evolved in response to
the lack of required manpower to reach all people in the current banking system.

OBJECTIVE

This study attempts to take a closer look at the Business Correspondent Model in India – an
RBI led initiative to further financial inclusion in India.
The objectives of this study are as follows:
 To deepen the understanding of the Business Correspondent Sector in India
 To highlight the salient features of BCM
 To highlight the challenges faced by BCM
 To highlight the progress under BCM

METHODOLOGY

A detailed literature review was conducted to understand the Business Correspondent Model
and its various aspects. All information has been derived from secondary sources including
research papers, business journals, articles etc. available on the web.

DISCUSSION

As discussed in the Introduction, Business Correspondents are authorised agents engaged by

banks for providing financial and banking services at locations other than bank branches/ATM,
thus increasing geographical access to said services. Thus, they play an instrumental role in
promoting financial inclusion.

Technology plays an important role to establish a link between the Service Seekers, BCs and
Service Providers (banks) for seamless operations duly protecting the interests of all parties
involved. Many organized players are entering this sector and showing a keen interest in
making the model successful, by providing the desired services to Users in a cost effective and
convenient manner using innovative technology applications.
Banks operate various channels through which they deliver financial services: bank branches,
ATMs and the internet are the traditional channels. The BC model offers a new channel through
which banks can extend their services – the guidelines are written in a way that requires a bank
to be involved and act as the ultimate provider of services. While the RBI retains oversight and
regulatory responsibility for the BC banking channel, the principal banks are ultimately
responsible for the actions of their correspondents.

The channel works through a process of collaboration by the bank with one or more partners.
These partners often include Technology Vendors, who provide a range of hardware,
processing capacity and connectivity which can link clients to BCs and the BCs to the banks.
The BCs organize and manage a proper network of such transaction points in partnership with
a specified bank. Customer Service Points (CSPs) are individuals, shops or other outlets that
are responsible for direct contact with the clients. CSPs open bank accounts, conduct KYC
requirements, cash out withdrawals, receive payments and in some cases, even extend credit.
For the channel to become financially viable, regulations require that all revenue from the
services must be collected by the bank. The Technology Vendors, BCs and CSPs are not
allowed to charge fees to the clients for services rendered by them. The bank’s revenue may
come from the extension of services: accounts, savings, credit and payments. The bank then
makes a payment of service charges to the BCs and Technology Vendors.

In order for the BC Channel to work, the banks must work in collaboration with the different
partners who make up the BC banking channel. All the intermediaries for bankers and
customers of the channel will have to work in a cycle, be motivated to participate and receive
appropriate revenues in order for the channel to work.
Individuals and Entities eligible to act as BCs
The following list includes the various individuals and entities eligible to act as BCs. The banks
will be fully responsible for the actions of the BCs and their retail outlets/sub agents:

 Individuals like retired bank employees, retired teachers, retired government employees
and ex-servicemen
 Individual owners of Kirana, Medical, Fair Price shops
 Individual Public Call Office (PCO) operators
 Agents of Small Savings schemes of the Government of India/Insurance Companies
 Post Offices
 NGOs/MFIs set up under Societies/Trust Acts and Sections 25 Companies
 Cooperative Societies registered under Mutually Aided Cooperative Societies Act
 Companies registered under the Indian Companies Act, 1956 with large and widespread
retail outlets.
 Authorized functionaries of well-run Self-Help Groups (SHGs) which are linked to
banks

Scope of Activities
The following are the various activities that BCs perform:

 Identification of borrowers
 Collection and preliminary processing of loan applications including verification of
primary information/data
 Creating awareness about savings and other products
 Education and advice on managing money and debt counselling
 Processing and submission of applications to banks
 Promoting, nurturing and monitoring of Self-Help Groups/Joint Liability
Groups/Credit Groups/others
 Post-sanction monitoring
 Follow-up for recovery
 Disbursal of small value credit
 Recovery of principal/collection of interest
 Collection of small value deposits
 Receipt and delivery of small value remittances/other payment instruments.
 Sale of micro insurance/mutual fund products/pension products/other third-party
products

As per the RBI guidelines, the products provided by BCs are: Small Savings Accounts, Fixed
Deposit and Recurring Deposit with low minimum deposits, Remittances to BC customers,
Micro Credit and General Insurance.
Challenges faced by BCs
Although the BC model has shown great promise and holds potential to cater to the financial
needs of the rural population, the experiences have been mixed. Some reports argue that the
model has not taken off in the way it was envisioned in 2006.

As per CGAP Report (2013-14): As far as the viability of this model is concerned, CGAP report
(2013-14) reveals that the existing regulations do not allow sufficient flexibility for the BC
arrangement to be viable. It argues that most of the banks have not encouraged and promoted
the BC banking channel, as per requirement. Further, the report adds that majority of the no-
frills accounts opened under this model are not operational. Opening of these accounts so as to
provide deposit services to make these accounts profitable, has not yielded desired results. This
has made it unviable for the banks to consider this framework further.
As per RBI Annual Report (2011-12): RBI annual report (2011-12) states that despite efforts
of the banks to provide training to BC staff, the capacity for internalizing new products, new
technologies and systems remains a huge challenge. From the business correspondent’s
perspective, it is pointed out that mobilizing communities for accessing financial services,
particularly savings, became a big challenge for them. Due to shortage of sufficient funding,
BCs at the village level are unable to mobilize and conduct group meetings in the case of
SHGs/JLGs to explain the advantages and to promote BC model.

As per FICCI’s Report (2012-13): FICCI‟s Report (2012-13) highlights the problems
regarding the recruitment of BCs and the overall functionality of BC model. It states that
although RBI has permitted a variety of individuals and entities to act as BCs, very few have
been engaged by banks. Regarding the performance of BC staff, the report sheds light on the
lack of professional orientation. It states that the staff is inefficient and irregular in maintaining
records and even delay the processing of loans, which subsequently generates a lower volume
of business for banks. With regard to the operational aspects, it observes that the handling of
large amounts of cash proves risky, particularly in the hilly regions due to higher security risks,
difficult terrain and poor connectivity. Since the BC staff often operates in isolation and without
line supervision, there are increased risk of fraud and misappropriation of funds.

As per RBI Report on BC Model (2009): RBI’s report on the Business Correspondent Model
(2009) reveals that computer-based technology creates an issue due to lack of standard-training
and maintenance. Due to the absence of appropriate technology, BCs face problems with regard
to finger print storage and retrieval needs. Above all, illiteracy and lack of proper financial
education and awareness of the clientele is also a barrier to the effective utilization of the
banking facility provided to the clients through this model.
Recent Developments with regard to BC Model

As per the 2017-18 annual report of the Reserve Bank of India, several new initiatives were
undertaken so as to work towards fulfilling the financial inclusion agenda.

Strengthening the Business Correspondent model has been one of the most important
development agendas, after recognising the significant role played by BCs in providing last
mile financial services in the under and unbanked regions of the country. In 2015, the
Committee on Medium-Term Path on Financial Inclusion had suggested that having a BC
registry and certification process would strengthen the BC model.

A BC registry is a database of comprehensive information relating to the existing or potential

business correspondents. It provides a holistic view of un-banked and under-banked regions
and the delivery of financial services can be improved in these areas through appropriate policy
interventions. This will help in effectively monitoring and overseeing BC operations. It is
expected that banks and regulators will utilise this database to gather critical insights and frame
policies accordingly for strengthening the BC infrastructure.

As the clients served by the BCs are usually new to the formal financial system, it is important
to have knowledgeable business correspondents. Thus, there was a need to upgrade the skill
sets of the BC agents so as to make them more sensitive towards the requirements of different
customer groups who use the BC channel i.e. small and marginal farmers, SHGs, MSMEs,
migrant labourers and retired personnel. Accordingly, RBI has developed a framework for BC
certification with basic and advanced level courses to enhance the functional and behavioural
competencies of BCs.

In Conclusion, during 2017-18, a BC registry portal was launched to enable domestic SCBs,
excluding RRBs, to upload data pertaining to BCs deployed by them. Subsequently, on
stabilisation of the database, a facility of using BC tracker for public shall be made available.
A basic certification course for BCs has commenced. The translation of the syllabus into
different languages is also under process. The CCC scheme for MSMEs which could help
bridge the information gap, and help banks make better credit decisions was launched during
2017-18.
As can be observed from the above table, during 2017-18, the number of accounts opened
through BCs increased by 9 million while the amount transacted increased by Rs. 106 billion.
Similarly, the total number of transactions through the BC channel increased by 330 million,
while the amount transacted increased by Rs. 1640 billion.

CONCLUSION
The BC Model requires a holistic approach on the part of the banking sector, business
correspondents and customers as well to be able to improve its service offerings and financial
performance. Without an operationally and financially viable framework, the objective of
providing basic financial services to the underbanked and unbanked population will not be
possible with the BC model. In this respect, the banks play an instrumental role in developing
and promoting BC model. The banks also create awareness on easy accessibility and optimum
utilization of various financial services under the BC framework. The RBI report on the BC
model (2009) states that the process of financial inclusion involves the three critical aspects:
(i) access to banking markets (ii) access to credit markets and (iii) financial education.
Therefore, the BC model should focus on encompassing each of the above stated aspects in
order to be able to address the issue of financial inclusion in a holistic manner. Grameen
Foundation report (2013) states that technology and infrastructure should be robust, easy to
upgrade and cost effective. Training of BCs and financial literacy must be emphasized further.
The BC model should be customer centric, address customer needs, deliver high quality
demand-driven services and invest in customer awareness. The end customer needs to be
financially literate to be able to make proper use of banking services. Women and low-income
groups in particular, must cultivate the habit of utilizing all available financial services and
products under this model, which is aimed at their economic upliftment. Given the right
impetus by the banks and other financial institutions, the BC banking channel holds great
potential in ensuring financial inclusion and bringing the rural unbanked population within the
banking fold.

REFERENCES
 Kolloju, Naveen. “Business Correspondent Model Vis-à-vis Financial Inclusion in
India: New practice of Banking to the Poor”, International Journal of Scientific and
Research Publications, Volume 4, Issue 1, January 2014. Retrieved from
http://www.ijsrp.org/research-paper-0114/ijsrp-p2556.pdf

 K. Subha. “Role of Business Correspondents in Banking Sector Activities”,

Jnanavardhini - Multi-Disciplinary Research Journal, Volume 3, Issue 1, January 2018.
Retrieved from http://www.acharya.ac.in/aigs/thirdissuepapers/paper8.pdf

 Reserve Bank of India - Annual Report. (2018). Retrieved from

https://rbi.org.in/Scripts/AnnualReportPublications.aspx?Id=1231