The Business Correspondent (BC) Model : A Major Enabler of Financial Inclusion in India

Dr. Prafulla Arjun Pawar, Department of Management Sciences (PUMBA), University of Pune, Pune 411007 Komalkumar Yuwaraj Gedam, Manager- Pune city Region, Bank of Maharashtra, Pune -411 005

Abstract:
Financial inclusion (FI) by way of access to formal financial system is of critical importance for economic upliftment of the common man. With the objective of ensuring greater financial inclusion and increasing outreach of the banking sector, Reserve Bank, in January 2006 permitted banks to use intermediaries as Business Correspondents (BC) for providing financial and banking services. The BC model has the potential to speed up the process of financial inclusion and bring the vast majority of population within the banking fold. The process of financial inclusion involves the three critical aspects of (a) access to banking markets, (b) access to credit markets and (c) financial education. The BC model encompass each of the above three aspects & is able to address the issue of financial inclusion in a holistic manner. The benefits arising out of adopting the BC model and implementing the same with missionary zeal is to achieve the ultimate goal of financial inclusion. The BC model brings in the advantage of its outreach through its distribution network in unbanked areas to offer Banking services to the society. It caters to the banking needs of the most far-flung areas and remote locations in India. Business Correspondents are permitted to carry out transactions on behalf of the bank as agents, refer clients, pursue the customers proposal and facilitate the bank to carry out its transactions. BC model reduces customer acquisition costs by reducing burden of KYC. It facilitates condition for development of a credit bureau for the poor. BC model also augments governments policy to open No Frills Accounts and to process Government payments (G2P) such as the National Rural Employment Guarantee Scheme, Pensions and other social payments. It also acts as a model for the Corporate Social Responsibility (CSR) activity. Hence the growth and the successes of the BC model is very vital for achieving financial inclusion in India.

Keywords : Financial inclusion, micro-finance, BC model

Introduction:
The importance of an inclusive financial system is widely recognized in the policy circle in recent years and financial inclusion is seen as a policy priority in India. Government of India and financial sector regulators are seeking to create enabling conditions such that markets become more open, more competitive, affordable and inclusive. In order to promote financial inclusion amongst the unbanked, the Reserve Bank of India (RBI) developed a set of guidelines to formalize branchless banking,

which they called the Business Correspondent (BC)1 model. Under this framework, banks can partner with third party agents to provide financial services such as credit and savings on their behalf. Since its inception in 2006, various banks have promoted the BC model in all corners of the country, though few of these efforts have scaled up beyond modest pilots. The paper will discuss the effectiveness of business correspondent model in achieving financial inclusion by bringing the unbanked into the formal banking system. The Indian economy is growing at a steady rate of 7.8 per cent to 9.3 per cent in the last five years or so. Most of the growth is from industry and services sector. Agriculture is growing at a little over 5 per cent. The potential for growth in the primary and SME sector is enormous. Limited access to affordable financial services such as savings, loan, remittance and insurance services by the vast majority of the population in the rural areas and unorganized sector is believed to be acting as a constraint to the growth impetus in these sectors. Access to affordable financial services especially credit and insurance - enlarges livelihood opportunities and empowers the poor to take charge of their lives. Such empowerment aids social and political stability. Apart from these benefits, financial inclusion imparts formal identity, provides access to the payments system and to savings safety net like deposit insurance. Hence financial inclusion is considered to be critical for achieving inclusive growth; which itself is required for ensuring overall sustainable growth in the country. Financial exclusion can be thought of in two ways. One is exclusion from the payments system2 i.e. not having access to a bank account. The second type of exclusion is from formal credit markets, requiring the excluded to approach informal and exploitative markets. After nationalization of major banks in India in 1969, there was a significant expansion of branch network to unbanked areas and stepping up of lending to agriculture, small industry and business. More recently, the focus is on establishing the basic right of every person to have access to affordable basic banking services. Here BC model is considered to be very vital & effective channel for financial inclusion.

The Business Correspondent (BC) model:

Third party agent banking was launched in 2006 in India, with the intent of increasing the ambit of the formal banking sector. It builds on the regulatory inertia of prioritizing financial inclusion, particularly the RBIs no frills account drive which began in November 2005. To support the financial inclusion effort, as well as leverage advances in banking technology, two kinds of third party banking agents were created Business Facilitators (BF) who would primarily be involved in processing and opening accounts and Business Correspondents who could, in addition to the BF functions
1

RBI CIRCULAR RBI/2005-06/288 DATED JANUARY 25, 2006 Available at : http://rbidocs.rbi.org.in/rdocs/Notification/PDFs/68417.pdf 2 The series on Financial Inclusion: Recommendations for the Indian Business Correspondent Model & Branch Free Banking by Mr. Sanjay Bhargava.

mobilize deposits and disburse credit on behalf of the bank . Over the years, regulation on Business Correspondents has undergone several iterations, As per the current regulations3, the following entities are permitted to act as BCs for banks: NGOs (typically microfinance institutions (MFIs) set up as Societies/Trusts), Cooperative Societies, Section 25 companies in which no NBFC/telecom company/bank held more than 10% of ownership, post offices, retired government/bank employees and ex-servicemen. Key components of the regulatory framework surrounding BCs include: Banks pay a (undefined) commission to BCs though BCs/banks are not allowed to charge the end-user a service charge for any BC transactions; BCs can service clients only within a 30 km radius from the bank branch and in case of urban areas the radius should not be more than 10 km; All transactions undertaken through BCs must be recorded in the books of the bank by the end of working day; Know Your Customer (KYC) norms must be observed by the promoting banks for all BC clients The Business Correspondent (BC) model is a major enabler of financial inclusion in India and enables Universal Financial Access. To make a financial revolution possible one need to make more and more transactions electronic (because the cost of an electronic transaction at scale is close to zero) and reduce the cost of a cash transaction to Rs 2-3. There is also need to operate in a paper-less and cardless environment and leverage existing infrastructure while raising a large deposit pool to meet the credit needs of the unbanked. Business correspondents are vital to making the dream of Total Financial Inclusion a reality.

Operations of BC Model:
The Business Correspondent option offers a new channel through which banks can extend services the guidelines are written in a way which requires a bank to be involved and is the ultimate provider of services. To ensuring adequate supervision over the operations and activities of the BCs by banks, every BC is attached to and be under the oversight of a specific bank branch to be designated as the base branch4. The distance between the place of business of a BC and the base branch, ordinarily, does not exceed 30 kms in rural, semi-urban and urban areas. In metropolitan centers, the distance could be upto 5 kms. However, in case a need is felt to relax the distance criterion, the matter can be referred to the District Consultative Committee (DCC) of the district concerned for approval. Where such relaxations cover adjoining districts, the matter may be cleared by the State Level Bankers' Committee (SLBC), which also is the concerned forum for metropolitan areas. Such requests may be considered by the DCC/SLBC on
3

RBI Working Group Report is available here: http://www.RBI. Org.in/scripts/BS_pressreleasedisplay.aspx?prid=21221

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RBI Press release available here: www.rbi.org.in

merits in respect of under-banked areas or where the population is scattered over large area and where the need to provide banking services is imperative but having a branch may not be viable, keeping in view the ability of the base branch of the bank making the request to exercise sufficient oversight on the BC. Where currently BCs are operating beyond the distance limits specified above, DCC/SLBC is kept informed and steps are taken to conform to the stipulated limits within six months time, unless specific approval is accorded by the DCC/SLBC on the grounds indicated above. This new channel works through a process of collaboration by the bank with one or more partners. These partners often include: Technology Vendors: These provide a range of hardware and processing capacity and connectivity which can link clients to BCs and BCs to the bank. Customer Service Points: these can be individuals, shops or other outlet points which are responsible for the direct contact with the clients. CSPs open bank accounts, conduct KYC, cash out withdrawals, receive payments and in some cases, extend credit.

Appointment of sub-agents: If the duly appointed BCs of banks desires to appoint sub-agents at the grass root level to render the services of a BC, banks have to ensure that the subagents of BCs fulfill all relevant criteria stipulated for BCs and the BC appointed by them carries out proper due diligence in respect of the sub-agent to take care of the reputation and other risks involved and the distance criteria from the base branch. It has also been made clear that where individuals have been appointed as BCs, they cannot in turn appoint sub- agents In some cases the banks have used the BC model to open large numbers of No Frills Accounts in response to a policy push from the Government of India. In some cases this has also been combined with channeling government payments (G2P) such as NREGS, Pensions and other social payments. In a few cases, the focus has been on extending credit either in partnership with an MFI or through a relationship with a SHG Federation or network. The big difference in performance and partnerships is between those BC efforts that are account and savings focused, versus those that focus on delivering credit services.

Advantages of BC Model:
Some of the advantages of BC are listed below: A better alternative than bank branches: Normally a rural bank branch can serve 3,000 to 4,000 5 families in 12 to 15 villages within a radius of 15kms. A Public Sector Bank branch may require more than 5 years to breakeven in unbanked areas in India, while a private sector &
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Business Correspondent Model: A Preliminary Exploration, Report compiled by Binit Rath, Minakshi Ramji and Alexandra Kobishyn

foreign bank with IT connectivity may require about 5 times more. Further, obtaining permission to open a branch is a long and protracted process. The BC option potentially enables banks to reach out much faster and at a much lower cost. Reaching the unreached: The model enable banks to extend financial services to the unreached sector beyond their branch network as beneficiaries of the BCs are mostly located at unbanked and underbanked areas. Doorstep banking: Disbursement and loan recovery at the doorsteps of the beneficiary. Better quality of assets: Target clients are well known to local NGOs, Post Offices, BDOs and similar local social bodies, thus loan facilitation by the NGOs/BCs (who are the promoter/builder of the groups) enhances quality of assets.

Challenges to the BC Model:

Some of the issues/challenges in BC model areDormant accounts6: Saving accounts opened by clients are inactive, thus transactions after account opening have been minimal. End beneficiaries need to be financially literate to make apt use of banking services and services need to be more specifically designed to meet demand. Viability problems: The commission paid by banks for BC services is not adequate to produce viable business models. There are costs involved in staff salaries and training and the current compensation structure does not cover costs. A majority of BCs reported significant losses and some have already suspended their operations. Community mobilization: Mobilizing communities for banking services especially savings is a big challenge for the BCs. Due to previous bad experiences, potential clients were unwilling to accept BCs as deposit-taking organizations. Training requirements: In some relationships, banks are providing training to BC staff but still capacity for internalizing new technologies, new products and systems remains a big challenge. Technology integration: Integrating their existing technology with the banks technology is also a challenge in many cases.

Conclusion:
Achieving full scale financial inclusion will depend on favorable policy climate and availability of an efficient delivery system. The most important part of the delivery
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Business Correspondents and Facilitators: Pathway to Financial Inclusion? The retreat on the Business Correspondent (BC) model organized by the College of Agricultural Banking (C.A.B.), Reserve Bank of India and ACCESS.

system is the man power to deliver the banking products to the financially excluded. In Indian rural areas penetration of BCs are high and an efficient distribution infrastructure for the BCs are already exists. BC model is a viable

and feasible instrument of increasing financial services outreach.The technology service providers in India have taken efficiency of the BC model to new heights. Thus the BC model plays the role of Financial Inclusion encourager.

References The series on Financial Inclusion: Recommendations for the Indian Business Correspondent Model & Branch Free Banking by Mr. Sanjay Bhargava. Rangarajan committee, 2008, Report of the committee on financial Inclusion. Committee Report. Reserve Bank of India. Government of India: Economic Survey (various years), Government of India New Delhi. Inclusive Growth : The role of Financial education by Shyamala Gopinath , Deputy Governor RBI. Taking Banking Services to the Common Man Financial Inclusion by V Leeladhar Basu, Priya (2005).

A Financial System for Indias Poor. Economic and Political Weekly, .September 10, 2005. pp. 4008 4012 Business Correspondent Model : A preliminary exploration by Binit Rath, Minakshi Ramji and Alexandra Kobishyn. Business Correspondents and Facilitators: Pathway to Financial Inclusion? The retreat on the Business Correspondent (BC) model organized by the College of Agricultural Banking (C.A.B.), Reserve Bank of India and ACCESS.