Analyzing the BC Model (Part IV) – Policy Recommendations to Improve its Functionality
http://www.developmentoutlook.org/2012/11/analyzing-business-correspondent-model_19.html
[Terminology: Banking
Facilitators (BFs) disseminate education on bank products and collect
documents from clients on the bank’s behalf, along with offering a host of other
products.]
Our first post in the series discussed the significant
advantages of using information and communications (ICT) technology based models
for promoting financial inclusion and in our second and third posts, we
discussed reasons for the low usage of No-Frills accounts and the problems
faced by each tier in the BC model itself. In the last post in this series,
we’ll discuss some policy recommendations to improve the functionality of the
BC model and improve its financial viability.These policy recommendations aim to solve
operational problems with an objective to improve the functioning of BCs and make the model sustainable.
The demand-walah argument that the take-up of the model could be low simply because of a lack of demand for formal savings from the poor may be countered with a slightly paternalistic, supply-sided argument that the present issues hindering the effective functioning of the model have not been able to supply the product effectively, in turn making it impossible to successfully argue for either case.
The demand-walah argument that the take-up of the model could be low simply because of a lack of demand for formal savings from the poor may be countered with a slightly paternalistic, supply-sided argument that the present issues hindering the effective functioning of the model have not been able to supply the product effectively, in turn making it impossible to successfully argue for either case.
The entire objective of
‘financial inclusion’ can be questioned by asking for evidence that simply
opening a bank account increases the client’s well-being. However, research
studies including one
by CMF have documented that for people who were assigned savings accounts,
health and financial indicators exhibited positive effects when compared to
people who didn’t have any formal savings mechanisms at all. This may be due to
the significantly less risky nature of formal finance or the simple principle
that the propensity to consume cash-in-hand is always higher.
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A BC agent interacting with a client (Photocredit: Livemint) |
Still, we face the
question of a lack of demand. In conjunction with the policy recommendations
below, each heading discussed also points to major issues present in the model
which are currently hindering a successful take-up of the model by the unbanked population.
I. Product
Diversity
CMF’s upcoming research indicates that most clients
interviewed indicated a preference for a more diverse product mix. As of now, banks
don’t view the BC channel as a profitable opportunity and face a significant
amount of image risk on delegating their BC work to third parties. This
restricts the products they want to offer through the channel and since most
banks only allows No-Frills accounts (NFAs) to transact with other NFAs, BCs are left offering a single stand-alone product which doesn’t seem so
attractive by itself.
Clients also exhibited a demand for fixed
deposits, recurring deposits, insurance schemes and other services. The the
option to offer these services is directly dependent on the BC's bank, so why
aren’t they offered? Again, we come back to image risk.
In order to make the channel sustainable, the scope
of NFAs should be broadened and banks should be encouraged to let their BCs
offer a more diverse product mix to increase revenue. If possible, utility bill
payment facilities and other value added linkages should also be introduced
along with NFAs. This would demand a separate department, integrated into the
bank itself, dedicated to dealing the bank’s BC services. The costs incurred
by the banks should be subsidized by the government for a fixed period of time,
in lieu of fulfilling its financial inclusion goals.
The government should also allow government
transfers, subsidies and other payments to be linked to NFAs. A few states which have
adopted these accounts to channel MNREGA and social security payments have shown
good results. The effort should be extended and schemes like the Indira Aawas
Yojana should be channelized through BCs as well.
II. Expanding
the Scope of Customer Service Points
CMF’s research indicates that CSPs should assume
dual roles as CSPs for both a BC and a BF of the principal bank. This
arrangement could effectively grant customers access to multiple banking
services at a single service point and contribute to the greater business
viability of the CSP.
In the same turn, banks and BCs should adopt common practices to encourage their agents to assume these dual roles. Furthermore, the RBI should allow CSPs to work as agents for multiple BCs and banks in accordance to their respective capabilities. This will further enhance the financial viability of agents and bolster the existing variety of client services.
III. Cash
Management
As observed in our third post, risks related to cash
management are a major bottleneck to the smooth functioning of the business
correspondent network.
Issues of cash deficit are frequent in areas which
experience significantly more withdrawals than deposits, such as remittance heavy
rural areas. This problem is compounded by a mandatory limit
imposed on cash balances at the CSP (balance/transaction limits in a day).
During peak government payment times, there is a
chronic mismatch of cash availability versus the demand for withdrawals and money
transfers which often ends in delays and poses risks to the BC’s reputation,
along with the bank’s.
Presently, BC agents are usually issued a 1:1 balance
relative to their security deposit with the BC. This is due to the BCs
obligations to the bank and resultant risk management practices.In view of these problems, an ideal solution would
be to allow selected CSPs to access overdraft facilities at minimal cost for a
shorter time period.
There should also be greater clarity with regards to
the cost sharing for cash management and associated risks between the banks and
BCs. In particular, banks should share the costs with BCs and/or provide better
compensation to the BC/agent in question.While banks are worried about reputational risks
posed by their BCs and BCs in turn by their agents, banks as well as BC’s offer
minimal insurance coverage to CSPs for cash handling risks.
IV. Standardization
and Documentation
There is a lack of systematic documentation of
processes that all agents should follow irrespective of the BC and/or principal
bank that they operate with. Standardization would build a uniformity of roles and
responsibilities among agents. The same should apply to the relationship
between agents and local base branch managers to help improve coordination
between bank officials and BC agents.
V. Promotion
and Marketing
Surprisingly little effort has been put forward to
promote the model and its benefits among prospective clientele. There have been
only a few recorded cases of banks and BCs organizing marketing campaigns,
given that banks generally don’t consider the BC model to be a profitable
venture and high marketing costs pose a threat to BC’s financial viability.
The RBI and principal banks should invest time and
effort in promoting the BC model and its benefits. The RBI should also place a
greater effort and emphasis on building acceptance of the BC model amongst its
prospective account holders.
VI. Financial
Literacy of Clients as well as BC Agents
An observed lack of financial literacy among clients
means the target clientele for the BC model is largely unaware of the uses of
No-Frills accounts. A certain level of financial literacy is necessary to make
this model a success, as exemplified by FINO. The government, the RBI and
principal banks should spearhead the implementation in order to make the BC
model profitable.
Acknowledging the fact that such an effort will
entail heavy monetary costs, the RBI should come out with clear guidelines for
the implementation of these efforts and should consider creating a dedicated
fund for these campaigns.
Also, CMF’s upcoming research study found that while
BCs offer well designed training programs to their agents, they don’t usually
cover basic banking functions which is essential in order to help CSPs run
their business efficiently.
VII. Client
selection
As discussed in our second post, around 61% of BC
clientele are regular savings account holders, which effectively opposes the
point of these financial inclusion drives along with inflating the financial
inclusion implications of no-frills account volumes.
When the RBI assigns targets for No-Frills account
drives, they should ensure that the majority of these accounts are opened by
the presently unbanked to ensure their intended financial inclusion goals are simultaneously
fulfilled.
These major issues need to be tackled in order to help the
BC model succeed and fulfil its immense potential. If these problems are not
solved in the long run, the model could be deemed unsustainable and abandoned
without giving it a fair chance to succeed.
Apex institutions such as the RBI and principal
banks need to set guidelines to promote risk-sharing between BCs and banks,
which is the basis of most of the current issues brought up in this post. The
RBI must acknowledge that this model is sustainable, but only in the long run
with mass penetration and high transaction volumes.
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