Analyzing the BC Model (Part IV) – Policy Recommendations to Improve its Functionality

[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 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.

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.