Analyzing the Business Correspondent Model (Part I) - Why BCs?

Today, we begin a series on the Business Correspondent (BC) model based on findings from CMFs on-going studies and external research on the sector. For starters, what are the particular advantages of using information and communications technology (ICT) based correspondents for banks in order to achieve the Financial Inclusion goals of the Reserve bank of India (RBI)?

 

In rural areas, major inconveniences for the poor in accessing banking services include the cost of traveling long distances and waiting in long queues. These costs are significant when we account for the opportunity cost to daily wage earners. On top of this, they face problems filling bank forms coupled with the unwillingness of the bank staff to cooperate and provide the required level of assistance. All these factors serve as major deterrents to using formal banking services. Instead, they’re forced to use high risk informal savings mechanisms such as saving at home, with their friends/relatives, land lord, employer or with local moneylenders.

So how could we solve these accessibility issues and provide a safe, convenient platform for accessing formal banking services in remote rural areas?

Let’s brainstorm. India has a population of 1.25 billion and almost a billion mobile phones with high signal penetration in remote rural areas. So why not use mobile banking? Maybe we could even establish credit scores for these people by collecting transparent transaction data from telecom companies and slowly graduate them to bigger loans! (Are we getting a little carried away here?)

Would people in rural areas who mostly use their mobile phones to receive calls and have low literacy levels be able to efficiently use m-banking facilities on their cellphones? Here, we see a market for agents coordinating the banking activities of a number of people in their vicinity and charging a small fee for their services. What else would we need?

If 41% of India’s adult population is unbanked and lacks the ability (and motivation) to fulfil KYC requirements, how will they be able to use these banking services in the first place? Here, we can see the need for banks to relax Know Your Customer (KYC) requirements and provide specialized bank accounts focused on small balances with a preference for users who deposit and withdraw small amounts. So how did the RBI go about setting up this system?

In 2005, RBI called for Indian banks to design a no precondition, zero minimum balance saving account with relaxed KYC requirements. This led to the evolution of No-Frills saving accounts established by multiple banks which simply require a voters ID for registration or a recommendation from someone who has fulfilled KYC requirements. Secondly, in 2006, the RBI permitted banks to use the services of NGOs/MFIs registered under the Societies/Trusts Acts, Societies registered under the mutually aided cooperative societies or the cooperatives society’s acts of states, Section 25 companies and registered NBFCs (not accepting public deposits) and post offices as ‘business correspondents’ (BCs). These BCs can act as agents of the bank and open No-Frills accounts for their clients along with conducting a host of other banking activities.

A BC agent conducting a transaction (Source: The Economic Times)

 

The advantages of this model are significant. With their quick transaction facility, BCs provide their customers the ability to transact small amounts without the accessibility issues of travelling to distant bank branches or the opportunity costs of losing a day’s wage. They can also induce savings behaviour among their clients, giving them the option to save when they desire in the amounts of their choice. The clients can trust them as the BC agent is usually a part of the community and the agent is more helpful and patient with his clients as well. The elimination of the need to travel solves the risk associated with carrying cash and being included in the formal banking system also solves flight risks associated with using informal saving mechanisms. On top of this, BCs provide 3.5% annual interest and can provide support to the lending process between a client and the bank. This system solves the majority of problems associated with access to formal banking in financially excluded areas.

And yet, the model’s performance has been disappointing since its inception in 2006. An upcoming CMF study shows that urban CSPs (Customer service providers) are operating profitably while rural CSPs are not. Reports also suggest that only about 20% of the 100 million No-Frills accounts opened so far are actually active. Given the significant advantages of the model over existing informal saving options, why would it fail? We’ll discuss the reasons for low take up of the BC model and high levels of dormancy in No-Frills accounts in the next two posts of this four-part series.