Millennium Post

A model for greater financial inclusion

A model for greater financial inclusion
India houses one of the largest populations untouched by the banking services in the world with half of its 1.2 billion people still dependent on various informal channels of lending and borrowings. Not surprisingly, the government and  Reserve Bank of India, the country’s statutory bank, have been very proactive in promoting  ‘Financial Inclusion’ to reach out to the large unbanked section of the population.

Among the various policy shifts addressing Financial Inclusion, one of the most significant policy intent has been the introduction of the Business Correspondent Model, popularly known as the BC model. The BC model since its inception in the year 2006 is seen as an innovative way of serving the unbanked by allowing banks to reach out to the unbanked by external agents. The BC model has been a big departure from the status quo of premise based banking to door-step banking for the poor.

Since the watershed regulation was introduced, the Reserve Bank of India puts the number of “business correspondents” (BCs) or Customer Service Points employed by banks to help get services to people at the bottom of the income pyramid at 221,341.
 
The BC Model as translated   
The Model, has shown a lot of potential so far but faces some serious challenges that need to be addressed in order for it to reach even a fraction of its potential. Though the model has seen the interest of myriad entities including Telecom Companies, Corporates, and Technology firms as well as grassroots organisations working with the poor such as NGOs and Micro Finance Institutes, it is far from attaining business viability or sustainability.

At the heart of the problem lie two distinct issues; those of distribution and customer connect. Since the BC model is agent driven, the success of it is individual driven wherein the efficiency and motivation of the agent in connecting with the customer plays a very important role.

On the other hand banking being a distribution business, BC becomes a business of managing these distribution points by addressing risks associated in money management. This can only prove to be successful if the principle, in this case, the banks invest in the BC model. However, since the BC model is mandate driven the banks often lack the incentive to invest in it since there is “no money” in it. It is also true that managing retail channels is really hard business in a country with such a diverse geography, which makes it all the more hard for most banks who have no experience of operating beyond their own branches. It might be unfair to expect these banks to succeed in creating their own networks of BCs.

While the BC’s have been able to address access issues and reach out to the last mile…not enough attention has been paid to produce customer centric products and services that will motivate the customer to jump on to the bandwagon. Reaching out to the customer is one thing; but if the services they are offering do not fit a client’s need, then it could ultimately be a wasted visit. Design aspects such as product labelling, messaging and consumer education are largely missing.

Pricing, like for most products, has a strong influence on the client’s decision making. If a relevant service costs less, low-income customers are more likely to frequent the service. If a service has a fee associated with it, then customers will engage with it only if they clearly understand the value add of the services.

The BC model also does little to provide incentives to customers above the usual basic savings and bank deposit accounts. Given the exhaustive drive for financial inclusion done by the Government of India, one would have imagined that the level of activity by the banks would have increased especially in the rural spaces. However, neither the banks nor the customers seem to be biting the bait. A closer look indicates that several BC companies and banks began to approach the market through a savings lens. It is important to have a diverse basket to interest the customers and pull them away from the informal system that has become a matter of habit.

Time for NBFC-MFIs to step in            
The elusive “sustainable business model” which has been the focus of so many conversations, analysis, and efforts in the branches less banking sector in India and globally continues to remain unresolved. This provides NBFC-MFIs a space to step into.  RBI’s extension of BC guidelines in July 2014 and allowing NBFCs to work with banks as BCs couldn’t have come in at a better time for NBFC-MFIs in India. The period of time when NBFC-MFI industry is clearly looking for expansion, BC line of business offers ample room to diversify product lines and innovate newer delivery technologies.

The biggest strengths of NBFC-MFIs in rural parts of India is their brand presence, organisational trust that they enjoy among rural communities and a strong brand recall value. NBFC-MFIs unlike other players in the chain like grocery stores, technology companies etc. are very versed with the unbanked and under banked segment of customers especially regarding their financial requirements. This puts them at a comparative advantage to serve the population at their doorstep.  Another plus that MFIs have over their non MFI competitors is a well-established network of loan officers and supervisory staff, who may just need a little bit of training on BC related aspects.

The verdict    
Business Correspondent is an added layer of business which NBFC-MFIs can add-on at a relatively low cost with impressive returns in medium and long term provided MFIs strike right partnerships with banking partners and manage BC operations in a transparent manner. There are already half a dozen of NBFC-MFIs which have direct and/or indirect involvement in BC business, however an asserted partnership between Bank-MFIs over a range of financial products needs to be seen in the future. In effect the jury will be out for a while!

The author is CEO, Micro Finance Institutions Network (MFIN)
Alok Prasad

Alok Prasad

Our contributor helps bringing the latest updates to you


Share it
Top