Banking Business Correspondant - 15 Mints Seminar Notes

 Banking Business Correspondant - 15 Mints Seminar Notes

Introduction:

• The purpose of Banking business correspondants is to engage by banks ‘for-profit’ companies as well as NBFCs as their Business Correspondents for expanding their bankingoutreach.
  
• Business Correspondents are retail agents engaged by banks for providing banking services at locations other than a bank branch/ATM
  

Business Correspondent model:

• The Reserve Bank of India has taken several initiatives over the years for increasing banking outreach and ensuring greater financial inclusion.
  
• A significant step in this direction was the issue of RBI guidelines in January 2006 for engagement of Business Correspondents (BCs) by banks for providing banking and financial services.
  
• Banks are required to take full responsibility for the acts of omission and commission of the BCs that they engage and have, therefore, to ensure thorough due diligence and additional safeguards for minimizing the agency risk
  
• Basically, BCs enable a bank to expand its outreach and offer limited range of banking services at low cost, as setting up a brick and mortar branch may not be viable in all cases
  
• BCs, thus, are an integral part of a business strategy for achieving greater financial inclusion.
  
• BCs are permitted to perform a variety of activities which include identification of borrowers, collection and preliminary processing of loan applications including verification of primary information/data, creating awareness about savings and other products, education and advice on managing money and debt counseling, processing and submission of applications to banks, promoting, nurturing and monitoring of Self Help Groups/ Joint Liability Groups, post-sanction monitoring, follow-up of recovery.
  
• They can also attend to collection of small value deposit, disbursal of small value credit, recovery of principal / collection of interest, sale of micro insurance/ mutual fund products/ pension products/ other third party products and receipt and delivery of small value remittances/ other payment instruments.
  

Entities eligible to act as BC’s:

• when the BC model was introduced in January 2006, the entities permitted to act as BCs included NGOs/ MFIs set up under Societies/ Trust Acts, Societies registered under Mutually Aided Cooperative Societies Acts or the Cooperative Societies Acts of States
  
• Section 25 companies and post offices. As regards Section 25 companies, it was subsequently clarified in April 2008 that banks can engage such companies as BCs provided the companies are stand-alone entities or Section 25 companies in which NBFCs, banks, telecom companies and other corporate entities or their holding companies do not have holdings in excess of 10%.
  
• The Committee on financial inclusion (Chairman: Dr. C. Rangarajan) observed that with increasing competition, banks are getting to be quite wary of the reducing margins available to them on financial intermediation and that small value clients (depositors) in remote locations get very little preference in accessing financial services.
  
• Emphasizing the need for having a BC touch-point in each of the 6 lakh plus villages in the country, the Committee recommended individuals like locally settled retired Government servants like postmasters, school teachers ex-servicemen etc may also be permitted to act as BCs
  
• Micro Finance – Non Banking Finance Companies (MF-NBFCs) may be allowed to act as limited BCs of banks for providing only savings and remittance services. The Committee also recognized that technology has to be an integral part in sustaining outreach efforts through the BC model.
  
• The list of persons who can be engaged as BCs was further expanded to include individuals like retired bank employees, retired teachers, retired government employees and ex-servicemen, individual owners of kirana / medical /Fair Price shops, individual Public Call Office (PCO) operators, agents of Small Savings schemes of Government of India/Insurance Companies, individuals who own Petrol Pumps, authorized functionaries of well run Self Help Groups (SHGs) which are linked to banks. Any other individual including those operating Common Service Centres (CSCs) are also allowed to act as BCs of banks.
  

Pros:

• The Committee on Financial Inclusion (Chairman: Dr C. Rangarajan) had observed that NBFCs engaged in micro finance could be recognized as BCs of banks for providing only savings and remittance services. The rationale is that in case of such services there will not be any conflict of interest as NBFCs are not permitted to undertake such business.

• NBFCs have their own wide network of outlets and franchisees who are already trained in and have experience of providing all financial services such as loan , mutual fund and insurance products. They have the manpower, knowledge, skill and the requisite infrastructure to work as BC for Banks. There could be significant synergies if such networks are leveraged upon.
  
• NBFCs engaged in micro finance already have a large number of borrower clients who today do not have easy access to bank accounts, payments system, remittance services and insured deposits and if engaged as BCs can further the objective of financial inclusion
  

Cons:

• In case of deposit taking NBFCs there is a conflict of interest as they are engaged in the same business.
  
• If non deposit taking NBFCs are engaged only for deposit products and payments / remittance services, the objective of providing affordable credit as a major component of financial inclusion could be defeated. It is reported thatcurrently NBFC –MFIs charge between 20 and 35 per cent per annum for  micro loans which is much more than what banks charge for small loans.
  
• There could be conflict of interest if the NBFC provides its own loan product as principal and bank’s loan product as agent. There are also risks of co-mingling of funds.
  
• NBFCs mostly offer services through field officers and the branches are removed from the location where transactions take place closer to the customer. . Hence using them as retail outlets would be impractica
  

IMPORTANT POINTS: 

• ALANKIT: BC for STATE BANK OF INDIA & BANK OF BARODA 
• Corporate BC are now 2402 they are called as Business correspondents  agentsBC taken centre stage in Rural banking after RBI 
• Count of BC in 2010 – 34000 
• Count of BC in DEC 2020 – 12.4 Lakh 
• BLS international services selected the National business correspondents for the India largest bank service inn URBAN, SEMI URBAN & RURAL.

 

 

 

 

 

Presented by,

Dhandayuthapani

Banking Student

Magme School of Banking