RBI evaluates engaging Microfinance NBFCs as BCs

Microfinance Focus, Aug 5, 2010: The Reserve Bank (RBI) of India has recently released a discussion paper on ‘Engagement of for-profit companies as Business correspondents’ evaluating the prospects of allowing non-banking financial companies, specially the microfinance companies to act as business correspondents of banks.

The paper highlights the observations made by the Committee on Financial Inclusion under Dr C. Rangarajan, which said 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, the paper says.

On the downside it underlines that 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 that currently 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. Moreover 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 impractical.

The discussion paper speaks about the business correspondent (BC) model and the various initiatives RBI has taken 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.

Since then, the regulatory framework for the BC model has been progressively honed to ensure that consumer protection is not compromised while facilitating enhanced outreach of banking services. The relaxation in the regulatory framework was made possible due to the rapid changes in technology –both in terms of Core Banking Solution as also relatively low cost biometric hand held devices for ensuring authenticity and fraud prevention.

Business Correspondents are retail agents engaged by banks for providing banking services at locations other than a bank branch/ATM. 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.

The paper also includes examples of legal framework of branchless banking from other nations like Brazil, Kenya, Mexico, Philippines and South Africa, discussing the permitted and prohibited activities of BC in these countries.

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