In Jan 2006, the Reserve Bank of India issued a new set of guidelines allowing banks to employ two categories of intermediaries - Business Correspondents (BC) and Business Facilitators (BF) - to expand their outreach. According to the guidelines, while the BCs are permitted to carry out transactions on behalf of the bank as agents, the BF can refer clients, pursue the clients’ proposal and facilitate the bank to carry out its transactions, but cannot transact on behalf of the bank.
The Basics of the Business Correspondents Banking Channel (BC Banking Channel) / Business facilitator Banking Channel (BF Banking Channel)
Banks operate a number of channels through which they deliver financial services: Bank branches, ATMs and the internet banking are the traditional channels. The Business Correspondent option offers a new channel through which banks can extend services – the guidelines are written in a way which requires a bank to be involved and is the ultimate provider of services. While RBI has oversight and regulatory responsibility for the BC banking channel as part of its regulatory regime, the principal banks are responsible for the acts of their correspondents.
The BC/BF model will offer an effective way, for the banks, to reach the un-reached population at large, customers and intermediaries alike. In this model banks do not have to invest in costly infrastructure of a branch to reach the un-banked areas while and at the same time the people who remained excluded so far will be assured of easy access to financial products and services. For this to happen a large number of BC/BF, who are not bank employees but are outsourced by banks - across the country to function as their agents - would be needed. This will bring the hitherto ‘excluded’ rural poor and help establish an open, inclusive and egalitarian society in the rural areas and make financial inclusion a reality with in a time frame.
Advantages of using BC / BF
Some of the advantages in using BC as listed out by various banks are:
A better alternative than bank branches - Normally a rural bank branch can serve 3,000 to 4,000 families in 12 to 15 villages within a radius of 15kms. A Public Sector Bank branch may require more than 5 years to breakeven in unbanked areas in India, while a private sector & foreign bank with IT connectivity may require about 5 times more. Further, obtaining permission to open a branch is a long and protracted process. The BC option potentially enables banks to reach out much faster and at a much lower cost.
Reaching the unreached - The model enable banks to extend financial services to the unreached clients beyond their branch network as beneficiaries of the BC are mostly located at unbanked and underbanked areas.
Doorstep banking - Disbursement and loan recovery at the doorsteps of the beneficiary.
Better quality of assets - Target clients are well known to local NGOs, Post Offices, BDO and similar local social bodies, thus loan facilitation by the NGOs/BC (who are the promoter/builder of the groups) enhances quality of assets.
Scaling up of this model is possible within a short span of time.
Objective of Business Correspondents / Business Facilitators (BC/BF)
Business Correspondents / Business Facilitators (BC/BF) will help banks in:
- Identifying potential customers.
- Advising / counseling village people about appropriate bank products and services.
- Helping villagers in completing formalities that are needed to transact with banks.
- Educating customers about terms of sanction, repayment and recovery.
- Putting through / helping in Putting through basic and small-value transactions of rural people.
Origins of Business Correspondents and Business Facilitators
Began in the 1990s as a way of controlling the 20 years of high inflation and to improve Brazil’s social programmes. All bills were previously paid in bank branches which posed a problem in the North and Northeast region, as banks were inaccessible. Also, the government gave benefits to families to keep their children in school; but it was nearly impossible to distribute the benefits with the lack of accessibility to banks.
The model started with the extensive lottery network being able to perform transactions. Regulation was then changed to allow any non-financial institutions to act as agents.
Progress of Business Correspondents and Business Facilitators
In Brazil, the BC model has become the most important channel to receive bill payments and services from the government. It has become the main payment channel for the low-income population.
In 2000, 1,600 (out of 5,560) cities had no banking services. Since 2003, no Brazilian city is without banking services and more than 15 million new bank accounts have been opened through the correspondents model.
It is normally very difficult to enter the retail market as a bank since the network is so strong. The BC model, however, has allowed mid-size banks to successfully enter the market.
Why the BC model works in Brazil
Regulatory environment and the pro-activeness of the Central Bank
Brazilian banking technology and their network integration services
Bill presentation standards- Boleto bancário
Evolution of regulation
- Financial firms as correspondents
- 1973: mainly for payment transactions
- 1979: collection of information for loans
- Non-financial firms allowed as correspondents
- 1999: only to cities unserved by financial services
- 2000: to all cities
- 2002: accept documents to open bank accounts
- Current regulation (2003)
- MFI and credit unions can hire and be hired as correspondents
- List of services expanded
- Delegation to third parties of power established by contracts
Conclusion of the Brazilian experience
- There is no single model that can be used to serve all different situations. Diversity is part of the business
- Bank workers caused problems for the BC model as they felt that BC were taking work away from them.
- The BC model is a very profitable business in Brazil
- The government controls/regulates the prices not specifically for BC but for the banking system in general
- For banks, BC represents the cheapest channel, especially to service the poor.
- Standardization of processes at each stage of the value chain is critical
- The BC model is low credit-driven since the interest rates are so high