The Business Correspondent Model – Understanding the Gaps to Access to Financial Services

1. What are Business Correspondents?

Business correspondents (BCs) are agents of banks who perform functions of bank branches in areas where a bank does not consider it monetarily viable to set up a branch. The functions of a BC include collection of small value deposits, disbursal of small value credit, recovery of loans, sale of micro insurance, pension or other third party products. In exchange for providing these banking services, BCs earn a commission from the banks.

To facilitate the usage of bank accounts by the marginalized, BCs can also assist in the transfer of benefits under any one of the 56 government benefit schemes in India. BCs typically are retired bank employees, teachers, government employees; individual owners of kirana or medical stores, mobile recharge stores, petrol pumps; or authorized functionaries of schemes linked to banks.

2. How have they fared?

Permitted in the year 2006 by the Reserve Bank of India, the establishment of BCs has facilitated the operation of 247 Million bank accounts in India1. This is a significant section of the Indian population which has been brought under the ambit of formal banking. While the Pradhan Mantri Jan Dhan Yojana gave banks a much needed push to open bank accounts, there is no denying that business correspondents were in a large part responsible for carrying out the government’s mandate and facilitating a significant rise (30% from 2014 to 20172) in financial inclusion.

There are sufficient reasons to laud the business correspondent model for its contribution to financial inclusion in India. But this does not take away from the chinks in its armour. Here, it would be useful to know that my assessment of the gaps is supplemented by my conversations with 40 business correspondents across Delhi, Gurgaon, Kapashera and Sonipat and independent research on the topic.

3. What are the gaps in access to financial services?

Liquidity
The crucial problem most business correspondents face is the unavailability of liquid cash to undertake transactions. A large proportion of their transactions is the withdrawal and the deposit of money and a large number of BCs use the money from their other business of running a kirana store or a mobile recharge store to transact. This leaves room for a liquidity crunch, causing the BC to have to abandon his store and access liquid cash, thereby leading him to lose potential clients on both his businesses.

Low Earnings
A common woe of BCs is their low earnings from running their operations. While the RBI has promised BCs a monthly fixed remuneration of upto Rs. 50003, however on the ground, I personally found it hard to find a business correspondent who had seen a rupee of the fixed remuneration from the banks. The lack of support and guidance from banks further aggravates their problem of low earnings.

Absence of Support from Banks and Technology Companies
Every single business correspondent I spoke to remarked at the lack of support from banks and technology companies in undertaking their operations. Business correspondents can contribute to inclusion in larger numbers, if banks and companies providing them with point of sale devices the took effort to periodically visit and track their progress. Banks could provide them with guidance on best practises to maximize their revenues through commissions. Technology companies could help monitor their activities and help iron out issues BCs face in accessing banking facilities.

Poor Locational Choices
While many BCs appointed by banks exist only on paper, many BCs set their outlets in close proximity to a bank or an ATM or set shop in areas where people already accessed banks. Like any other business, the choice of location is closely related to the success of the BC both in terms of monetary gains and in terms of financial inclusion. In this situation, enforcing rules on location of the BCs and guiding BCs in setting up outlets would go a long way in facilitating financial inclusion.

1RBI Report on Financial Inclusion dated December 29, 2016.
2The Global Findex Database, 2017.
3https://www.thehindubusinessline.com/money-and-banking/Business-correspondents-to-get-minimum-monthly-pay-of-%E2%82%B95000-IBA/article20853175.ece

The Business Correspondent Model – Understanding the Gaps to Access to Financial Services

1. What are Business Correspondents?

Business correspondents (BCs) are agents of banks who perform functions of bank branches in areas where a bank does not consider it monetarily viable to set up a branch. The functions of a BC include collection of small value deposits, disbursal of small value credit, recovery of loans, sale of micro insurance, pension or other third party products. In exchange for providing these banking services, BCs earn a commission from the banks.

To facilitate the usage of bank accounts by the marginalized, BCs can also assist in the transfer of benefits under any one of the 56 government benefit schemes in India. BCs typically are retired bank employees, teachers, government employees; individual owners of kirana or medical stores, mobile recharge stores, petrol pumps; or authorized functionaries of schemes linked to banks.

2. How have they fared?

Permitted in the year 2006 by the Reserve Bank of India, the establishment of BCs has facilitated the operation of 247 Million bank accounts in India1. This is a significant section of the Indian population which has been brought under the ambit of formal banking. While the Pradhan Mantri Jan Dhan Yojana gave banks a much needed push to open bank accounts, there is no denying that business correspondents were in a large part responsible for carrying out the government’s mandate and facilitating a significant rise (30% from 2014 to 20172) in financial inclusion.

There are sufficient reasons to laud the business correspondent model for its contribution to financial inclusion in India. But this does not take away from the chinks in its armour. Here, it would be useful to know that my assessment of the gaps is supplemented by my conversations with 40 business correspondents across Delhi, Gurgaon, Kapashera and Sonipat and independent research on the topic.

3. What are the gaps in access to financial services?

Liquidity
The crucial problem most business correspondents face is the unavailability of liquid cash to undertake transactions. A large proportion of their transactions is the withdrawal and the deposit of money and a large number of BCs use the money from their other business of running a kirana store or a mobile recharge store to transact. This leaves room for a liquidity crunch, causing the BC to have to abandon his store and access liquid cash, thereby leading him to lose potential clients on both his businesses.

Low Earnings
A common woe of BCs is their low earnings from running their operations. While the RBI has promised BCs a monthly fixed remuneration of upto Rs. 50003, however on the ground, I personally found it hard to find a business correspondent who had seen a rupee of the fixed remuneration from the banks. The lack of support and guidance from banks further aggravates their problem of low earnings.

Absence of Support from Banks and Technology Companies
Every single business correspondent I spoke to remarked at the lack of support from banks and technology companies in undertaking their operations. Business correspondents can contribute to inclusion in larger numbers, if banks and companies providing them with point of sale devices the took effort to periodically visit and track their progress. Banks could provide them with guidance on best practises to maximize their revenues through commissions. Technology companies could help monitor their activities and help iron out issues BCs face in accessing banking facilities.

Poor Locational Choices
While many BCs appointed by banks exist only on paper, many BCs set their outlets in close proximity to a bank or an ATM or set shop in areas where people already accessed banks. Like any other business, the choice of location is closely related to the success of the BC both in terms of monetary gains and in terms of financial inclusion. In this situation, enforcing rules on location of the BCs and guiding BCs in setting up outlets would go a long way in facilitating financial inclusion.

1RBI Report on Financial Inclusion dated December 29, 2016.
2The Global Findex Database, 2017.
3https://www.thehindubusinessline.com/money-and-banking/Business-correspondents-to-get-minimum-monthly-pay-of-%E2%82%B95000-IBA/article20853175.ece