The Reserve Bank of India (RBI) is looking at the possibility of appointing corporates and non banking finance companies (NBFCs) as business correspondents,in a move aimed at promoting financial inclusion.Until now only non profit organisations and ngo’s were allowed to become business correspondents.
To further discuss this issue the Reserve Bank of India has released, a Discussion Paper on “Engagement of ‘for profit’ Companies as Business Correspondents (BCs)” to seek the views and comments of banks, non-banking financial institutions, ‘for-profit’ companies, regulators, academicians, NGOs and the public at large.
Comments/feedback on the Discussion Paper may please be sent by August 20, 2010 to the
Chief General Manager,
Reserve Bank of India,
Department of Banking Operations and Development,
Central Office, 5th floor, World Trade Centre-1,
Cuffe Parade, Mumbai-400005
or by email
Download the full RBI Discussion paper on Engagement of ‘for-profit’ Companies as Business Correspondents in PDF format at link below
The Discussion Paper on Engagement of ‘for-profit’ Companies as Business Correspondents is given below
1. The purpose of this paper is to seek the views / comments of banks, non-banking financial institutions, ‘for-profit’ companies, regulators, academicians, NGOs and the public at large on the discussion on whether there is a case for allowing banks to engage ‘for-profit’ companies as well as NBFCs as their Business Correspondents for expanding their banking outreach.
Business Correspondent model
2. 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. 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. The circulars issued by the Reserve Bank on the subject are listed at the end of this paper (Annex- 3).
3. 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.
4. 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 BCs
5. To start with, 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%.
6. 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. Further, 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. (Extract of recommendations of the Committee furnished in Annex – 2)
7. 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.
Other major regulatory guidelines governing BCs
8. With a view to ensuring adequate supervision over the operations and activities of the BCs by banks, every BC is required to be attached to and be under the oversight of a specific bank branch designated as the base branch. This guideline was issued in April 2008 along with the stipulation that the distance between the place of business of a BC and the base branch, ordinarily, should not exceed 15 kms in rural, semi-urban and urban areas and 5 kms in metropolitan centers. However, it was also provided that in case there was a need to relax the distance criterion, the District Consultative Committee (DCC)/State level Bankers Committee (SLBC) could consider and approve relaxation on merits in respect of under-banked areas etc. Subsequently, the maximum distance criterion in respect of rural, semi-urban and urban areas was raised from 15 kms to 30 kms.
9. Banks were encouraged to adopt Information and Communication Technology (ICT) solutions for implementing the model to ensure integrity and fraud prevention. Banks are also required to ensure that their arrangements with BCs should specify suitable limits on cash holding by intermediaries as also limits on individual customer payments and receipts; it should also specify that the transactions are accounted for and reflected in the bank’s books by end of day or next working day. The banks may, if necessary, use the services of the BC for preliminary work relating to account opening formalities. However, compliance with KYC norms under the BC model continues to be the responsibility of banks. The banks should also ensure that all agreements/ contracts with the customer clearly specify that the bank is responsible to the customer for acts of omission and commission of the BCs. Banks are required to comply with the RBI guidelines on managing risks and code of conduct in outsourcing of financial services.
Banks should constitute Grievance Redressal Machinery within the bank for redressing complaints about services rendered by Business Correspondents and Facilitators and give wide publicity about it through electronic and print media. The name and contact number of designated Grievance Redressal Officer of the bank should be made known and widely publicised. The designated officer should ensure that genuine grievances of customers are redressed promptly.
10. Initially, banks were not allowed to collect any charges from the customers for providing services through BC, close to the location of the customers. Subsequently, banks were allowed in November 2009 to collect reasonable service charges from customers in a transparent manner under a Board-approved policy. Considering the profile of the clientele to whom banking services are being delivered through the BC model, banks were advised to ensure that the service charges/fees collected from the customer for delivery of banking services through the BC model is not only fair and reasonable but also seen to be so.
Banks’ experience with BCs
11. Although a variety of entities/ individuals have been permitted by the Reserve Bank to act as BCs, only a few have actually been so engaged by banks. Out of 50 public sector and private sector banks, only 27 banks have so far reported engaging BCs. Most of the banks that have engaged BCs have appointed Section 25 companies/ Trusts/ Societies as BCs. Further, almost all the Section 25 companies engaged as BCs have been floated by the technology service providers who had provided the smart card or biometric solutions for account openings, etc. FINO a technology firm working together with its non-profit partner Fintech Foundation, which acts as BC network manager has opened about 10 million accounts on behalf of 14 banks, Post Offices and nine Government agencies. A Little World (ALW) and its non-profit partner Zero Mass Foundation have also opened about 4 million accounts as BC for 20 banks. Eko is a similar technology focused company with Eko Aspire Foundation, a parallel non-profit organization operating as BC for State Bank of India. Similarly, Integra Micro Systems (Pvt.) Ltd, has also provided technology solution under the BC model to a few banks.
12. While many banks have taken some steps to adopt the BC model, only a few of them have scaled-up beyond the pilot stage. The difficulty experienced by banks in scaling up have been attributed to several factors including credit, operational, legal and reputation risks faced by banks in engaging a large number of BCs, low coverage by individuals acting as BCs due to their financial and other constraints, difficulty in assessing integrity of individuals acting as BCs, general lack of professionalism of BCs in matters of regularity, punctuality, maintenance of various records, delays in loan processing, disbursements, low volume of business generated by BCs and costs associated with low volume small value transactions.
For the rest visit the RBI Website