Bank Business Correspondents: Miles to go

Banks needs to avoid appointing all and sundry as their business correspondents, just to meet internal or policy targets

The government in India has adopted a very important strategy to try and achieve financial inclusion, using business correspondents (BC) to serve and service excluded segments of the population, especially those living in rural areas. However, while this is yet to take off in any serious manner, of late we have witnessed greater activity in this area during the BC model being pushed as an alternative route to financial inclusion (vis-à-vis MFIs—microfinance institutions).  

While the idea of using BCs is perhaps appealing because of various benefits BCs may seem to provide, there are huge risks as well. This is especially true in the present environment in India, where there are many controversies with regard to financial services provided to low-income and excluded people, service delivery methods used, prices charged, etc, by the outsourced entities (such as BCs). As seen during 2010 and 2011, the new breed of micro-finance agents in India, who functioned almost like BCs, certainly created havoc in the lives of low-income people.

Therefore, it is imperative for regulators and supervisors to ensure that banks have an appropriate due diligence process in selecting their BCs. They must likewise ensure that banks avoid appointing all and sundry as their BCs, just to meet any (internal or policy targets) that may be imposed on them from time to time.

Specifically, the regulators and supervisors must encourage banks to develop a solid criteria that enable them to assess, prior to selection, a business correspondent’s capacity and ability to perform the various required activities effectively, reliably and most importantly, to a high standard, together with any potential risk factors associated with using a particular BC. Cost alone cannot be the deciding factor!

More importantly, the key emphasis must be on ensuring that the BC is indeed sensitive to the needs and situations of low-income clients and/or excluded segments of the population. Regulators and supervisors must also ensure that banks put in adequate client protection measures in the entire scheme of ‘outsourcing’ to BCs, and their on-site examination must verify the implementation of these in real time.

Among other things, such due diligence should include assessments with regard to the following (not exhaustive by any means):

a.    Whether the business correspondent is really qualified and interested in performing the specified tasks?
b.    Whether the business correspondent understands and can meet the objectives of the bank(s) in performing the specified activities?
c.    Whether the business correspondent has the financial soundness, managerial capacity and all other resources in adequate measure to fulfill the obligations and successfully perform the various (outsourced) roles and activities?
d.    Whether the business correspondent has the reach, resources and capacity to meet any special needs of the envisaged clients and/or the bank(s)?
e.    Whether the business correspondent has proposed a viable operational model to fulfill its obligations and specified tasks?

And given the above background, I was rather surprised to see that Vakrangee Finserve won “the SBI RFP to become the common Banking Correspondent company for all public sector banks operating in Maharashtra. … Vakrangee won the five-year contract, which can be extended by another two years, with a price of 0.48%. The company will now have to appoint BC agents in 4,200 locations in Maharashtra. … If things go as the finance ministry wants them to, welfare payments to the rural/poor population will be routed through Vakrangee now. …The low value of the final bid took some of the other bidders by surprise.” (The Economic Times, 25 May 2012 - Vakrangee wins Maharashtra RFP, becomes common BC for public sector banks in the state

Having spent over two decades in working with rural and urban poor, I must say that such a low value of the final bid is beyond any reasonable comprehension. If there is one thing that I have learnt through my work in over 540 districts in India and elsewhere globally, it is that servicing the rural poor is rather costly and it certainly has minimum costs associated with it. That said, I am really baffled as to how the bidder (Vakrangee Finserve) expects to provide the required quality of service at the (extremely low) bid cost?

What then are the implications based on lessons from past experiences in India and abroad of similar services being outsourced? There are four distinct aspects that need to be looked at with regard to such low cost bids of government/public services. And the RBI and other regulators shaping the financial inclusion agenda certainly have a responsibility to do so:

a)    How does the bidder gain cost advantages? Are these cost savings real or illusory? What is the real motivation of the bidder to bid for delivering the services in the first place?

For example, in other instances in India and abroad, companies have bid for large public contracts at extremely low (bid) prices Just to boost their credentials in the stock market—they have either abandoned the service and/or compromised severely on the quality of service provided after the stock manipulation objective has been achieved. Others have got a foot in the door (by winning the bid and extending the various services) and thereafter, have gone back for a revision of the contractual terms (including price) citing various reasons and loop holes. These are aspects that must be guarded against at all times by the RBI and other regulators concerned!  

b)    What about the quality of service? How is that (to be) maintained at minimum stipulated (quality) levels at all places? How can that be effectively monitored and ensured at all times during the service contract, especially given the remoteness of the rural locations?

For example, please see the proceedings of the meeting held under the chairmanship of the Haryana chief minister on 7th December, 2011 to review the implementation of Electronic Benefit Transfer Scheme and its convergence with Financial Inclusion Plan in Haryana. I quote from this report:

“The implementation at the ground level by the Business Correspondent appointed by the banks is not satisfactory. Non-availability of the BC agents at the field level tantamount to denial of banking service to senior citizens, destitute and disabled beneficiaries and their right to enjoy the benefit timely remittance into their bank accounts by the state government. The Director General, Social Justice & Empowerment informed that since the commencement of implementation from the month of April 2011, a total of Rs54 crore were disbursed manually using physical payee receipts through banks along with simultaneous enrolment for opening of bank accounts and another Rs504 crore was transferred into the bank accounts electronically up to 30 November 2011. In fact, as reported by the banks, an amount of Rs96 crore is still lying undisbursed as on 30 November 2011, though 80% of the total amount was released up to 12 August 2011. This shows that the infrastructure deployed by the business correspondent of the banks is grossly inadequate to provide a satisfactory level of banking service to the 2 million banking customers. Due to the uncertain and rare visit of the BC agent in the local area, there is no perception of banking service amongst the beneficiaries. The schedule of visits of the BC agent is uncertain causing inconvenience to the account holders. The average frequency of visit of the BC agent in the village has been once every 90 days and in some villages, there has been no visit at all in the last six months. An analysis of the transaction data supplied for a period of one month by the TSP indicates that the average transaction value is very high at Rs1,200 against the average monthly benefit of Rs615.

Other major problems encountered are non-operation of accounts; making manual payments using the department's E pay-order to banks, multiple accounts to the same person, not carrying out biometrics based de-duplication, Non establishment of customer complaint centers and non supply of transaction data for monitoring by the department.” (

All of these and similar issues need the attention of the Reserve Bank of India (RBI) and other regulators, especially when the bid is extremely low cost!
c)    Is there cause to believe that the bid is a front for some other (corrupt or illegal) activity?

In other countries, especially in Africa, such bid-based public services have served as the platform for carrying on other (illegal) activities. That again needs to be focused on by the RBI and other regulators.

d)    Will the low cost nature of the bid result in the poor and disadvantaged being further isolated?  

This is a very serious question that the RBI and other regulators need to be clear about upfront as if that is the case, or else the whole objective of financial inclusion would really be lost

Therefore, while the desire to enhance and speed up financial inclusion is much appreciated, such a drive should also have appropriate risk mitigation mechanisms and safeguards so that things do not go wrong during implementation. The lessons from the 2010 micro-finance crisis are still fresh in memory indeed. And as far as the present situation is concerned, while I am not pre-judging Vakrangee Finserve in any manner what-so-ever, we will have to wait and see what they actually do on the ground in terms of their BC operations and the quality of BC services offered there in. That said, the RBI and other regulators who are actively pushing the BC model, will certainly have to look into the critical issues highlighted above if indeed they are really serious about financially including much (if not all) of India’s rural poor…

(Ramesh Arunachalam has over two decades of strong grass-roots and institutional experience in rural finance, MSME development, agriculture and rural livelihood systems, rural and urban development and urban poverty alleviation across Asia, Africa, North America and Europe. He has worked with national and state governments and multilateral agencies. His book—Indian Microfinance, The Way Forward, is the first authentic compendium on the history of microfinance in India and its possible future.)

nitai chandra ray
1 decade ago
The questions raised by Ramesh Arunachalam about BC should be
discussed threadbare at appropriate
levels for rural as well as urban inclusion for poverty alleviation programme .
a v moorthi besides TIHAR
1 decade ago
It would have been nice if the situation for low bidding is not allowed and the Govt, RBI, NABARD and Banks have really thought of providing properly remunerating and supporting BCs instead of leaving the onus of pushing the BC model to BCs themselves and thus leaving them high and dry. just recall the out sourcing of un armed guards by Banks for ATM and branches. Banks were happy to get low costs ( even below proper renumeration meant for semi skilled workers as per various State Govt minimum wages rates meant for rates) so what happened was there is a labour inspector who was able to milk the agency supplying guards because the agency cannot pay guards as per minimum wages but at the same time the contract is so big the agency cannot afford to leave the contract. Similarly the engagement of BCs is clear admission of the fact RRBs and Dist cooperative Banks are failures and Commercial Banks with their wage structure will not find it viable to increase foot hold any further in under banked areas. only organisation which stand a chance of sucess is India Post which as on date has got deep penetration all over the country.
V Ramkumar
Replied to a v moorthi besides TIHAR comment 1 decade ago
India Post initially tried to become BC of banks but finally it has fizzled out. Inclusion of mainstream banks in providing financial access to the poor across the geography has been accepted as a must for FI. However, lack of understanding and efforts by stake holders - including NGOs /development institutions - in supporting the BC model is the real challenge.
V Ramkumar
1 decade ago
We have seen MFI route reaching out to a miniscule of the needy population that too at a very high cost . For achieving an enlarged and deepened FI coverage in a reasonably quick time, the BC route is the only way when financial services can be accessed by poor at the rate at which Banks charge for their services. However, lot of reluctance is seen in accepting this reality by those who have experience in this sector and they want to beat around the same MFI route in some form or other. This has hampered the BC model coming up.
The irony is that only now GOI has felt the need for the BC model to be pushed as an alternative route to financial inclusion.
There will always be some teething problems and what is called for is the coming together of all brains as to how to make the BC model more viable instead of picking holes in any effort begun. This RFP also has undergone the due diligence process. It would have been nice if the situation for low bidding is not allowed and the Govt, RBI, NABARD and Banks have really thought of providing properly remunerating and supporting BCs instead of leaving the onus of pushing the BC model to BCs themselves and thus leaving them high and dry. "BC model is not viable" is the common refrain of those who do not want this model to be viable so that MFI's interest can be protected.

Ramesh S Arunachalam
Replied to V Ramkumar comment 1 decade ago
Dear Sirs, All of your points are well taken. Thanks

I wanted to make two simple points in the article:

a) Low cost bids have the potential to become counter productive later as the obligations may not be discharged and/or may be discharged partially or ineffectively. The RBI needs to take care and ensure that this does not happen

b) Financial inclusion is a great policy initiative but it must not degenerate into improper, ineffective and/or fraudulent implementation (of policy initiatives). This again needs to be ensured by the RBI

Thanks again for your comments and the points are well taken
V Ramkumar
Replied to Ramesh S Arunachalam comment 1 decade ago
Appreciate your reply and the focus of the article as also the sincerity/merits of them.

Looking for exclusive research papers/ articles to suggest ways on "how to make BC model viable" and what every stake holder should do to make it, instead of every one waiting for others, except themselves to make this,
with utmost regards
Ratanlal Purohit
1 decade ago
The financial inclusion is our social obligation. Its an investment to include all deprived to uplift poverty. Dont forget demographic divident.
We are writing off big defaulters. Farmers. Let's empower the real produceres of wealth.
It is our Social obligation.
Ramesh S Arunachalam
1 decade ago
Very well said and the RBI cannot afford be as laizze faire as it did in the case of Micro-Finance.

Telcos as BCs have their advantages and disadvantages and the RBI must again be careful that weaknesses and non serious players do not spoil the financial inclusion agenda.

Very interesting to hear committed bank staff being given incentives to take banking to remote areas. That is an option we need to try seriously as it has a lot of merit. There have been other such experiments in India and Africa and they need to be looked into as well

Thanks again for your comments

Warm regards

1 decade ago
Several companies are entering the BC space with the hope to cross sell products/services to rural India, often forgetting that financial services is a different ball game. Once they realize the difficulty in operations, they pull out of these areas, leaving the customer unserviced, thus creating a bad name for the industry. The repercussions of uninterested parties not meeting their mandates are multifold. The RBI should intervene before people start to disregard such financial inclusion projects.
Ratanlal Purohit
1 decade ago
What happened to mobile banking. MOBILE COMPANIES AS BCs. And their agents in villages.
Alternatively Post Offices for microfinance.
R Murugan
1 decade ago
In the seventies and eighties Andhra Bank had a unique system called cluster banking where a group of villages was attached to a branch and the Cluster Manager used to visit village/s once week (or more than once a week) depending on the volume of transactions and transactions of the day would be recorded in the books of the base branch by the end of day. Now with computerisation it should be easier to record transactions. Staff working in these branches would travel by van to different villages and they can be given incentives/concessions in pay/promotions to motivate them to opt for these services. This would be a better option than BCs who can not be expected to deliver since they would lack commitment and sincerity, not being permanent employees of Banks.
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