With the ongoing bids for becoming BCs approaching near zero percent, the boards of the banks should be made responsible for any outsourcing done by their respective banks through the common BC

The ongoing bids for becoming bank business correspondent (BC) in 20 clusters across India is getting to be more interesting with Vakrangee supposedly having won the bid for being the common BC for Rajasthan and Delhi at 0.02%. From the time Vakrangee bid and won the Maharashtra common BC bid at 0.48% to their recent successful bid at 0.02% (for Rajasthan/Delhi), they have not been alone. Fino’s and Strategic Outsourcing Services have bid 0.35%/0.19% and 0.11% respectively to be selected as common BC for Jharkhand/Chhattisgarh and Orissa.
 
What are the implications of very low cost BC bids that are now beginning to approach near zero percent? Can BCs really deliver at such cost levels? Are there any resultant concerns with regard to delivery of quality financial inclusion services through BCs? What should the regulators do in the present circumstances?
 
While questions such as these are very legitimate ones and need to be answered transparently, I personally think that banks must be held responsible for the success/failure of the BC model, whichever happens over time. When the microfinance crisis happened in Andhra Pradesh in 2010, DFIs (like SIDBI) and commercial banks feigned complete ignorance over issues like presence of broker agents, multiple lending, sharing of clients/JLGs, ghost clients and other frauds, etc. I simply fail to understand how DFIs and banks, who were supposedly undertaking due diligence visits to the MFIs (microfinance institutions) and their field areas (during and after disbursement of every tranche of loans to MFIs), could not spot these happenings over a two to four year period. And conveniently, many banks claimed that the crisis happened because the MFI promoters were perhaps pushed hard by the equity investors—but the irony of the matter is that the 2010 microfinance crisis in Andhra Pradesh would not have occurred but for the banks pumping huge sums of priority sector loans to the MFIs. Let us make no mistake about that!
 
Therefore, lest history repeat itself, I strongly feel that with the BC model, the board of directors of the various banks should be made (wholly) responsible for any outsourcing done by their respective banks through the common BC. And that is where the buck has to stop.
 
OK what does this mean in terms of tangible actions?
 
First, on its part, the Reserve Bank of India (RBI) must ensure that bank boards have a clear policy framework—with regard to outsourcing through BCs—that can be implemented in real time. And it is not a “cut and paste” policy document that I am talking about. I am referring to an outsourcing policy, with regard to BCs (and their sub-agents), where respective bank boards have thoroughly debated the pros and cons of various activities (to be outsourced) after understanding the attendant risks and benefits.  
 
Second, the policy must clearly specify as to how the outsourcing through BC (and their sub-agents) will be overseen effectively by the bank. And without question, such an appropriate governance structure with properly defined roles and responsibilities on the part of the outsourcing bank should exist (in real time) as specified in the policy.
 
Third—given that it is the bank’s board of directors which has the overall responsibility for ensuring that all ongoing outsourcing decisions taken by the bank, and activities undertaken by the BC (and their sub-agents) are in keeping with its outsourcing policy as well as extant laws—the policy must clearly and unequivocally specify the role of internal audit in helping to achieve the above objective.
 
Fourth, the policy must specify appropriate (fall-back) measures/safeguards so as to deal with any situation (like the 2010 Andhra Pradesh MFI crisis) when the bank’s ability to comply with legal and regulatory requirements may be diminished in any serious manner.
 
In terms of specific issues, the board of directors of the respective banks should:
 
a.       Review and approve the outsourcing policy of the bank with regard to BCs (and their sub-agents) and the risk-management policies (for such outsourcing) as recommended by senior management. This will also include approving the framework to evaluate the risks and materiality of all existing and prospective outsourcing to BCs (and their sub-agents) and the specific policies that apply to such arrangements.
b.      Review periodically, but at least semi-annually, management reports demonstrating extent of compliance with the approved risk-management policies for outsourcing (to BCs and their sub-agents);
c.       Approve any outsourcing arrangement with BCs (and their sub-agents) that exceeds the level of authority delegated to management;
d.      Review periodically the content and frequency of management’s ‘status of BC outsourcing’ reports (prepared for the board).
e.       Create a special board sub-committee with regard to outsourcing to BCs (and their sub-agents). Among other things, this sub-committee should ensure that:
•         People responsible for administering the risk-management policies for outsourcing to BCs (and their sub-agents) possess the quality and competency required;
•         The (internal) audit function regularly reviews operations to assess whether or not the risk-management policies and procedures for outsourcing to BCs (and their sub-agents) are being followed and to confirm that sufficient risk-management processes are in place;
•         The periodic performance review of outsourced functions to BCs (and their sub-agents) also includes assessment of: i) the fact that the BC and their sub-agents (have complied with and) remain capable of complying with all the extant legal and regulatory requirements in the future as well; and ii) the continued relevance, and safety and soundness of the outsourcing to the BCs and their sub-agents; and
•         The bank will not, in any way, be impaired in its ability to supervise the BC (and its sub-agents) at any point in time—both now and in the future.
 
To summarise, what is required is an outsourcing policy over which the bank boards have complete ownership. This is especially critical given that in the present scenario, some large public sector banks have expressed their lack of familiarity with regard to outsourcing to business correspondents (and their sub-agents). Therefore, even if the RFPs are ongoing, it still makes immense sense for the concerned banks to go through a proper process and develop a clear policy framework that guides outsourcing through business correspondents. And without question, it is the board (of the bank) that must have ownership over the policy and complete responsibility for its implementation. And the policy and its implementation in real time must be consistently evaluated in the light of what happened in Indian micro-finance in 2010. Without any doubt, we must learn from the 2010 Andhra Pradesh micro-finance and other crisis situations and make banks fully responsible and accountable for their actions/activities and outsourcing to BCs is no exception. And who better than the bank boards to do this in real time?
 
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.)