The business correspondent model to financial inclusion can work, but since it transfers various types of risk, responsibility and management compliance to third parties, it requires appropriate regulation and supervision
With the ongoing bidding for the whole of India, the business correspondent (BC) model is surely on its way to become a pan-India effort of huge scale and deep penetration with regard to financial inclusion. While I am certainly not comfortable with the (low) bidding values and have discussed it in a previous article Business correspondent model at near-zero cost may fail with deep negative impact, I do however believe that the BC model can perhaps effectively serve the cause of financial inclusion if it is structured appropriately. That said, in my opinion, there are many risks and serious regulatory and supervisory issues that need to be addressed by the RBI for this to become a reality. The key ones are briefly highlighted hereafter.
Specifically, under the proposed BC model, a regulated entity (bank) is to use a third party (BC and its sub-agents) to perform activities on a continuing basis that would normally be undertaken by the regulated entity (bank)—in other words, it would outsource the activities to various kinds of business correspondents and its sub-agents.
Thus, in the business correspondent model, in effect, there is a transfer of an activity (or a part of that activity) from a regulated entity (bank) to a third party (BC and its sub-agents). There is no doubt that financial service businesses throughout the world are increasingly using third parties to carry out activities that they themselves would normally have undertaken. While industry research and surveys by regulators/others show financial firms outsourcing significant parts of their regulated and unregulated activities, especially because of cost and other considerations, there is no doubt that these outsourcing arrangements are also becoming increasingly complex and, as a result, causing problems on the ground as well.
The fundamental issue here is that such outsourcing by banks, as envisaged in the business correspondent model, has the potential to transfer risk, management and compliance to third parties (BC and their sub-agents) who may not be as well regulated and supervised—especially in line with the financial functions that they may be performing (which certainly calls for an appropriate kind of regulation/supervision).
Several concerns arise in this regard:
a. In these situations, how can the regulator and/or the regulated financial service businesses (banks, in this case) remain confident that they are indeed in charge of their own business and in control of their business/other risks?
A look at the 2010 microfinance crisis in India suggests that neither the regulator/supervisor nor DFIs/banks were aware of any of the ground-level problems/happenings in Andhra Pradesh and their real causes. The presence of unscrupulous agents, rampant multiple lending, serious corporate governance violations, ghost clients and several other issues including violation of priority sector norms and the like were neither known/anticipated nor dealt with appropriately/nipped in the bud. This is a serious aspect that needs to be recognized by all stakeholders, including regulators/supervisors, and it calls for appropriate supervision arrangements with regard to the proposed business correspondent outsourcing activities as well. I am not sure whether these are in place and hence, my cautionary note with regard to the ongoing bidding which envisages upscaling of the business correspondents model. And let us not forget what happened when regulatory/supervisory arrangements (including the self-regulatory mechanism) with regard to microfinance were almost absent over a five-year period.
b. How do the regulated financial service businesses (banks, in this case) know they are complying with their extant regulatory responsibilities as per the Banking Regulation Act and other periodic circulars and notifications? How can these regulated financial service businesses demonstrate that they are doing so when regulators/supervisors ask them?
Let us take the microfinance crisis as an example again. There were many serious violations with regard to KYC (know your customer) and, in many cases, the last mile end user clients were just not known. Imagine the consequences of this for the anti- money laundering regulations based on the global Financial Services Task Force (FSTF) recommendations. There have been many cases of lending to non-priority sector clients (including loans to founder directors) and there are no safeguards against these even as on date. Many a time, KYC forms have included people who are no longer alive. There is documentary evidence of several such cases in Andhra Pradesh and other states. Again, I am not sure that banks currently have the capacity and ability to ensure compliance in real time and therefore, I would like to stress that while arrangements like business correspondents (BCs) are upscaled, the banks, on their part, must also demonstrate the willingness and capacity to have appropriate supervisory mechanisms (for example, rigorous internal audits) in line with their regulatory responsibilities. We need commercial banks to be more accountable and transparent with regard to the regulatory responsibilities they are discharging. After all, they mainly intermediate public deposits.
c. Most importantly, how can the regulated financial service businesses (outsourcing banks) assure themselves that their business correspondents (and sub-agents), who are 3rd parties, are not engaging in practices that could contribute to institutional and other failures including client level abuses?
Again, it was demonstrated during the recent microfinance crisis that banks and DFIs assumed that MFI practices were good on the ground and regulators/supervisors also did do. The consequences are out there for all of you to see and judge.
Therefore, I would really hope that there is serious regulatory and supervisory introspection into issues such as those given above while upscaling the business correspondent model. And before I sign off, I would like to leave you with a list of potential risks (certainly not exhaustive) in the business correspondent model for the benefit of banks and regulators/supervisors and I really hope that the banks and regulators devise appropriate strategies to mitigate these risks…
A) Strategic Risk
1. The BC (and/or their sub-agents) may conduct activities which are inconsistent with the overall strategic goals (of the outsourcing banks) with regard to financial inclusion. This is a very critical issue
2. A second issue relates to the failure of the outsourcing bank to implement appropriate oversight with regard to activities outsourced to the BC and its sub-agents. This could arise also because of the fact that the outsourcing bank has inadequate expertise (for example in internal audits or compliance) to oversee the BC and their sub-agents. Here, one must not forget what the public sector banks have been saying with regard to the BC model and outsourcing in the recent times—“We need to work out a proper model. Public sector banks are poor in managing outsourcing as we don't have experience in outsourcing like our private peers. There are internal challenges as well as our employees did not accept this alternate channel of banking”—A Krishna Kumar, State Bank of India managing director .
B) Operational Risk
1. Since much of the present BC model hinges on use of technology, technology failure (at the level of the BC and their sub-agents) is a critical issue here. A related issue is the compatibility and integration of technology between BC (and its sub-agents) with that of the outsourcing banks
2. The BC and their sub-agents may have inadequate financial and other capacity to fulfil their obligations and/or provide remedies in case of serious frauds or errors. This again needs to be looked into, especially given the scale of operations envisaged and volume of money to be physically intermediated
3. Further, given the proposed vast outreach of each cluster and the difficult physical terrains, the outsourcing bank and/or BC may find it difficult and costly to undertake rigorous internal audits and inspections. This needs to be evaluated and mitigated appropriately
C) Compliance Risk
4. Processes, procedures, activities and practices at BC (and their sub-agents) are not in accordance with the stipulated processes, procedures, activities and practices of the outsourcing bank (which is a regulated entity and has to comply with prevailing laws as the Banking regulation Act)
5. The BC and its sub-agents do not comply with confidentiality aspects and related privacy laws
6. The BC has compliance systems and controls that are inadequate with regard to its sub-agents
7. In fact, all non-compliance brings a huge reputation risk as well
D) Reputation Risk
8. The BCs and their sub-agents provide poor service to their clients in terms of all features of service quality—level of service, consistency, timeliness, adaptability, etc
9. Customer interaction and engagement by the BC and their sub-agents do not meet the overall quality levels of the outsourcing bank (which as a regulated entity is supposed to maintain as the BR Act and prevailing voluntary codes of conduct). Apart from quality levels, consistency is a critical issue here
E) Exit Strategy Risk
10. The risk that appropriate exit strategies are not in place is another key issue. This could arise from several factors: (a) over-reliance on one firm (like common BC and sub-agents for a cluster; (b) the loss of relevant skills in the outsourcing bank (s) themselves thereby preventing banks from bringing the activity back in-house at a later date; and (c) contractual terms that could make a quick exit prohibitively expensive. These need to be addressed as well
F) Information and Access Risk
11. Outsourcing arrangements like in the present BC model greatly affects the ability of the regulated entity (outsourcing bank in this case) to provide accurate, necessary and timely data/information with regard to financial inclusion to regulators/supervisors. The RBI needs to be aware of this critical risk and manage it appropriately
12. When the BC and its sub-agents operate, there will be several additional layers of difficulty for the regulator/supervisor not only in terms of accessing accurate, necessary and timely information but also understanding the various activities of the BCs (and their sub-agents) in remote locations. That needs to be factored in as well in formulating regulatory/supervisory arrangements
G) Systemic and Concentration Risk
13. The financial inclusion industry (all banks together) has significant exposure to one or few BCs. This concentration could result in lack of control of individual banks over the concerned BC(s). Again, this needs to be assessed closely given what some of the public sector banks have been saying.
14. Additionally, if the BC model were to become unsound, the few BCs together pose a huge systemic risk to financial inclusion and banking industry as a whole. This is especially true given the huge scale of operations and the large volume of money proposed to be intermediated
(Ramesh S 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.)
Tamil Nadu boasts of the largest number of spiritual magazines (around 70). Most of them are geared to exploit the vulnerability of their readers
Tamil Nadu boasts the highest number of spiritual magazines in India. At last count, the number of such magazines was hovering at around 70. What is common to all these magazines is dollops and dollops of free spiritual advice (new mantras being published every month) besides, of course, the ubiquitous astrological advice. Almost 25% of the state's population seems to look at astrology as a full-time career option.
Let us take a look at the typical content in such magazines. The cover story would be an enticing topic like-"How to ensure your ward's success in exams"- an annual feature during the months of March and April. Then there are a few think-pieces on hypothetical issues like whether LordRam did the right thing in banishing Seeta from Ayodhya-never mind if the issue has been discussed a zillion times before. Then there are pages after pages about new temples with the gratuitous mention at the end of each that "visiting these shrines will help the poor earn wealth, parents to get their daughters married, unemployed will get a job and the sick heal quickly". There is nothing wrong in publishing information about new and unknown temples but the unsubstantiated reason offered at the end to nudge people into visiting them is what rankles readers like me the most.
The less said about astrological forecasts offered by these publications the better. The predictions range from - "you will fight with your brother" or "mother's health needs attention" or attention getters like "please be careful with your boss" or "you will enter into a land dispute". Stuff like, "you will suffer from stomach ache and diarrhoea" is always a possibility in India and cuts across age and gender barriers!
Tamil TV channels telecast several programmes exclusively devoted to astrological forecasts. Jaya TV, the Tamil Nadu chief minister's channel tops the list. But this is a trend that cuts across Indian states and language barriers. For the past couple of months, many Hindi channels too have devoted their prime time coverage to a strange Nirmal Baba, some under the guise of exposing his hollow antics. In fact, several godmen and godwomen are prime time newsmakers on all regional channels.
The promotion is not restricted to advice. A magazine called "Kumudam Bhakti" used to supply 'holy' Ganga water along with its Diwali issue. Another magazine regularly sent out "tantras" to be kept in the pooja room with assurance that doing so would result in a flood of gold coins in one's home.
If you analyse a one-year collection of any of these astrological magazines, it becomes apparent that there is a simple formula to dishing out advice. Inject a bit of fear with regard to health, wealth and relationships and pander to greed by dangling the prospect of goodies. Who is going to cross-check anyway? It is like Vividh Bharati playing the same "Man Chahe" geet on a few Wednesdays without anyone noticing it. And who is to know whether a "Rekha, Madan, Rinku, Chinky and Pintoo" from Udhampur or jhumritalaiya have really requested a particular Hindi song? Does anyone know if the same predictions are repeated?
Most of astrologers give themselves titles like "Chakravarthy , "King of Astrologers", "Real Astrologer". I also learn that a new breed of people who have taken voluntary retirement from nationalised banks have found themselves a second career as astrologers. No wonder, India has no dearth of them.
There may be a few good astrologers but they are conspicuous by their absence. MR Ramarathnam, a retired professional, based in Chennai, says, "The real astrologers will never take money for predictions. Neither will they look at horoscopes after sunset". Gone are the days when astrological advice was given cautiously keeping the reading public in mind.
Sukumar Sakthivel approached a Tanjore-based astrologer who calls himself "the King of Mandreekam" (mandreekam is the Tamil word for sorcery). Within a week, he received a detailed letter from the astrologer telling him that his life was in danger and someone had performed black magic on him. Solution? "He advised me to send him a cheque for Rs39,000 immediately to perform a chandika homam that would help in warding off my enemies", says Sukumar. There was also a veiled threat that in case he did not do the pooja, his condition would worsen. Sukumar's spouse Sanyogita fired him for even approaching the astrologer. A week later, Sukumar and his family took off for a trip to Kerala (a kind of religious pilgrimage) and in the next three weeks, Sukumar landed a new job. He is doing fine now. I hope this incident serves as warning to those who spend money based on such advice.
A retired professional who wanted to build a temple for Lord Hanuman shared his experience with a local magazine. He started out by approaching an astrologer for "prasannam" (an astrological forecast using sea-conches and shells) and as shocked to be told that he wouldn't live to see the temple completed. While he was completely shattered, his wife rubbished the astrologer's predictions and gave him the confidence to continue his work. Twenty-seven years later, the gentleman is still alive and though his wife passed away two years ago, he can't thank her enough.
Ramarathnam adds, "The world today is characterized by an extreme avarice even in the religious community. Even temple priests do not perform the archanas religiously. Most of them are only after money. There is also an explanation that they offer that they also need to survive and so they need the money". Again, this is not restricted to Tamil Nadu. The greed and grasping behaviour of the pandas (priests) at the world famous Jagganath temple a Puri (Orissa) is often a culture shock for first time visitors, even if they have been warned. Nobody denies temple priests their legitimate dues, but can money be the only driving factor in a temple?
A Mumbai-based priest who performs poojas at film stars' homes was famous for demanding gold chains and gold rings to religious ceremonies. He is so glamorous that he even appeared in a television advertisement. Another Dombivli-based priest has extended his brand to offer catering services. In South Indian Brahmin families, there is a tradition of visiting the "kula deivam" (family deity) after a marriage in the family. The temples of the family deities located in small towns are seldom maintained well as none of the younger generation of Brahmins is willing to take up the job of a village priest.
The dwindling population of Tamil Brahmins in villages in Tamil Nadu (and even in cities) is posing a major challenge. Prior to visiting these temples, you have to keep the priest informed well in advance! Interestingly, most cities have an acute shortage of priests and pujaris because the next generation don't necessarily want to follow the family tradition or devote time, beyond their school work for the rigor involved in learning all the Sanskrit rituals and mantras by rote. This means the price of having a priest for rituals soars during major festivals or the wedding season. Most of priests have four-wheelers and two-wheelers and during major festivals, most religious activity has to be timed according to the appointment given by the busy priest for the puja and rituals. It is this shortage that has removed the taboo on women conducting religious rituals.
On the flip side, the new generation is far less religious or inclined to follow rituals like thread changing ceremonies or the "sandhya vandanam" or performing the gayatri japa regularly.
Nikhil Kelkar a retired professional says, "I follow the principle of Sadguru Wamanrao Pai (who passed away recently). Man can shape his destiny if he has the will". Mumbai based professional C Vaidyanathan, a logistics expert, believes that self-confidence is the key. He adds, "No problem is insurmountable if you have the will to face it head on. If you are part of the problem, then the solution lies with you".
Lastly, readers will do well to recall a short story written by Munshi Premchand. Look at his foresight! An angry housewife throws something at a cat which has entered her kitchen. The cat is dead. There is a furore in the house. The priest is summoned and he orders that a golden statue of cat is made and donated to him to seek salvation from the sin of the cat-hatya. Even as deliberations and negotiations are on with the priest, there is a shriek from the kitchen. The cat is not dead-it has run away!
After spending some 38 years overseas the writer is seen making plans to return back to India. The 47th part of a series describing the unknown triumphs and travails of doing international business
The property market is a barometer for the economic conditions prevailing in the country, because it has always a dream of every person to own a house and call it and make it his/her own home. Land prices, for instance, in Washington DC area were increasing by the hour, if and where available; as is the universal habit with building contractors, they were buying small parcels, demolishing the old houses, and building multi-storied buildings, or townhouses with most modern facilities.
The rates varied from location to location. In some areas like Woodbridge, a few miles down the road on the Richmond Highway where very large and beautiful buildings were built just a few years earlier, was now coming down in market value. The enthusiasm was now on the back-burner, as the owners were facing difficulties in travelling back and forth to their places of work. Tenants were leaving the owners in the lurch and a lot of houses were being foreclosed by banks, which had lent money for buying them.
Our own house, which was also on the Richmond Highway side road, was in demand, all because one could be in Washington DC in less than fifteen minutes by metro or by car. As our son had made up his mind to return and settle down in Bangalore, we began to seriously consider a move likewise at the best opportunity. We began a search for a good real estate broker who could advice us.
We recalled how some seven years earlier we had met Nigel Willis, whose name was recommended by a neighbour, as the realtor who would be putting up a Chimney Wood Court townhouse on sale in a week or ten days from the time we met her, and gave us his phone number. We got in touch with him and after a brief chat, Nigel gave us good guidance, recommended his own friend Robert (Bob) McEl Roy, a real estate financier who was associated with the Bank of America, and based on his advice, we made a bid, which was accepted by the owner. We had happily lived in that townhouse for some seven years, and now, we planned to sell it at the best possible price.
In the meantime, as other houses in the community were also coming up for sale, we visited and it was my wife Neela who came up with recommendation of two other realtors, Curt McArtor and Patty & Maria. So, we asked Nigel, Curt and Patty Maria team to make the bids so that we could make a comparative study and decide as to who would be our agent to handle the sale. We chose Curt, whose recommendations and ideas were more practical and within our budget, because we needed to do so upgrading before the house went on sale. We did not want to spend too much money on beautification and modernization, as it was then difficult for the new owners to make changes, should they desire to do so.
I must marvel the professional way Curt and his team went about doing the planning. We had regular discussions, repair and repainting work, and finally a virtual photo session by a specialised team, ending with a beautiful brochure printed and presented to the prospective buyers. We had planned that the whole process should take something like 120 days at best. Before the deadline we had a few buyers but it was a military couple who made the final successful and acceptable offer. Prepared by lawyers on both sides, after a few last minute minor hiccups of repairs, the entire transaction took place in less than one hour in the lawyer's office, based on a simple document like our drivers' license! Just like they said in the meeting, “the entire amount will be transferred to your account by 2pm today, when you can get the confirmation from your bankers”. When we called Jim at the bank at 2.15, he confirmed the amount has been “credited to your account” but you can access it “only tomorrow”! Doing business like this is a satisfying experience!
Meanwhile, we had located a nearby residential complex with some 500 apartments, so that we could move in when the sale was completed. Since Gregory, the new buyer had already deposited the required amount in the escrow account; we had no problem in making our commitment to move into the rented apartment until our return.
We had decided to leave Washington by second week of October 2007; based on the long use of my Visa card and the ‘miles’ earned, I decided to use the same for getting one ticket from this, and buy the other through the agents, but coordinating the departure plans, so that we could leave together. We finally made a booking to leave on 19th October.
Leaving in October meant that we had spent some 38 years abroad. We had come to the Middle East in a couple of suitcases and now we had to leave behind a lot of stuff, mostly free and for charitable institutions and for the needy, but other personal items, down to the kitchenware, etc, had to return with us. There was nothing electrical that we could take, because of the different voltage systems applicable in both the countries, and even the table-top computers were given away to needy students, along with book shelves, other wood furniture, etc. Since the new rented place was a walkable distance from our Chimney Wood Court home, by using our cars we began the shift, as we moved into the final sale and transfer deed formalities.
We planned a holiday within the US and Canada before our departure and bid goodbye to our employers. In my own case, as luck would have it, the Sheraton Suites, which was a franchised property, managed by Starwood, was bought over by TPG group, a very large conglomerate with interest in various areas including hospitality industry. Their own staff was moving in to take over our jobs, and a lot of the staff was retained, but I was one of the few who had to go; in a way, earlier than planned. I had decided to give them notice in September, so that I could train somebody before leaving in October, but still take a vacation. Well, this was not to be.
In more ways than one, this was a blessing in disguise; I was able to systematically pack our belongings, prepare and keep detail recording of every single box that was to be sent back to India in a container; stay at home, cook the food, and dispose junk collected over years and deliver all those recyclable items for charity. Who would need heavy blankets, snow jackets and other similar items for use in India? We disposed off the first car, a Nissan Sentra. It was bought in no time, as the buyer could not believe her own eyes when we said that it was one owner-driven and accident-free! The other, a Protege Mazda, is the hardy vehicle we took on our trips to Atlantic City and drove it all the way to Ottawa to see the Niagara Falls on the way and spend some time with our niece there. Our son Anand had joined us for this purpose from Dubai and after a few days drove back to Alexandria.
In New York we went took the trolley and drove around all important places and the Lady of Liberty Statue, a gift from the French more than 200 years ago.
We took a few days rest, and took off again, but this time, all the way to stop over and spend two days in San Jose to be with our extended family, after which we took our flight to visit Las Vegas to spend two days in the MGM Grand. We met thousands of one-eyed jacks (slot machines), and saw the unbelievable sight of people gambling away their fortunes in the hope of making one!
In the end, we had the excitement, enjoyment and saw some nice shows. We did not return with loads of cash, but did not lose much either, as we had planned everything to the detail and stood by our own promises!
I think a couple of weeks later the clearing agents came and collected the entire consignment, and assured us the delivery in Bangalore in four to six weeks thereafter.
For the last few days stay before our actual departure we returned back and stayed at the Sheraton Suites to be with our friends with whom I had worked for some seven years. My wife had left her job at the Fort Belvoir a couple of months earlier, and so it was a sort of forced relaxation, but anxiety kept creeping in as what we would do when we get back in India.
I sold the Protege just a few days before we left the Sheraton and took the opportunity to visit the Shiva-Vishnu and Karthik temples in Maryland before we left for India.
Our Air France flight left Washington Dulles airport on time; it would stop at the Charles De Gaulle airport at Paris for a few hours when we would change aircraft for our onward journey to arrive the next morning in the early hours, after some 17 hours of flight!
Immediately after take-off, food was served along with drinks and table wine. I had a good meal, and dozed off to sleep, with my safety belt on...
(AK Ramdas has worked with the Engineering Export Promotion Council of the ministry of commerce and was associated with various committees of the Council. His international career took him to places like Beirut, Kuwait and Dubai at a time when these were small trading outposts. From being the advisor to exporters, he took over the mantle of a trader, travelled far and wide, and switched over to setting up garment factories and then worked in the US. He can be contacted at [email protected].)