DFIs and banks, including SIDBI, have miserably failed in their due diligence of NBFC MFIs, and expecting them to do this with regard to the business correspondent model is somewhat naïve. The RBI should undertake an examination of the grass-roots realities before implementing the new initiatives for financial inclusion

Within the past one year, the Reserve Bank of India (RBI) has brought forth many initiatives with regard to financial inclusion and one of the most important changes is "permitting for-profit companies (corporates) to act as business correspondents for banks" with a view to enhance the cause of financial inclusionⁱ . There are several lessons for the RBI and other stakeholders from the 2010 Indian microfinance crisis on this aspect. It is hoped that the RBI would look at these lessons and revise its decisions accordingly.

The past few months have shown what havoc the inability to regulate and/or supervise can do in a field like microfinance and/or financial inclusion. The proliferation of the decentralised MFI model, using different kinds of agentsⁱⁱ  through informal outsourcing arrangements, is perhaps responsible for much of the microfinance mess in India currently. That said, the RBI must therefore be very careful in pushing through initiatives [like using corporates as business correspondents (BCs)] that it perhaps does not have the wherewithal to supervise and/or monitorⁱⁱⁱ , especially on the ground. And for the record, DFIs and banks, including SIDBI and others, have miserably failed in their due diligence of NBFC MFIs, and expecting them to do this with regard to the business correspondent model is somewhat naïve. Their supervisory systems are very rudimentary and DFIs and many banks have got used to the lazy approach in promoting financial inclusion, which is to piggyback on MFIs, rather than to do the hard work by themselves.

The lessons from the present (field level) failure of microfinance NBFC supervision in India continues to loom large and the RBI must really ponder on (if and) whether such new initiatives (like using corporates as business correspondents) are indeed required and worth the effort in the quest for financial inclusion. What I am arguing for here is an unbiased and objective evaluation of the pros and cons in "having corporates as business correspondents (BCs)", especially in the light of the present microfinance and financial inclusion field experiences. Everything seems fine on paper, but when you visit the field and look at grass-roots realities, the problems and risks are totally different. I sincerely hope that the RBI does initiate such an exercise before facilitating large-scale implementation of these and other new initiatives for financial inclusion.

While proponents may claim many advantages with using corporates as business correspondents (BCs), the risks are many and plenty too and I attempt to outline some of these here for the benefit of the RBI^iv :

First of all, there are huge conflicts of interest because a strong "corporate business correspondent (BC)-bank tie up" could push unnecessary products onto the (vulnerable) people in the garb of financial inclusion. Cross-selling of products is a huge aspect that cannot and should not be discounted and there are numerous examples from the India experience with regard to financial services.

Second, corporates tend to adopt models similar to the decentralised model that many of the NBFC MFIs are currently using and that is fraught with problems as has been pointed out with clear evidence earlier. If any of the regulators/supervisors were to travel deep within Tamil Nadu, Andhra Pradesh, Karnataka, West Bengal and Orissa, they would see what havoc "informal" outsourced microfinance agents, solely focused on growth and profit, have (are) caused (causing) on the ground. Therefore, I am not sure that there is a good case for the  'corporate business correspondent' model as that could result in formalising these informal microfinance agents who are sure to be picked up by the corporate who lacks the last-mile connectivity and familiarity with microfinance/financial inclusion. That could prove disastrous and I hope that this risk is weighed carefully by the regulators/supervisors.

Third, with any initiative, we need to enquire into the purpose behind it. I am not sure that the outlook on using corporate as business correspondents (BCs) is all that clear. Financial inclusion is a must and a fundamental right, but the methods used to achieve financial inclusion also need to be carefully considered as, otherwise, the efforts may turn out to be counterproductive. The crisis in Andhra Pradesh and the unfolding problems in a few other states are a reminder of what can happen when the methods go wrong.

Fourth, and herein lies the primary risk with a corporate. If to include someone, I provide them access to a loan, but with the rider that they also buy my (group companies') fertiliser or any other product, then I am not sure that this is fair financial inclusion. The same argument can be extended when a corporate's business correspondent makes a loan offer on the condition that the farmer receiving the loan has to sell back his/her produce to the corporate at a pre-agreed (perhaps unfair) price.

These are just a few of the numerous examples from the financial inclusion space, with regard to literate (but highly vulnerable) people who have been forced to buy products that they did not need in the first place. Many of them even considered approaching the banking ombudsman, but did not do so because of the high perceived transactions cost in doing this. And if this is the case for literate and knowledgeable people, who are used to reading the fine print, imagine what can happen to real vulnerable people at the grass roots.

Fifth, the lessons from the personal loan saga of 2005-06-07 are still fresh in the mind, where many customers did not receive their agreements and were not even aware of the loan terms and conditions (usually in fine print, and/or filled in subsequent to getting the signatures and sent much later to the customer, etc). This happened primarily because the (corporate) agents of banks were solely focused on quick indiscriminate selling of personal loans to people to make huge profits. Today, many banks have almost withdrawn from the personal loan market due to the high levels of delinquency.

I really hope that the concerned regulators/supervisors learn lessons from the ongoing microfinance crisis involving NBFCs, the past personal-loan saga of 2005-06-07 involving (corporate) agents of banks and other such failures in the larger financial sector in India. While the case for financial inclusion is always a sound one, the risks in methods employed for financial inclusion must also be carefully weighed and addressed, as otherwise all our efforts could turn out to be counterproductive.

Last, but not the least, when we deal with very vulnerable people, let us be extra careful and try to protect them from excesses and abusive practices that are so widely prevalent in microfinance as well as the larger financial sector in India. The global financial crisis and the current Indian microfinance crisis are still very fresh in memory.

While financial inclusion is a fundamental right and a noble cause, protecting clients is equally, if not more important. I hope that this critical lesson for regulators/supervisors is dovetailed into proper and rigorous analysis in the present as well as future initiatives for furthering financial inclusion, including the use of corporates as business correspondents.

  ⁱPlease see RBI circular on this -http://www.rbi.org.in/scripts/BS_CircularIndexDisplay.aspx?Id=6017 
  ⁱⁱPlease see Moneylife articles on agents - http://www.moneylife.in/article/how-and-why-did-microfinance-agents-become-a-part-of-the-indian-microfinance-business/19301.html and
http://www.moneylife.in/article/implementation-safeguards-against-notorious-agents-are-an-imperative-for-the-proposed-microfinance-bill/19017.html
  ⁱⁱⁱThis is a genuine concern and the intention is not to offend any stakeholder including The Central Bank. I hope my views are taken in the right spirit! Thanks
  ^ivWhile a recent paper sponsored by the Bill and Melinda Gates Foundation cites some of the serious risks in Chapter 9, I am unable to understand the easy manner in which they explain away some of these very serious risks. I am also deeply concerned that the risks have been more mentioned, rather than dealt with in a comprehensive fashion.

(The writer has over two decades of grassroots and institutional experience in rural finance, MSME development, agriculture and rural livelihood systems, rural/urban development and urban poverty alleviation/governance. He has worked extensively in Asia, Africa, North America and Europe with a wide range of stakeholders, from the private sector and academia to governments.)