The business correspondent model offers a unique possibility for mainstream low-income financial services. But recent experience has shown that there are huge risks as well, which is why it must be regulated carefully
The Reserve Bank of India (RBI) has facilitated the adoption of a very important strategy to try and achieve financial inclusion, that is to use business correspondentsi to serve and service excluded segments of the population. While this is yet to take off in any serious manner for various reasons, given the current microfinance scenario, this model may be worth exploring in greater depth, because it offers a unique possibility to mainstream low-income financial services, with banks as the principals and microfinance institutions (MFIs)/other forms of institutions as agents.
Under the business correspondent model, banks can "outsource" certain activities to their business correspondents. According to the RBI circulars in place, "The scope of activities may include (i) identification of borrowers, (ii) collection and preliminary processing of loan applications, including verification of primary information/data, (iii) creating awareness about savings and other products and education and advice on managing money and debt counseling, (iv) processing and submission of applications to banks, (v) promoting, nurturing and monitoring of self-help groups/joint liability groups/credit groups/others, (vi) post-sanction monitoring, (vii) follow-up for recovery, (viii) disbursal of small value credit, (ix) recovery of principal/collection of interest, (x) collection of small-value deposits, (xi) sale of micro insurance/ mutual fund products/ pension products/ other third party products, and (xii) receipt and delivery of small value remittances/ other payment instruments."ii
Thus, while the idea of using business correspondents (BCs) is indeed appealing because of various benefits BCs may seem to provide, there are huge risks as well, given the activities that can be outsourced. This is especially true in the existing environment in India, where there are many controversies with regard to the kind of financial services provided to low-income people, the type of service delivery methods employed, the abnormal prices charged by the informally outsourced entities (such as centre leaders and others acting as microfinance agents who are in many ways similar to BCsiii).
In fact, the informal outsourcing of loans disbursal and \'collecting back the loans\' has led to the proliferation of \'microfinance recovery agents\' who have caused tremendous hardships for clients in Andhra Pradesh and other states in the past few years! As noted in previous Moneylife articles, the new breed of microfinance agents, who functioned almost like BCs, certainly seemed to have created havoc in the lives of low-income people. And these experiences certainly have strong implications for the use of the BC model that the RBI is advocating!
That said, what then are the regulatory implications for the use of the business correspondent model in India, and especially in the context of the 2010 microfinance crisis?
Most importantly, it is imperative for the RBI to ensure that banks have an appropriate due diligence process in selecting their business correspondents (BCs). The RBI must likewise ensure that banks avoid appointing all and sundry as their business correspondents, just to meet any internal or policy targets that may be imposed on them from time to time. Further, such due diligence processes must not just exist on paper, but rather they must be implemented in real time at the banks, and this is something that the RBI must ensure by its supervisory function through the department of banking supervision.
That DFIs like SIDBI and the banks failed miserably to see the unethical practices in Indian microfinance that ultimately led to the 2010 microfinance crisis, is something that we should not forget at this juncture. While we tend to blame MFIs, equity investors and/or regulators largely for what happened in Andhra Pradesh in 2010, what about the role of commercial banks and DFIs like SIDBI? Were they not responsible in anyway? There is no doubt that without their (SIDBI and commercial bank) funds and lazy attitude to supervision of priority sector loans, much of the multiple, over- and ghost-lending by MFIs, and strong-arm recovery practices witnessed in the past few years would not have happened. Let us be absolutely clear about that! And what is scary is that neither SIDBI nor the commercial banks seem to have learnt from the 2010 microfinance crisis, to improve the supervision systems on the ground with regard to priority sector lending. Many continue to be in a denial mode, blaming the Andhra Pradesh government, when in reality they were hugely responsible for much of the mess in Indian microfinance. This is to set the record straight!
Therefore, the RBI, while encouraging the use of the business correspondent model, must also ensure that the banks employ appropriate (due diligence) criteria 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 business correspondent. That is very critical.
Further, the RBI must place emphasis on ensuring that business correspondents appointed by the banks are sensitive to the needs and situations of low-income clients and do not harass/oppress them in terms of over-lending and use of strong-arm recovery tactics. Thus, the RBI must also enable the concerned banks to put in place \'adequate client protection measures\' in the entire scheme of "outsourcing" their activities to BCs. And without question, RBI\'s supervision including on-site examination of banks must verify the implementation of these in real time.
OK, given that due diligence of business correspondents by banks is critical, what should it typically include? In simple terms, such due diligence must include assessment with regard to (this is not exhaustive by any means):
a. Commitment to low-income people
Whether the business correspondent is interested in delivering last-mile financial services to low-income people in an ethical and efficient manner? This essentially deals with the real commitment and sensitivity of the business correspondent to low-income people.
b. Understanding financial inclusion and its objectives
Whether the business correspondent understands (and can meet) the objectives of the bank in performing the specified activities related to financial inclusion? The broad objective should be financial inclusion and creating financial access for low-income people. It must not degenerate into money-lending under any circumstances, as we witnessed in Andhra Pradesh in the past few years.
c. Capacity to perform outsourced activities
Whether the business correspondent has the governance, financial soundness and managerial capability to successfully perform the various (outsourced) roles and activities in a fair, ethical and efficient manner? This must include a proper assessment of the business correspondent to effectively carry out loan origination, disbursement and collection activities.
d. Consideration of special needs
Whether the business correspondent has the reach, resources and capacity to meet any special needs of low-income and excluded clients of the bank? In case the bank has any special needs, such as servicing geographically dispersed/ disadvantaged clientele and/ or performing any special activities for them, the reach, capacity and resources of the business correspondents must specifically be assessed with regard to such activities, and they should not be outsourced to BCs who do not meet these criteria. That is critical, and making the assumption that the BCs will over time acquire the expertise has, many a time, proved costly in similar situations.
Two other aspects require consideration while appointing business correspondents. (a) If a business correspondent fails, or is otherwise unable to perform the outsourced activity, it may be costly or problematic (for the bank) to find alternative solutions. Thus, transition costs and potential business disruptions should also be considered, as also the larger (regulatory and other) implications of not being able to complete such activities. (b) Additional concerns may exist if the BCs are to be appointed to service remote and/ or communally sensitive areas (like Nizamabadiv in Andhra Pradesh is one such example). In such areas, in case of an emergency or extraordinary situation, the bank may find it more difficult to implement appropriate responses in a timely fashion. Therefore, the bank may also need to assess the local or special conditions that might adversely impact the BC\'s ability to perform the various (outsourced) tasks effectively for the bank.
While these are some starting guidelines to assess business correspondents and choose those who meet the various criteria in terms of resources, capacity, goal congruence and other aspects, the key point that should not be missed is the aspect of banks developing a proper due diligence framework for business correspondents and also implementing it on the ground. Banks have been very naïve in choosing their partners in Indian microfinance and have consequently found themselves in rather precarious situations. Therefore, it is sincerely hoped that the RBI will ensure that banks follow a proper process of selecting BCs, so that there is a win-win situation for all stakeholders concerned.
iPlease see following RBI circular - http://www.rbi.org.in/scripts/BS_CircularIndexDisplay.aspx?Id=6017
iiRBI circular given above and other circulars, www.rbi.org.in
iiiPlease see following Moneylife articles:
The marketing margin is to cover for cost of employees involved in marketing and sales, related infrastructure and all legal and operational expenses that occur beyond the delivery point as defined in the PSC, RIL executive director PMS Prasad wrote in his letter to oil secretary GC Chaturvedi
New Delhi: Reliance Industries (RIL) has strongly defended its decision to impose a marketing margin over-and-above the government-approved sale price for KG-D6 gas, saying the levy was to cover for the risk and cost associated with marketing of gas, reports PTI.
Responding to upstream oil and gas production regulator Directorate General of Hydrocarbons (DGH) reopening the issue, RIL executive director PMS Prasad on 24th August wrote to oil secretary GC Chaturvedi saying the $0.135 per million metric British thermal units (mmBtu) marketing margin is a cost levied beyond the gas delivery flange and as such, is not regulated by the Production Sharing Contract (PSC).
The PSC governs fixation of price of gas at the 'delivery point', the point at which an upstream operator transfers custody of gas to a marketing and transportation agency. That point for eastern offshore KG-D6 gas is Kakinada, in Andhra Pradesh, and the government had in 2007 approved a gas price of $4.205 per mmBtu at the delivery point.
But the DGH wants the $0.135 per mmBtu levy added to the gas sale price and profits for RIL and the government to be calculated thereafter. Currently, profits are calculated by deducting capital and the operating cost from the gas sales price only.
Mr Prasad, however, said the PSC does not provide for such a move, as the marketing and transportation cost cannot be recovered from revenues earned from sale of oil or gas.
Section 3.2 (iii) of the PSC states that "costs of marketing or transportation of petroleum beyond the delivery point are not cost-recoverable. Both marketing and transport costs are clearly recognised as being distinct from the sale price at the delivery point and kept outside the PSC for purposes of cost recovery," he wrote.
He said any attempt to include the margin as part of the price of gas approved under the PSC "will have the effect of making all marketing costs as well as ensuing risks and liabilities cost-recoverable under the PSC".
Moreover, such inclusion can be done only after amendment of the present PSC.
The marketing margin is to cover for cost of employees involved in marketing and sales, related infrastructure and all legal and operational expenses that occur beyond the delivery point, as defined in the PSC.
It also covers the credit risk of buyers, litigation costs and penalties such as ship-or-pay reimbursement to transporters and levies for supplying off-spec gas.
"Any costs associated with these risks are at the moment not chargeable to the PSC for the purpose of cost-recovery and are not being claimed as such by" RIL, he added.
He pointed to state-run ONGC and GAIL are charging a marketing margin on government-administered gas, called APM gas, as well as on the produce from the Panna/Mukta and Tapti fields.
Experts also said the movement in the CPI on a month-on-month basis was too small to make any significant statistical suggestions. However, with the passage of the time, the government expects the CPI to supersede the Wholesale Price Index as the benchmark for measurement inflation
New Delhi: Expensive food and clothing pushed up the Consumer Price Index (CPI) in India by 1.18% in August from the previous month, but experts said too much should not be read into the numbers, as the data on retail prices is yet to stabilise, reports PTI.
The CPI based on retail prices stood at 111.7 points in August, compared to 110.4 points in July, as per data released by the government on Monday.
At the all-India level, the CPI for 'food, beverages and tobacco' went up by 1.27% to 111.7 points in August from 110.3 points in the previous month.
The main increase was seen in the prices of vegetables, with the index rising by 4.61% month-on-month to 113.4 points, while the indices for milk and milk products and fruits went up by over 1% each.
Similarly, the index for oils and fats went up by 1.27% to 119.5 points.
Prices in the 'fuel and light' segment rose by 0.69% in August in relation to the previous month, with the index inching up to 116.4 points in August from 115.6 points in July.
In August, the CPI for 'clothing, bedding and footwear' stood at 117.7 points on an all-India basis, as against 116.4 points in July, an increase of 1.12%.
The index for 'housing' was up 0.65% month-on- month at 107.6 points in August, up from 106.9 points in July.
This is the third month that housing prices have been factored into the CPI data. However, the data was compiled only for urban areas.
The government had earlier said that "house rent is negligible for the rural areas" and as such, only urban areas have been taken into account for the index on housing.
The price of miscellaneous items rose by 1.19% in August from July, as per the CPI data, with the index for this segment rising to 110.3 points on a countrywide basis in the month under review from 109 points in the previous month.
Experts, however, said the index cannot be used yet as a measurement of retail inflation.
"We cannot deduce much from the monthly CPI data. It needs time to stabilise," Crisil chief economist DK Joshi said.
He said inflation based on retail prices would only be ready for calculation from next year.
"The government began releasing the nationwide CPI from January this year. It will need at one full year before inflation data could be measured," Mr Joshi said.
The general index for rural and urban consumers stood at 113.1 points and 109.8 points, respectively, in August.
In July, they were recorded at 111.6 points and 108.9 points, respectively, for rural and urban consumers.
Meanwhile, the overall June CPI reading has been maintained at the provisional estimate of 108.8 points.
Experts also said the movement in the CPI on a month-on-month basis was too small to make any significant statistical suggestions.
The new nationwide CPI launched earlier this year was introduced to reflect the actual movement of prices at the micro-level and help policymakers like the RBI in better framing of decisions.
With the passage of the time, the government expects it to supersede the Wholesale Price Index (WPI) as the benchmark for measurement inflation.
Inflation, as measured by the WPI, stood at 9.78% in August.
At the time of unveiling the new CPI earlier this year, the government had said it would continue the practice of giving the figures in the present form without quoting the inflation rate for one year.
These consumer indices include five major groups-food, beverages and tobacco; fuel and light; housing; clothing, bedding and footwear; and miscellaneous items.