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.” (http://socialjusticehry.nic.in/proceedings.pdf)
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.)
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