Business correspondent model at near-zero cost may fail with deep negative impact

Winning bids for BC model is at such low prices that it will either fail or service levels will be pathetic. Let’s hope regulators would strictly monitor what is happening on the ground


Something strange is happening in the financial inclusion and business correspondent (BC) space in India. The Maharashtra BC bid was won by Vakrangee Finserv for 0.48% of the reserve price of the bid. If that surprised most people, FINO’s winning BC bid of 0.35% for Jharkhand and parts of Bihar started to make people wonder. The icing on the cake was that FINO’s bid at 0.19% for being the common Chhattisgarh BC . And before I could complete this article, the bid results for the Orissa cluster are out and it has been won at 0.11%. Wonder what the next winning BC bid would be? I certainly do not want to hazard a guess!

I am sure that the regulators are knowledgeable people and they understand what is going and what the implications for financial inclusion are. To me, as someone who has worked at the grass-roots for over two decades, I see “quality servicing” of the last mile as very critical for business correspondents appointed to promote financial inclusion. And quality servicing is indeed costly as I explain later in this article.

While the use of technology is well taken, it is often perhaps over-hyped. Just as ‘putting more money in the hands of people (through micro loans) could never remove poverty’, likewise, technology alone cannot solve the puzzle of financial inclusion (especially servicing the last mile). And as FINO’s CEO is said to have once remarked—“technology is 10%, rest are people and processes”. FINO becomes common Banking Correspondent for Jharkhand.  That being the case, I am not sure of what is the rationale behind the present (low) bidding trend?  

Let me give you an example of why servicing the last mile is costly. Take the case of the micro-insurance (MI) regulation (2005), a pioneering effort by the Insurance Regulatory and Development Authority (IRDA). Some years ago, prior to the MI legislation being enacted, insurance agents for low income policies were compensated on the basis of a hugely front loaded commission (about 30% in the 1st year and 6% or so in the 2nd and subsequent years—the exact numbers are less relevant here but the larger issue of inappropriate agent compensation is what needs to be noted). Thereafter, it was consistently explained to the IRDA that:

a)    To collect the 2nd, 3rd, and or remaining years premium, the work to be done by the agent is much higher for low income insurance than in case of normal insurance; and
b)    In fact, renewals are almost equivalent to a sale [in term service levels] for low income insurance policies as in every renewal year, low income people have to be sought out and convinced (again) to make the insurance renewal payment—as the (competing) demands for their limited money is rather high, availability of such money is quite low and priorities are very dynamically changing.

On that basis, the IRDA came up with a novel agent commission scheme (as part of its MI regulation) that recognized the (larger) effort of the agent in collecting renewals for low income insurance schemes. And as per this novel scheme, agents were compensated commensurate to their efforts in the subsequent years—20% on a yearly basis for all years instead of the 30% in 1st year and 6% in subsequent years. Thus, as per the MI regulation, IRDA went in for a consistent larger yearly commission rather than a front-loaded yearly commission for agents with regard to low income insurance policies.

In fact, when I compared regular rural low income policies (where agents get the front-loaded yearly commission) to low income insurance policies as per the MI regulation (where the agents get a consistent larger yearly commission) in a very small sample some years ago, I found that the renewal rates were by and large higher for latter. This is because the agents could be compensated on the basis of real effort rather than some notional numbers. And in the case of the former (regular rural insurance policies for low income people), it is the people who suffered and the companies who gained as agents (who were compensated poorly in subsequent years) did not do their work properly and the policies lapsed after the initial year. Likewise, a similar argument could be made here in terms of the recurring savings deposits—where by the BC who has bid low (and their agents) could cut corners and not provide appropriate service and thereby it is the customer who would be affected (either in terms of penal charges and/or getting lower interest overall). This is just an example and there are many such aspects that could wrong in the BC model because of shortcuts taken by BC agents.

That is why, just as IRDA then brought in the micro-insurance regulation which made agent commission commensurate with the level of effort across the years (from the start year to renewal years), the BC model also needs to recognize the consistent and rigorous effort required in servicing rural low income people and compensate BCs and agents accordingly. I wonder how that would be possible given the present decreasing trend towards lower and lower BC bids as noted above?

Overall, the arguments here are very simple:

a.    Servicing the last mile especially in rural areas (remote ones) is costly. Take districts like Narayanpur (with population density/km of 20), Bijapur (with population density/km of 39) or Dantewade (with population density/km of 59) in Chattisgarh. I have personally worked in many of these (and other districts) given in Table #1 below. With a low population density and the attendant (Maoist or other kinds) problems, physical servicing can indeed be a very arduous task. Therefore, the lower bid for Chhattisgarh (even if a couple of these low population density districts are excluded) as compared to Maharashtra or even Jharkhand does not make intuitive sense. This is especially true given the fact that Maharashtra will provide a much larger business base than Chhattisgarh and most certainly, it would be much easier and safer for BCs and their agents to perform their tasks in Maharashtra (on a relative basis).

Likewise, many districts in Dandakaranya (parts of Chhattisgarh, Orissa, Maharashtra and Andhra Pradesh) or Santhal Parganas (parts of Jharkhand and Bihar) are extremely difficult to service in terms of the physical terrain and the prevailing socio-economic/political situation. Apart from having low population densities (as shown in the table below), for many of these districts, the business base is also not likely to be very high. That being the case, the present (low) bidding trend for cash management seems rather peculiar—the Chhattisgarh bid was lower than Jharkhand which was lower than Maharashtra … something very odd indeed…


b.    A second issue is that low income rural/tribal people need a lot of quality time in terms of service provision by the BCs and /or their agents: a) to break the ice, gain peoples’ confidence and have social acceptability first; and b) then explain the various aspects related to the products and schemes and also make them use these services. Hence, any servicing by the BC and/or their agents mandatorily requires a good financial literacy component as well. This aspect of financial literacy is also a necessity now given what happened in Indian micro-finance over the last few years and is perhaps in keeping with RBI’s drive for greater financial literacy and transparency at  the grass-roots

c.    And given the above, without any doubt, BCs and their agents need to be compensated appropriately. The issue of compensation especially becomes critical with regard to agents (for example, 4,200 are to be appointed for Maharashtra by Vakrangee) . And if these agents are not compensated properly, they will either not work or they will cut corners (like further sub-contracting the BC work) and that could be a recipe for disaster. You will all surely remember how the (notorious) individual agents played an important part in the Indian micro-finance crisis in 2010, as outlined in the following Moneylife articles:

(i)    Implementation safeguards against notorious agents are an imperative for the proposed microfinance bill;
(ii)    How and why did microfinance agents become a part of the Indian microfinance business?;  
(iii)    Proposed Microfinance Bill has to look at the centre leader as a microfinance agent;
(iv)    Microfinance: Will seal of excellence and social performance management as yardsticks work?;
(v)    MFIN-NCAER study unearths agents’ role in microfinance, but does not find these middlemen in Chennai; and
(vi)    MFIN-NCAER study: Here’s the proof that microfinance agents are thriving in Tamil Nadu.

Therefore, it is imperative that BCs and their agents are compensated appropriately so that they do their work as envisaged and diligently. Any attempt to reduce agent compensation is likely to manifest itself as reduced customer engagement through subsequent sub-contracting (it could be done many times over). And let us not forget what happened in 2010 in Andhra Pradesh and elsewhere where untrained and unrelated people (including those with criminal records) entered the MFI rolls (formally/informally) and very nearly destroyed the whole fabric of rural and low income finance. Thus, as Dr KC Chakrabarty, deputy governor, Reserve Bank of India (RBI), has consistently argued, “Banks have to realise that for Business Correspondent (BC) model to succeed, the BCs, who are the first level of contact for customers, have to be compensated adequately so that they too see this as a business opportunity” - Financial Inclusion and Banks : Issues and Perspectives

d.    And in the light of the fact that BCs and/or their agents may take shortcuts to get the job done and given what happened in Indian microfinance in 2010, it is imperative that banks and BCs have a rigorous system of internal audits. Also, because of the pan-India scale and the sheer volume of money to be handled, the current BC model could indeed pose a systemic risk to the banking system and that is why such internal audits are even more critical. And that again will cost money and so, like a broken record, I am back to the same issue: Can Banks and BCs provide effective and transparent financial inclusion services, especially given the very low and decreasing bidding trend that is slowly but surely gaining ground in the present scenario?

Apparently, a senior regular commenting on the BC bidding said “What do we do? It is the companies that have chosen to bid so low.” That, however, is a lame excuse as the ramifications of the low cost bids are many and serious and the regulators cannot afford to look elsewhere as then the whole financial inclusion paradigm, as envisaged under the BC model could collapse. While others have pointed out that the bid amounts are for cash management only and BCs will be compensated separately for other activities, based on my own experience of work in over 540 districts in India, I would say that the numbers simply don’t add up. While, most certainly, the RFPs do provide for additional compensation to BCs for various tasks, I am not sure if there has been enough thought into whether these amounts are and will be sufficient: a) to provide quality service at the grass-roots; and b) for the overall model to actually work on the ground (given the above aspects). And without question, what is really lacking is transparency on how the BC model will actually work on the ground and meet all of its attendant costs in such physically demanding geographies?

To summarise, let me reemphasize that without quality servicing (which requires appropriate costing first of all) and rigorous internal audits, the BC model is doomed to fail and I hope that the powers that be look closely into the present structure of model, do a dispassionate analysis and make the necessary course corrections. Otherwise, yet another sincere effort at financial inclusion could well be lost even before the game begins…

(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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