CS Vinita Nair, Debolina Banerjee
Background
The concept of “Business Correspondents” can be dated back to 2006 when a significant step in this direction was taken by way of issue of RBI guidelines in January 2006 (2006 guidelines)[1] for engagement of Business Correspondents by banks for providing banking and financial services. Since then, the regulatory framework for the Business Correspondent model has been progressively honed to ensure that consumer protection is not compromised while facilitating enhanced outreach of banking services.
Business Correspondents- Meaning and Scope of activities
Business Correspondents (BCs) are basically retail agents engaged by banks for providing banking services at locations other than a bank branch/ ATM. In simpler terms BCs enable a bank to expand its outreach and offer limited range of banking services at low cost. They are therefore an integral part of a business strategy for achieving greater financial inclusion.
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 counselling; (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.
The activities to be undertaken by the BCs would be within the normal course of the bank’s banking business, but conducted through the BCs at places other than the bank premises/ATMs
Eligible entities to act as BCs
Eligible entities in the 2006 guidelines that could act as BC included registered NBFCs not accepting public deposits. However, the Committee on financial inclusion under the Chairmanship of Dr. C. Rangarajan in their discussion paper[2] examined the inclusion of NBFC as eligible entity to act as BC, extract whereof is reproduced hereunder:
“Should NBFCs be allowed to act as BCs:
17. Another related issue for consideration is the case for allowing non banking financial companies (NBFCs), especially micro finance companies to act as business correspondents of banks. The pros and cons of this are discussed below:
Pros
- The Committee on Financial Inclusion (Chairman: Dr C. Rangarajan) had observed that NBFCs engaged in micro finance could be recognized as BCs of banks for providing only savings and remittance services. The rationale is that in case of such services there will not be any conflict of interest as NBFCs are not permitted to undertake such business.
- NBFCs have their own wide network of outlets and franchisees who are already trained in and have experience of providing all financial services such as loan , mutual fund and insurance products. They have the manpower, knowledge, skill and the requisite infrastructure to work as BC for Banks. There could be significant synergies if such networks are leveraged upon.
- NBFCs engaged in micro finance already have a large number of borrower clients who today do not have easy access to bank accounts, payments system, remittance services and insured deposits and if engaged as BCs can further the objective of financial inclusion.
Cons
- In case of deposit taking NBFCs there is a conflict of interest as they are engaged in the same business.
- If non deposit taking NBFCs are engaged only for deposit products and payments / remittance services, the objective of providing affordable credit as a major component of financial inclusion could be defeated. It is reported that currently NBFC –MFIs charge between 20 and 35 per cent per annum for micro loans which is much more than what banks charge for small loans.
- There could be conflict of interest if the NBFC provides its own loan product as principal and bank’s loan product as agent. There are also risks of co-mingling of funds.
- NBFCs mostly offer services through field officers and the branches are removed from the location where transactions take place closer to the customer. . Hence using them as retail outlets would be impractical.
Subsequently, in the revised guidelines on BC rolled out in 2010[3], NBFCs were excluded from the list of eligible entities/ individuals that could act as BC. The List of eligible entites/ individuals appeared as under:
“2. Eligible individuals/entities
The banks may engage the following individuals/entities as BC.
i) Individuals like retired bank employees, retired teachers, retired government employees and ex-servicemen, individual owners of kirana / medical /Fair Price shops, individual Public Call Office (PCO) operators, agents of Small Savings schemes of Government of India/Insurance Companies, individuals who own Petrol Pumps, authorized functionaries of well run Self Help Groups (SHGs) which are linked to banks, any other individual including those operating Common Service Centres (CSCs);
ii) NGOs/ MFIs set up under Societies/ Trust Acts and Section 25 Companies ;
iii) Cooperative Societies registered under Mutually Aided Cooperative Societies Acts/ Cooperative Societies Acts of States/Multi State Cooperative Societies Act;
iv) Post Offices; and
v) Companies registered under the Indian Companies Act, 1956 with large and widespread retail outlets, excluding Non Banking Financial Companies (NBFCs).
Nachiket Mor Committee.
A major breakthrough in the concept of BCs came into action when RBI on September, 2013 had set up a “Committee on Comprehensive Financial Services for Small Businesses and Low-Income Households’’[4], under the Chairmanship of Dr. Nachiket Mor. This committee popularly known as the Nachiket Mor Committee recommended sweeping changes in the banking structure of India. The committee highlightened the fact that “close to 90 per cent. of small businesses have no connection with formal financial institutions and 60 per cent. of the rural and urban population don’t have a functional bank account.” NBFCs can be considered as the best medium for achieving more financial inclusion.
Most importantly it suggested setting up of specialized banks to cater to low income households and also to enable widespread reach of the banking services through its agents. Though there may still be rising concerns about co-mingling of deposits raised through its BC activity, yet the Committee was of the view that this can be effectively handled through technology driven solutions.
Present Circular.
The RBI vide its circular RBI/2013-14/653 DBOD.No.BAPD.BC.122/22.01.009/2013-14 dated 24th June, 2014[5] and giving due consideration to the First Bi- Monthly Monetary Policy Statement 2014-15 wherein it was expressly stated that the recommendations of the Nachiket Mor Committee on the enlargement of the eligible entities as BCs was under review. In tune with the recommendations the RBI thereby amends the existing guidelines on the BC models. A bird’s eye view of the amendments made by RBI is as under:
i. Eligible individuals/entities
The services of Non- Deposit taking NBFCs (ND-NBFC) can be engaged by banks as business correspondents. However such engagement is subject to the following conditions:
a) There should not be any co-mingling of bank funds and those raised as BC activity;
b) The existence of a contractual arrangement between the bank and such NBFCs should be in place to address effectively any cases of conflicts;
c) Such NBFCs should not adopt any restrictive practices such as offering savings or remittance functions only to its own customers.
d) There should not be any forced bundling of services between the bank and such NBFCs.
II. Distance Criteria
Vide RBI Circular on 28th September,2010 wherein it was stated that to ensure adequate supervision over the operations and activities of the retail outlet/sub-agent of BCs by banks, every retail outlet/sub-agent of BC is required to be attached to and be under the oversight of a specific bank branch designated as the base branch. Moreover the distance between the place of business of a retail outlet/sub-agent of BC and the base branch should ordinarily not exceed 30 kms in rural, semi-urban and urban areas and 5 kms in metropolitan centers.
With regard to the same RBI vide the present circular and to ensure operational flexibility to banks and in light of technological developments in the banking sector has reviewed to remove the condition regarding the distance criteria between the place of business of a retail outet/sub-agent of BC and the base branch. The RBI has left it to the discretion of the banks to modify extant distance criteria while formulating the board-approved policy for engaging BCs keeping in mind the objectives of adequate oversight of the BCs as well as provision of services to the customers.
Conclusion.
Thus the recommendations of the Nachiket Mor Committee has finally been put to action by RBI to hasten the financial inclusion by extension of Banking Services. This has brought forth a new era of operations for the NBFCs.
[The above post is contributed by CS Vinita Nair and Debolina Banerjee at Vinod Kothari & Co. They can be contacted at vinita@vinodkothari.com and mt@vinodkothari.com respectively]
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[1] http://www.rbi.org.in/Scripts/BS_CircularIndexDisplay.aspx?Id=2718
[2] http://rbi.org.in/scripts/bs_viewcontent.aspx?Id=2234
[3] http://rbi.org.in/scripts/NotificationUser.aspx?Id=6017&Mode=0
[4] http://rbidocs.rbi.org.in/rdocs/PublicationReport/Pdfs/CFS070114RFL.pdf
[5] http://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=8955&Mode=0
Dear Sir
Please tell, how to become a business corrspndent for money transfer services bc for banks and where to apply. Plz suggest
Thanks