BUSINESS CORRESPONDENTS SOFTEN THE PAIN OF PANDEMIC

Financial inclusion is increasingly getting a rural flavour – and opening up new business windows .The COVID-19 pandemic has put a flashlight again on the rural segment as a potential avenue of business for banks. With the workforce leaving congested cities and heading back to their upcountry homes, the role of banking correspondents (BC) is emerging as a lucrative option for many rural traders.  

As part of the relief measures for COVID-19, more than 300 million poor people in India received direct cash assistance under PM Garib Kalyan Yojana. In addition farmers have received cash transfer under PM- KISAN launched last year. Business Correspondents are serving as the key conduits for delivery of this relief assistance to beneficiaries. They are expected to be the key points in the emerging financial ecosystem post covid-19.

Since BCs constitute the first -mile connect   on the ground that is both empathetic and efficient and are equipped with digital tools, they are well positioned to source small-ticket loans also.  In situations where credit scores do not truly offers solutions for potential customers such as farmers and street-vendors with unsteady incomes, it is imperative to rely on human touch points that understand the customer’s  cash flow and solvability, has a transactional relationship, and enough leverage to ensure repayments. . In all form of collateral-free digital lending what is critical is ‘trust’, and it is here that BC agents fill the brief.

India has traditionally been an under-banked country, with a banking system that doesn’t work for the poor and hard-to-serve populations. One key reason for this is the fact that most transactions are conducted in cash, and “brick and mortar” outlets make cash-based services difficult and expensive to serve.

For years, India’s banking system struggled to reach these individuals with products that can significantly improve their financial lives and integrate them into the mainstream financial system. But the global revolution in digital payments has created new opportunities to connect these households with affordable, convenient and reliable financial tools. Ground-breaking channels and new instruments are allowing financial services to grow and broaden their reach. The business correspondent (BC) model — has shown promise by bringing a network of tech-enabled banking agents into underserved communities.

It is one of the many channels that have enabled banks to reach remote customers. It is also known as agent banking or correspondent banking. It involves the use of technology, such as payment cards or mobile phones, to identify customers and record transactions electronically and, in some cases, to allow customers to initiate transactions remotely. The entire framework hinges on technology-enabled remote banking logged into the system in a brick-and-mortar bank.

A banking agent in a rural or semi-urban locality would require a minimum qualification of having a basic certification and cleared matriculation. For a retail banking agent, they should have a permanent establishment under their name.

The model comprises essentially of the following elements:

∙Use of dedicated and exclusive or non-dedicated third-party outlets, that act as agents for financial services providers and that enable customers to perform functions that require their physical presence, such as cash handling and customer due diligence for various banking services.

∙Use of technology such as payment cards or mobile phones to identify customers and record transactions electronically and, in some cases, to allow customers to initiate transactions remotely.

∙Provision of at least basic cash deposit and withdrawal in addition to transactional or payment services.

The model is a distribution channel strategy used for delivering financial services to the unbanked — those not having easy access to traditional banking channels — without relying on bank branches. The services can all be conducted on low-cost mobile devices and all transactions can be conducted online.

 Equipped with smartphones, tablets, or laptops and biometric scanners, they provide basic banking services and financial access for women, self-help groups and many others in some 20,000 difficult-to-reach villages in rural India. In 2015-16, a female BC model was promoted by the National Rural Livelihoods Mission (NRLM), with support from the World Bank, financed the National Rural Livelihoods Project (NRLP), these agents are known colloquially as bank sakhis,  . Bank sakhi – literally “female banker friend” in Hindi – is an informal term for female banking agents.  It has helped in reducing the gender gap in access to financial services and provided a regular income stream for local women who were trained and employed.

The business correspondent model has turned out to be a powerful and revolutionary vehicle for providing financial services reliably and securely to the unbanked and the vulnerable (those without easy access to traditional banking channels due to its “feet on street” style of doorstep banking). Rather than using bank branches and their own field officers, the bank hires agents to offer banking services. Given its greater geographical reach and speed, the channel enhances the convenience and outreach of affordable financial services to an underserved segment of the population in a very cost-efficient manner.

It is far from clear that banks have cracked the dynamics underlying the business correspondent model. Most BCs have not moved beyond remittances and deposits. There are two ways to make the agent model more sustainable — by adopting varied agent models, ranging from full-time “wealth advisors” to part-time “lite” agents.

First, players can diversify and expand the portfolio of products sold by agents to include higher-margin products such as loans or investment products. Some BCs also serve as agents for mutual fund insurance companies or sell small savings instruments, as this offers a fair amount of commission.

Second, players can pick agents who are involved in businesses other than financial services, so they are not “dedicated”, that is, not solely dependent on the financial services businesses for their income. They can focus on simple transactions, and do not remain solely dependent on the BC business for revenue. (Currently, almost two-thirds of BCs in India are dedicated, full-time agents, far higher than in other countries such as Kenya, Pakistan, or Bangladesh.)

Further, banks can diversify and expand the portfolio of products and offerings sold through agents to include higher-margin products. Some banks have adopted a Fixed-Point BC Model wherein the BC also provides other digital-enabled services like printing of land record certificates, registers of births/deaths, and other such government-services which help to bring in additional income, making the BC operations viable. BCs having a good customer base can use their existing infrastructure for building auxiliary businesses, and financial services have proved to be the most promising in developing economies. This would help agents increase their earnings and counteract the effects of high operating costs.

There is a strong will at the policy level, a lot of good ideas, and a robust demand for services, but not the desired motivation at the ground level to make the model gain pace. There is a need for collaborative synergy and all constraints — demand-side, supply-side and the policy side — have to be simultaneously addressed.

Meaningful financial inclusion will be possible in India only if BCs provide quality services with transparency and dignity to the country’s underserved populations. But BCs need financial stability for themselves before they can be expected to extend financial inclusion to the unbanked and serve a new generation of account holders. With financial inclusion growing at a sprint pace, the BC model has enabled banks to separate themselves from their legacy business models and move into the unproven territory.

Today banks are the most trusted custodians of our liquid assets. The greatest asset banks have is a bond of trust with their customers that will be difficult to break by non-banks and neo-banks. The success of the BC model lies in importing new technologies and algorithms into legacy institutions. This involves substantial costs. What is holding banks back? Could be legacy core systems or legacy mindsets? Whatever it is, it can prove toxic for banks in the long run. The model may not have a viable short-term business case but will certainly help banks outpace their peers in the long term. Banks should view the model with a distant lens.

We are already seeing the uberisation of banking where micro banks launch to satisfy narrow use cases, as witnessed by the success and proliferation of small finance banks and payment banks (including the India Post Payment Bank) — these entities do not have the financial might of the large banks which is so necessary for driving financial inclusion in the remote crannies of India. Banks will have to do a lot of serious thinking on the economics of the BC model. There are issues that can be resolved if only banks reconfigure their approach and seriously address the transitional frictions. The BC model has the potential to help banks outpace their peers.

Banks will not be able to unlock opportunity through just incremental actions and will have to shift their legacy mindsets. They will need to invest for the long term and be prepared to work in new ways, including through partnerships with other types of firms.