Financial inclusion is a process of providing access to appropriate banking and financial products and services to the vulnerable groups in particular such as weaker sections, low income groups at an affordable cost. In simple terms bringing vast sections of society who were excluded from availing banking services in to the folds of formal banking. In business angle, it is tapping of untapped business opportunities in way of creation of strong base and foundation for good volume of low cost deposits for the bank in the long run. From peoples point of view getting a banking facility is costly, hence if such service available at an affordable cost and available at suitable location most of the people will start doing banking.
It is an obligation from RBI also to implement FI in the country either by establishing brick and mortar branches or in any other way, but the service must reach.
So in this paper, an attempt made to discuss different issues faced by banks while scaling up BC model and strategies for making it a success.
Let us discuss:
During 2008, based on the recommendations of Rangarajan committee RBI has advised banks to establish a road map for implementation of FI, either by establishing brick and mortar branch or BC/Kiosk point in villages with population >2000, <2000, over a period of time.
The focus of financial inclusion is to ensure coverage of each household in the country under banking umbrella by providing banking services such as
v Opening Saving account
v Micro credit
v RuPay card
v Aadhar based services
v Financial literacy
v Empowerment of women
v Direct benefit transfer
v Insurance and Pension services
Establishment of brick and mortar branches is an expensive arrangement due to high capital expenditure which causes serious concern on profitability of the banks. So banks are in search of other alternatives to establish a win – win situation where in financial services shall be made available at door steps in unbanked /under banked locations at an affordable cost without establishing regular branches. ICT (Information and Communication Technology) has made the job easy.
Different models which different banks have adopted are as follows,
- Business correspondent model
- Bank Mitra model
- Customer Service provider (CSP)model
- Kiosk model etc.,
Out of the above said models most of the PSBs using Business correspondent model to implement Financial Inclusion.
Business correspondent model: Business Correspondents (BCs) are retail agents engaged by banks for providing banking services at locations other than a bank branch or ATM. BCs enable a bank to provide a limited range of banking services at low cost and are hence, instrumental in promoting FI. They will provide banking service at a designated places or their own locations based on their convenience.
Banks usually go through a process of RFP (Request For Proposal), to appoint corporate BC at apex level. This will be taken care by central offices of banks. Banks have established financial inclusion departments to look after overall financial inclusion implementation.
Either by capex or opex model bank will choose corporate BC. The corporate BC will in turn appoint individual business correspondents to serve at desired locations.
Corporate BC will enter an agreement with bank to provide services on commission basis.
Issues faced by banks while scaling up of BC model:
At Corporate BC level:
v Delayed procedures in appointments of corporate BCs
v Inadequate experience of corporate BCs
v Inadequate procedures to appoint honest BCs in field
v Low commission earnings
v In active BCs
v Technology support
v Infrastructure issues
v Training issues
v Handling multiple services of different banks
- Delayed procedures in appointment of corporate BCs: Being public sector entities, banks while appointing corporate BCs, need to follow, fair and transparent practices. Judging the corporate BC capacity to establish individual BC locations is of a great concern at the time of appointment. Now, many payment banks are also offering corporate BC services like FINO, IPPB etc., Delay in appointment of corporate BC lead to delayed implementation of financial inclusion.
- Inadequate experience of corporate BC: it is a point of concern in establishing BC network. Forming suitable office structure to handle issues like, suitable technology finalisation, developing infrastructure like POS machines, establishment of connectivity, appointment of staff at different levels for monitoring, co ordination & maintaining liaison with bank etc., will become late.
iii. Inadequate procedures to appoint honest BCs in field: Integrity is of high value in successful implementation. Corporate BCs while appointing individual BCs, to select honest individual belonging to that particular location. It is a difficult task to establish honesty at the initial stages.
- Low commission earnings: It will take lot of time to establish a BC network, which earn ample commission income. During early stages, due to low income, in lieu of high establishment expenditure, corporate BC may shut his operations.
- Inactive individual BCs: During early stages, people may not trust the BCs as banking outlet and level of operations also very less. Due to this bank may treat the BC location as in active BC if he is not operating for 22 days in a month or atleast 200 transactions in a month. If more than 70% of the individual BCs are active then only corporate BC will be treated as active on daily basis.
- Technology, infrastructure and training issues: Selection of suitable software, purchase of POS machines in bulk involves high capital expenditure. Training to all individual BCs is also a major task during initial stages.
vii. Handling multiple services of different banks: BC may enter in to different contracts with >1 bank, to offer different services. It may lead to confusion among individual BCs.
At Individual BC level:
v Credit, operational, legal, and reputation risk for banks
v Difficulty in assessing integrity of the BCs
v Low coverage by individual BCs due to financial constraints
v Low income from BC operations associated with low volume of business and high operational costs
v Lack of professionalism
- Credit, operational, legal, and reputation risk for banks: As BC is a third party, different inherent risks which are associated with for the bank. Due to failure in recoveries of small value loans given by BCs, dishonest BCs, failure of technology these risks are associated with. Failure of BC leads to reputation loss for the bank.
- Difficulty in assessing integrity of BCs: Honesty at every level is very important. Selection of honest BCs is a difficult task. Failure in monitoring branch staff on BC point lead to diversion of funds by BC.
iii. Low income from BC operations: Corporate BCs, will take major portion of commission earned from bank and offer a very less percentage to individual BCs. During initial stages, due to very low income he may not move out also due to financial constraints. These twin factors lead to diversion of BCs from main activity to others also some times. BC need to bear operational expenditure like, rents, electricity bills, etc., from his little earnings.
- Lack of professionalism: while appointing individual BCs, major thrust will be given to nativity, so finding suitable person, giving training in the aspect of dealing with customers is important. Professionalism brings trust easily. Wearing uniform, dealing in a polite manner etc., need to be inculcated which is lacking in BC sometimes.
Strategies for scaling up of BC model:
- Board approved financial inclusion policy and a separate financial inclusion department at apex level and at all controlling office levels for monitoring of BCs.
- Appointment of experienced and prudent corporate BC
- Suitable instructions to be given to corporate BC for timely establishment of BC points with honest BCs, procurement of POS machines, including giving advance notice to bank well in advance if corporate BC wants to terminate relationship with bank, to implement BCP(Business continuity plan)
- BC locations shall be identified by Banks, in such a way that they are within 5km radius from bank branch. It helps in providing uninterrupted or minimal disruption service in the BC location.
- Developing micro products which suit the needs of financially excluded individuals. Now a day’s needs of individuals are changing continuously, hence suitable products to be developed on continuous basis.
- Settlement of transactions on real time basis improves liquidity at BC.
- Negotiating with corporate BC for nurturing, training, monitoring of BCs on continuous basis.
- Investment in R&D by banks, for better outreach. Like innovation of banking apps in local languages, provision for increasing service range through bio metric authentication at BC locations Ex. life certificate service, etc.
- Employee mind set should be changed from a burden view point to opportunity view point by conducting workshops, trainings by duly explaining statistical figures in terms of gains in the journey of financial inclusion. ‘If we don’t somebody else will serve and earn” principle shall be inculcated among staff.
For Bank branches:
- Owning of BC locations by branches from day 1 of their establishment
- Regular visits of branch manager / staff to BC location not only help to monitor but also to bring confidence in the public.
- Timely attendance to grievances of BC like, failure of transactions, etc.,
- Inculcate honesty during frequent interactions
- Timely support by providing small loans for procurement of POS machines & for creation of good ambience at BC location etc.,
- Educating BCs with regard to financial literacy, product knowledge etc., by conducting frequent meetings with all BCs in branch location. Competitive environment may be created among different BCs by giving targets in account opening, social security scheme mobilization, recovery of bank dues, RD account openings, turn over etc., will lead to improvement in overall efficiency of BC.
For Corporate BC:
- Being a business entity it always looks for higher margins. But these margins not at the cost of service.
- Identification of suitable technology partner, establishment of strong network of individual BCs, formation of control structures to monitor and address issues of BCs at different levels are the key issues with corporate BC.
- Strong monitoring will help in reduction of inactive BCs; thereby increase in FI transactions ultimately leads to higher income.
- Location specific tie ups with different banks will help to scale up their business.
For individual BCs:
- He/she must be honest in discharging his duties.
- Working during demand hours like early mornings, evenings etc., if customers are farmers
- Maintenance of proper dress code, providing door step services for Senior citizens, maintaining good ambience in the BC location, keeping required stationery ready on daily basis, visiting and depositing excess money regularly in bank are some of the important strategies at BC level.
Being an aggregator, government can utilize DBT for more number of services so that customer base at BC point can be increased. Short advertisements in mass media for the BC model can improve confidence among public.
BC is a cost effective model, can be implemented in lieu of regular branches by the banks to implement FI plan. BCs can be used to penetrate banking services both horizontally and vertically in the unbanked/under banked areas. BCs further can be utilised for generating leads, conducting due diligence, recovery of loans etc. by offering a little extra amount along with their regular activities. A bank can tap the untapped opportunities by investing in R&D by developing suitable micro products in deposits as well as advances which suits for small customers.
A bank which can focus on nurturing & Training BCs & Bank staff will be always a head in employee involvement. Monitoring is king among all factors, hence proper structures at all levels to monitor BCs to be established. Branches to own BC points & should try for high turnover at BC locations. Finally for effective financial inclusion every stake holder should work with integrity and honesty to have a better financially included society tomorrow. Financial Inclusion is not a service, it is a responsibility