MFIs as BCs: Game changers in financial inclusion

Financial inclusion could witness a paradigm shift if microfinance institutions (MFIs) are appointed as banking correspondents (BCs), says a recommendation made by economist Raghuram Rajan’s Report of the Committee on Financial Sector Reforms in 2008.

 The move, it is believed, could result in routing cash transactions running into thousands of crores, through banking channels, in making financial inclusion truly meaningful.

The Rajan Committee, in the chapter titled “Broadening Access to Finance”, says, “The Committee recommends that the BC definition be broadened and endorses the recommendations of the Rangarajan Committee on Financial Inclusion with regard to the BC model.

It supports the proposal to allow microfinance NBFCs to act as limited BCs  (banking correspondents) for banks with regards to savings and remittances and recommends that microfinance NBFCs also be allowed to provide credit as BCs of banks, if they choose to do so. Finally, in order to make this business viable, it is important that business correspondents be allowed to levy reasonable user charges to recover the cost of services.”

The recommendation was recalled by an MFI during a panel discussion on “Financial Inclusion” jointly organized by Bankers’ Club and Centre for Public Policy, Indian Institute of Management, Bangalore, as part of the seventh annual international conference on public policy and management.

Samit Ghosh, chief executive officer and managing director, Ujjivan Financial Services, an MFI with a turnover of about Rs 1,200 crore, said there are benefits for all. “We disburse about Rs 100 crore and collect about Rs 90 crore every month, all in cash. If this amount can be brought into the banking system, it would scale up business for the banks.

At the same time, it would eliminate the risk of physically carrying cash. If we are appointed as BCs, we would be in a position to ensure all these,” says Ghosh, a former banker.

The company is bullish on opportunities in microfinance, having raised
Rs 128 crore in January this year through equity and firmed up plans to raise about
Rs 45 crore by issuing fresh equity to the International Finance Corporation, by the end of this month. Meanwhile, aggressive bidding by institutions to grab a share of the rural banking space, have led to concerns being expressed over viability.

The bidding process kickstarted in May after the Union Finance Ministry divided India into 20 clusters in April this year to pave the way for the appointment of a BC in each cluster. Commission rates quoted by the bidders were too low, given that many BCs who were appointed earlier by bankers individually were citing this as the precise reason for the model becoming unviable. 

“We earned about Rs 8,000 per centre for rendering services in seven centres of Kunigal taluk in Karnataka, while our expenses were Rs 10,000; clearly the model is a loss-making proposition for us,” says Vivekanand N Salimath, managing trustee, Initiatives for Development Foundation (IDF), appointed as BC by the State Bank of India in Karnataka.

He says that the agreement with SBI puts a cap on commission earned so that it does not exceed Rs 6 for deposits and Rs 9 for withdrawals by the beneficiaries. The commission otherwise is 0.50 per cent of the value of the transaction, he added.

Salimath says that BCs who have won by quoting rates as low as 0.03 per cent (for Karnataka and Goa) could find the going extremely difficult.  The winner is believed to be Financial Inclusion Network & Operations Limited (FINO). When contacted, a spokesperson for FINO declined to comment on the rate but said his firm did bid for Karnataka and for other clusters as well.

On the flip side, concerns of aggressive bidding have come from the central bank. Harun R Khan, deputy governor, RBI, had said during the course of a speech on June 30, 2012 at the Indian Institute of Public Administration, Bhubaneswar.

 “Pursuit of higher volume of business for revenue maximisation may dilute prudential requirements exposing the banks concerned to whole host of risks like reputation risk, strategic risk, compliance risk, operations risk besides the risk of contaminated asset portfolio,” Khan had said.

With financial inclusion slated to be extended to 3,50,000 more villages in the coming months, this space is set to witness many changes and could see forays into insurance also, an almost neglected area. This holds out opportunities for many players. As A K Bhattacharya, general manager, RBI, Bangalore says, “The coverage is abysmal.”