Source: Business Standard
Much has been said about the last-mile challenges in taking financial inclusion to the unserved and underserved population. There has been a slew of regulation, procedural guidelines, business models to enable the outreach. Technology has been deployed to provide scale economies and reliability, through mobile banking and, most recently, micro-ATMs. The human element still looms large in battling the last frontier, however. The core of the problem, I feel, is the credibility of the middleman, in this case, the business correspondent (BC). And like general perceptions about “middle men”, the BC, too, faces a trust deficit with customers as well as banks.
Initially, the BC model was rolled out bilaterally, with banks appointing their BCs all over the country, under contractual terms. The BCs made all point-of-service investments, in kiosks and human interfaces, and had autonomy in selecting the technology platforms. Over time, this resulted in a diversity of captive networks, which remained largely non-interoperable and disconnected, thus preventing any benefits of pooling and scale. A fundamental challenge of the BC model has been the watered-down service menu: no passbook facilities, no provisions for joint account opening, minimum age for account holders, which created the impression of a discounted second-grade service compared to the real bank interface. BC staffers also tend to be paid less than bank employees, which results in low quality and high staff turnover.
In 2012, the department of financial services announced its new BCNM cluster model, based on the idea of a large single BC Network Manager for each of 20 geographical clusters. The intended advantages: breaking the “walled gardens” of banks and BCs and creating an interoperable network between them, apart from enabling viability and cost benefits through scale and captive footprints. The BCNM model also mandated points of presence at the gram panchayat level, making it a highly capital-intensive project for bidders.
Many stakeholders feel that the BCNM route may have distorted the landscape in a number of ways. First, by eliminating a direct accountability framework between individual banks and their BCs, and even creating an attrition of the BCs appointed earlier under different (more remunerative) terms. Second, by introducing a new local monopoly and a single intermediary between banks and BCs. And third, by reducing the financial viability of BCs by prescribing service charges for enrolment and creating market distortions through the reverse auction model, which can potentially lead to new risks. No wonder there has been considerable discomfort with the BCNM model and, of late, even dissenting voices from within the government.
With moves to introduce a countrywide network of micro-ATMs to deliver cash transfers, thus reducing the human risks and allowing a diverse range of agents – teachers, post offices, grocery merchants and social workers – to become BCs, suddenly, the viability of the BCNM model seems questionable. Even though no official statements have been issued, there have been hints in the press that the model may get a quiet burial sometime this year. And we may be back to the bank-centric BC model.
But does that really improve things? Unfortunately not.
At the crux of the resistance and slow uptake of the agent network model is the human element of trust. Why do BCs have low credibility before customers as representatives of banks? Who is to be ultimately responsible for their conduct? The intuitive answer is: the banks. Why? Because the very definition of financial inclusion we have adopted is bank-centric. Financial inclusion is all about the increased adoption of mainstream banking by the masses. In this construct, BCs are merely the limbs and offshoots, and the banking network is the central trunk, the lifeline. Banks, however, have not completely assumed the ownership of their extensions and the risks associated with them, and the conscious distinction between branch and BC – both in offerings and status – has only added to the distrust. BCs must carry the trust and the confidence of the bank if they are to be credible before customers.
As for banks, it is a question of instituting robust controls and risk management standards over their BCs. After all, banks have successfully created a largely flawless outsourced system even in the mission-critical task of cash management services. The answer, perhaps, lies not in ring-fencing the risk and liability that arise from BCs but in putting in a more stringent set of conditions for their selection, besides appropriate and economically viable service fees and, more important, fiduciary and risk management frameworks between banks and correspondents.
Therefore, if banks must be, by regulation, the providers and deliverers of financial inclusion, they should take the responsibility of their nominated channels. It is time for another acronym in banking: KYBC.
The author is Fellow at the Indicus Centre for Financial Inclusion and can be contacted at firstname.lastname@example.org