This study evaluates the Business Correspondents Model to identify challenges in its implementation and suggests strategies to improve its financial viability and sustainability.
One of the recent policy initiatives spearheaded by the Reserve Bank of India with a view to achieve financial inclusion, is the Business Correspondent Model (BC Model), or the third-party agent model of banking. Under this Approach, banks can appoint third party agents who offer banking services to unbanked populations. Since its inception, the RBI has licensed many institutions and individuals to be business correspondents/facilitators for banks. Though these agencies are experiencing business growths in terms of client outreach and number of transactions, they are still struggling to achieve financial sustainability. While, the current model does not seem viable in the short term, some advocates believe that the model has the potential to be profitable in the long-run by expanding its client base and providing value-added services. Since practitioners and researchers know little about the various BC models available in the public sector, it is difficult to gauge the potential advantages and disadvantages of the model. This study was designed with the view to find ways to increase the financial viability of the BC model, and examine a host of issues related to its sustainability.
A literature review was conducted to understand various issues related to the financial viability of Business Correspondents with special focus on Customer Service Providers (CSPs or agents), client profile, and existing regulatory framework. Surveys were used to collect detailed data on the cost and revenue pattern of selected CSPs/agents and details of selected number of clients and agents’ behaviour. Of the 12 major BCs Approached for the study, 5 agreed to participate. With regards to district selection, the districts were selected to achieve maximum diversity in terms of economic and social conditions (rural or urban) and in terms of operations handled by the BCs. Agents were selected randomly at the district level using the CSP information available with the BCs. Clients, however were not selected randomly due to time constraints and practicability issues.
Findings from the study express the many challenges and issues with the existing BC model, and based on the analysis of it, present various policy recommendations as well. The researchers suggest a more diverse set of products and services being made available to clients, with the Government playing a big role in the diversification. They also believe that in order to make the channel sustainable, the scope of No-Frills Accounts (NFAs) should be expanded to improve their usability and efficiency. Customer Service Providers (CSPs) can provide their services to both a BC and a BF of the same principal bank.
While the BC model holds tremendous promise for improving last-mile financial access in India, a greater push in promoting the BC model is required , with a focus on expanding the outreach to financially excluded populations. Further suggestions also indicate a need for integrating financial literacy initiatives regarding functionality of NFA accounts opened through the BC channel.