Making banking correspondents work

While Nilekani recommended 3.14% of last-mile banking transactions as fee, the reality, at less than 2%, means most BCs in the network would remain unviable.

With the direct benefits transfer (DBT) scheme being accelerated in a time-bound fashion across India, much will depend on connecting it to the beneficiary at the last mile. If the DBT is to be leveraged to attain financial inclusion, the glitches in the business correspondent (BC) network need to be addressed.

While the number of business correspondent agents or customer service points has increased over the last two years, rural coverage is still less than satisfactory. As of March 31, 2012, just 1.47 lakh villages had banking presence, out of the 5.93 lakh villages in India. There have been numerous changes in the BC model as it has evolved since 2006. While some of these changes were positive, some have held back smooth progress. For instance, opening up of the BC space by allowing for-profit corporates was a positive step, allowing BC agents to work for multiple BCs and banks was another one. However, the cluster model ran into difficulties with its design but, thankfully, appears to be on its way out of those difficulties within the year.

The key goals include allowing ultra small branches to be set up with regular attendance of bank officials and BC agents at these kiosks. This has enhanced the BC-bank relationship in the eyes of the customer. Each gram panchayat is to get one BC, now even common service centres are set to operate as BCs, the number of PoS terminals is to increase from 6 lakh to 20 lakh and India Post may also be getting its act together over the next year to begin operations in this space. All in all, quite a lot is happening to increase the number of people at the last mile.

However, one of the biggest issues facing the BC network, as it stands today, is the absence of a viable business model for the agents and banks. Experiences from abroad and from the existing network in India show that the higher the number of transactions, the better the profitability of the agent. Surveys by CGAP-CAB and MicroSave show significant attrition in the agent network and this needs to be addressed to allow seamless connectivity till the beneficiary/customer.

A recent MicroSave Policy Brief by Puneet Chopra, ?What will it take to deliver Direct Benefits/Cash Transfer programmes successfully?? puts down a comprehensive list of recommendations for an efficient roll out of the DBT plan, and these include raising the commission for the BC agent. The Nandan Nilekani-headed task force had recommended a fee of 3.14% of the transaction value (with a cap of R20 per transaction) for government payments handled by banks and business correspondents. Unfortunately, except for some states like Andhra Pradesh, the transaction fee is hardly 1% to 2%. Obviously, ensuring the viability of the BCNM and the BC agent are essential, if the DBT programme is to work effectively and in a sustainable manner.

Chopra also recommends the compensation to the BCs linked to measurable outcomes be delivered. This would include not just the number of bank accounts opened for beneficiaries but also tangible support provided to the district administration to achieve database digitisation, achievement of a threshold level of transactions per agent, a score based on satisfaction surveys that will cover quality and beneficiary satisfaction, etc. The list given is indicative and reflects the various concerns that have come up currently in the CGAP-CAB and MicroSave surveys of agents.

Another important recommendation made is to mandate SMS alerts to beneficiaries about the amount being credited and balance enquiries. While this may seem to be a small point, such linkages can be then scaled up to enable mobile banking as the beneficiaries become more familiar with the systems. This will also focus attention on telco-regulatory issues like charges for SMS, response time, etc.

Moving away from cash is not an easy task but government payments have the scale to power up a large network that can then be leveraged most effectively for universal financial inclusion. In August 2011, RBI had put together the operational guidelines for the convergence of electronic benefits transfer (EBT) and the Financial Inclusion Plan (FIP), spelling out a vision: ?Once FIP is fully implemented covering all the unbanked villages and a UID number is issued to all the villagers, a ?model? will emerge where the customer will have the option to transact with the bank of their choice in any village by using UID enabled Micro ATMs.? The vision is therefore in place. The key is in getting all the linkages right that satisfy the different objectives of banks, telcos, customers, governments and regulators. Nobody can claim that this to be an easy task, especially in a country like India with all its socio-economic complexities. But, though there are a few hiccups, India is definitely moving in the right direction.

This concludes the two-part series.

The author is with the Indicus Centre for Financial Inclusion and can be contacted at

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First published on: 23-01-2013 at 03:39 IST