'Appointing NBFCs as BCs involves conflict of interest'

The Reserve Bank of India (RBI) on Tuesday said that appointing non-banking financial institutions (NBFCs) as business correspondents (BCs) involved a conflict of interest with banks.

In September this year, RBI allowed banks to engage the services of ‘for profit’ companies as BCs. However, NBFCs were not permitted to act as BCs.

“There is a certain conflict of interest there because business correspondents are something banks are using as an extension of their services in unbanked areas. NBFCs in that sense are a competitor to banks. Whether a competitor can be an agent is a broader issue,” said RBI Deputy Governor Subir Gokarn.

In its discussion paper on engagement of ‘for profit' companies as BCs, RBI had said that companiees with large and widespread retail networks could bring larger resources, organisational strength and financial backing for aiding financial inclusion.

“The transition from non-profit to for-profit will immediately expand the choice of agents. We will have to see what advantage is being taken of it. There are some bridges yet to be built. For example, entities like oil marketing companies, which have a wide distribution network, need to come out with viable business plans. Banks and these entities need to talk about how they come together,” said Gokarn.

There was also a need to develop financial inclusion as a viable business activity for banks and it could not survive on a subsidy or a cross-subsidy model for long, he said.

“Banks also need to make some money out of it (financial inclusion) . It cannot be a subsidised or a cross-subsidised model if it has to reach the level we intend it to achieve,” said Gokarn.