MFIs demand more incentives to work as biz correspondents

According to survey by microfinance institution network (MFIN), published in February this year, nine out of 14 MFIs closed their operation as BCs in the recent past

In June, the Reserve Bank of India (RBI) had allowed banks to appoint microfinance institutions (MFIs) operating as non-banking financial companies, as business correspondents (BCs). The move was aimed at promoting financial inclusion. However, the experience of MFIs operating as BCs through their not-for-profit wings, has been ridden with operational difficulties.

Ahead of Prime Minister Narendra Modi’s announcement to roll out a new financial inclusion programme on August 15, Microfinance Institutions Network (MFIN) is likely to raise the issue at a meeting with the Union finance ministry and banks this week.

According to Samit Ghosh, president MFIN and founder of Ujjivan, MFIs prefer to be banks’ agents rather than BCs, because the former gives them more operational freedom.

Several MFIs have already started experimenting with new models to work with banks. For example, Janalakshmi Financial Services, which used to serve as a BC to Axis Bank, has put its alliance on hold. Instead, it has now tied up with DCB Bank (formerly Development Credit Bank) to launch a co-branded pre-paid card for disbursal of small loans by Janalakshmi Microfinance. The product is administered in association with Jana Urban Foundation.

“The business correspondent model with Axis Bank was a very amicable arrangement, but our priorities changed. At the moment, the plan is on hold. Now, we have tied up with DCB for prepaid cards,” said V S Radhakrishnan, managing director and CEO of Janalakshmi.

According to survey by MFIN, published in February this year, nine out of 14 MFIs closed their operation as BCs in the recent past. Of the 14 MFIs that had formerly been BCs with banks, four were profit-making, nine were loss-making, while only one achieved break-even in their BC operations, the survey noted.

The MFIs cited a lack of support from banks as the key reason to stop operations.

In his Independence Day speech, Modi is expected to announce plans to open 75 million new bank accounts over the next one year.

Through their reach of 30 million rural borrowers, MFIs are expected to play a significant role in the government’s plans, particularly with RBI recently relaxing norms on business correspondent model of banking.

This apart, according to the MFIN survey, the BC model was not suitable for small MFIs due to low revenues and high operational costs. Also, a few MFIs perceived banks as competitors who may poach the good clients of the MFI once they are linked through the BC channel.

The two key issues with MFIs are regarding the remuneration and the reluctance of banks to open the basic savings account for borrowers, says Ghosh. “The model did not work with MFIs. We will now see, how can MFIs work outside the BC arrangement as agents for banks.”

ISSUES TO PONDER

• In June, RBI had allowed banks to appoint MFIs operating as NBFCs, as business correspondents (BCs)
  

 

Move aimed at promoting financial inclusion
 

MFIs prefer to be banks’ agents rather than BCs, because the former gives them more operational freedom