Muthoot Fincorp to act as biz correspondent for banks

Muthoot Fincorp, a diversified financial services firm, is set to become one of the first non-banking finance companies (NBFCs) to function as a business correspondent of banks. The company has initiated discussion with a few private and public sector banks and aims to start this business as early as next month.

“We believe that we have the required infrastructure to act as business correspondent of banks. Almost 70 per cent of our 3,900 branches are in rural and semi-urban geographies. These branches serve individuals who are either under-banked or un-banked. This business also fits with our objective of promoting financial inclusion in the country,” Thomas John Muthoot, group chairman and managing director of the Muthoot Pappachan Group, told Business Standard. Muthoot Fincorp is the flagship company of Muthoot Pappachan Group.

NBFCs were earlier not allowed to operate as business correspondents of banks. But on June 24, the Reserve Bank of India (RBI) said it will permit banks to engage non-deposit taking NBFCs as business correspondents, subject to certain conditions.

“It should be ensured that there is no co-mingling of bank funds and those of the non-deposit taking NBFC appointed as business correspondent. There should be a specific contractual arrangement between the bank and the non-deposit taking NBFC to ensure that all possible conflicts of interest are adequately taken care of,” the banking regulator had said.

Muthoot said acting as business correspondent of banks also makes sense commercially as margins in this business are lucrative. “We will be getting a commission from banks for facilitating loan disbursals. The commission will be more or less similar to the margin that we make in small loans (despite the bank bearing the credit risk). If we decide to share a part of the risk with the bank, the commission will be higher,” he said.

Currently, fee-based income accounts for eight per cent of Muthoot Fincorp's cash revenues. The company expects that by functioning as business correspondent of banks its fee-based income's share will increase to 30 per cent of its cash revenues in next two to three years.

As business correspondent, Muthoot Fincorp will disburse microfinance loans and MSME (micro, small and medium enterprise) advances on behalf of banks. It may partner more than one bank subject to regulatory approval. “We believe that we can act as business correspondent for multiple banks. But probably for every state we will be allowed to partner only one bank,” Muthoot said.

Separately, he said Muthoot Fincorp plans to raise up to Rs 600 crore of capital in the near-term to finance its expansion plans and fund business growth.