Non-profit firms to assist banks in financial inclusion

In an effort to speed up the pace of financial inclusion, the Reserve Bank of India (RBI) has allowed banks to use companies, which are registered as not-for-profit entities, as business correspondents (BCs).

In addition, business correspondents have also been permitted to appoint sub-agents for these programmes.

Banks can engage companies registered under Section 25 of the Companies Act, 1956, as BCs. These should be standalone entities. Non-banking finance companies, banks, telecom companies and other corporate entities or their holding companies cannot hold more than 10 per cent stake in such companies, RBI said in a statement today.

Andhra Bank Chairman and Managing Director K R Reddy said there is a shortage of persons and organisations that can help in financial inclusion. “Credibility is an issue that banks have to deal with while engaging the services of outside agencies,” he said.

The move follows a demand from the banking sector to expand the list of entities that can provide services. The move is, however, expected to have only a limited impact, given the volume of work that is left to be done, said the head of priority sector lending department at a public sector bank.

According to the 59th round of National Sample Survey Organisation report, 51.4 per cent of farmer households are financially excluded from both formal and informal sources. Of the total farmer households, only 27 per cent have access to formal sources of credit, one-third of this group also borrows from non-formal sources. Overall, 73 per cent farmer households have no access to formal sources of credit.

The central bank also said the duly-appointed BCs of banks can engage sub-agents at the grassroots level. But banks have to ensure that these sub-agents meet the criteria prescribed for BCs. Correspondents will have to carry out proper due diligence in respect of the sub-agent to take care of the reputational and other risks, RBI said.

“Besides initial screening, correspondents also have to monitor sub-agent activities like depositing cash on a regular basis. Else, they could become a liability,” a senior executive of a large state-owned bank said. Where individuals are working as BCs, they cannot, in turn, appoint sub-agents, RBI added.