RBI mulling appointing corporates as biz correspondents

The Reserve Bank of India (RBI) is looking at the possibility of appointing corporates and non-banking finance companies (NBFCs) as business correspondents (BCs), a move aimed at promoting financial inclusion.

"... The suggestion from some quarters is to allow banks to use corporates, including telecom companies, NBFCs, etc., as business correspondents," the RBI said in a a discussion paper for engagement of 'for profit' companies as business correspondents (BCs).

The RBI issued guidelines in January, 2006, for engagement of BCs by banks for providing banking and financial services.

Business correspondents are retail agents engaged by banks for providing banking services at locations other than bank branches or ATMs.

The Reserve Bank said the benefit of appointing corporates with a large and widespread retail network is that they would bring in larger resources, higher organisational strength and the financial backing needed for a large network of BCs, besides providing financial security to the bank.

"Failure of large companies as BCs would mean a reputation risk to the company and endanger its substantive business. As such, the companies could be relied upon to ensure that their agents do not jeopardise their reputation," it added.

However, a retail agent of a corporate may tend to provide banking services only to those customers who patronise the corporate's products as that would enhance his earnings. As such, there could be a conflict of interest.

The RBI said that NBFCs engaged in micro finance already have a large number of borrower clients who today do not have easy access to bank accounts, payment systems, remittance services and insured deposits and if engaged as BCs, they can further the objective of financial inclusion.

When the BC model was introduced in January, 2006, the entities permitted to act as BCs included NGOs or Micro Finance Institutions set up under Societies or Trust Acts.

As regards Section 25 companies, it was subsequently clarified in April, 2008, that banks can engage such companies as BCs provided the NBFCs, banks, telecom companies and other corporate entities or their holding companies did not have holdings in the proposed BC in excess of 10 per cent.

The RBI has asked for comments and feedback on the discussion paper by August 20, 2010.