Banking channel for financial inclusion feels left out as scrutiny rises

Business correspondent firms' revenues are under stress as banks get tough with them to meet targets

Nearly two decades after business correspondent (BC) firms came into being to bolster financial inclusion, the channel may be ripe for a rehaul. The flashpoint is the penalties imposed on them by banks, and the revenue-sharing structure.

Since its inception, there has been no concept of penalty in the BC-bank arrangement. It was a low-cost approach that thrived on the meagre commissions earned by ‘Bank Mitras’ (agents deployed by BCs on the field) on the basis of the transactions put through by them. Subsequently, while a penalty clause was incorporated, it was never acted upon. This was because of the channel’s low-income structure, fewer opportunities and potential in rural areas, of centres being classified as “difficult” (as decided by banks), low connectivity, and at times, non-payment of fixed allowances by banks.

The plot has changed.

Some banks now slap a penalty of Rs 1,000 per month in case agents remain inactive for two months. If they are found operating another bank's portal or mobile app, they are to be terminated immediately with a penalty of Rs 10,000. So, why are banks acting tough? They have stiff financial-inclusion targets to meet and have in recent years delegated a substantial part of branch tasks to Bank Mitras (BMs). However, apart from a small lead generation fee, BCs and Bank Mitras on the field receive nothing for cross-selling savings deposits or loans. 

Price vs earning

While banks are right from their point of view in being tight-fisted, the issue is that the BC architecture had come into being when there were hardly any fintech firms; digital was nowhere close to what it is today. Cash-in, cash- out (CICO) is the earning mainstay. Though CICO transactions constitute more than 60 per cent of their income, there has been no revision in the pricing for the last decade. The pricing is thin: It ranges between 20 basis points (bps) and 50 bp for Rs 100; for fund transfers between 40 bps and 100 bps. This range is insufficient to offset the per-transaction costs effectively. A 30-50 bp increase in pricing is being discussed.

What few will admit to is that while agents are primarily recruited from rural, tribal, or semi-urban areas, to become fully operational, you have to invest in a Bank Mitra: This ranges between Rs 1.5 lakh and Rs 2.5 lakh. It covers locality-specific costs, rent, internet charges, back-up power, branding, and purchasing laptops or tablets to adhere to the bank’s procedures. On the earnings side, more than 40 per cent of Bank Mitras earn a monthly commission of less than Rs 5,000.

A white paper by the Indicus Centre for Financial Inclusion in March 2021 noted that there has been a trend of rising share of non-dedicated agents. While 45 per cent of the agents surveyed in 2017 were dedicated agents, 36 per cent of them reported making losses, compared to just 21 per cent in the case of non-dedicated agents. Further, 34 per cent of the dedicated agents expressed their intent to start other businesses as well, to supplement their incomes. The high share of non-dedicated agents prevents them and their customers from benefitting from specialisation.

Capital investment

In July last year, the Business Correspondent Federation of India  and Grameen Foundation India made a pitch for “concrete capacity building” in the channel. The Business Correspondent Resource Council sought setting up of an India Business Correspondent Equity Fund – akin to the India Microfinance Equity Fund – from North Block.

Both requests mark a lift-off from the C Rangarajan Committee on Financial Inclusion (January 2008): It was for funds being provided to specialised institutions which provide capacity-building inputs to BCs. And that the same could be extended out of the Financial Inclusion Promotion and Development Fund. The committee had observed even back then that merely pumping a backward region with financial capital would not be enough in the absence of improvements in human, social and physical capital. The people in the first place have to be healthy and educated to be productive, so that they can use finance effectively.

Penalties and pain

>Business correspondent (BC) firms use field agents called Bank Mitras (BMs) 

>Banks have delegated a substantial part of their branch tasks to BMs 

>Some banks impose monthly penalty of Rs 1,000 if BMs are inactive for 2 months

>BMs found operating another bank's portal or app are fired, penalised

>Load on BCs has gone up as banks have stiff financial inclusion targets to meet