Champions of Financial Inclusion

Friday, August 6, 2010

Engagement of For Profit Companies as Business Correspondents: Winners and Losers?

By Jatinder Handoo
Published in Microfinance Focus on August 6, 2010

The Reserve Bank of India (RBI) has recently put up a discussion paper in public space for engagement of “for profit” companies as business correspondents (BC) in India. This was on cards after a series of developments like August 2009 Working Group’s review of the BC guidelines which paved path for relaxing entry barriers for new entities and individuals as BCs. It also entailed provision of allowing banks to charge a “reasonable” user fee followed by Government’s acceptance of Inter Ministerial Group’s recommendations for use of mobile phones to further financial inclusion and now the latest one – Prime minister’s high power committee on financial inclusion which includes Industry captains from sectors like telcom, retail,BFSI,IT etc.

Finally, we have a 22 page document on the bank’s website cobbled up with familiar arguments for a business case to facilitate entry of “for profit corporate BCs” citing reasons like “risk mitigation and organizational capabilities” and “too big to fail” as pros and a few cons as well. But the conventional public policy reasoning reminds: “Behind every policy decision there are winners and losers”. I leave it to the wisdom of esteemed readers to find out the set of winners and losers in this case.

The paper shores up case for quashing entry barriers in favour of corporate BCs who would be either telcos or organized retail players (organized retailing in India is less than 2-3 percent in India) or “bankers to poor” NBFC –MFI . The pivotal argument put forth in the draft arrows that there is a paucity of organizational innovation and technology adoption by the existing players for furthering the “business of financial inclusion” in India, hence the entry of corporate BCs for speeding financial inclusion.

By mentioning this, does proponents find a technology and innovation vacuum in the current network of BCs? And thus expects “for profit corporate delivery channels” to employ these engines of commercial viability?. If this is the case, then it becomes interesting to foresee how would a for profit corporate channel solve commercial viability jigsaw on its own which is primarily the outcome of “low take up rates” of financial services and products at bottom of the pyramid; particularly when end customers have erratic cash flows and there are not enough better designed and properly priced micro banking products and services available which is the domain specialization of financial institutions and not telcos and retailers .

Commercial viability of the model as a factor is cited in the draft to buttress the case, but there are no pointers as to how “for profit” BCs will make the model commercially viable. Finally a global overview of Business Correspondents and need for adhering to principles of client protection is also touched upon despite of the fact that globally celebrated telco led model of M-Pesa is also largely a remittance service oriented and Safaricom makes no or extremely razor thin profits from this business stream. In Brazil BCs are in picture since 1970s, they are commercial entities but still more than 95 percent revenues are generated from checking accounts, utility bill payments and remittances and they have to cross subsidize their operations.

Finally, it is an open secret that the RBI despite of its herculean endeavors to go with bank led model at present seems to be under tremendous pressure from various quarters to accommodate corporate interests. Retailer-Telco-Technology interest groups and corporate lobbying at high echelons has taken the debate of financial inclusion beyond obvious.

It needs to be understood clearly that business of banking is of bankers and not of telcos or retailers. In the Indian context is visible on ground that the regulator has been proactive and Banks have demonstrated serious intentions and vision for enabling universal financial inclusion. However the missing link is investment gap. To fund the gap, policy can play a defining role here by incentivizing banks monetarily and this could be done by propounding a clear cut financial support policy for banks.

Non banking Players like retailers and telcos have along way to go in demonstrating some scalable and profitable models of micro banking for bottom billion junta. BC model is just on the verge of stabilization after four years. Let the existing system be incentivized without further experimentation and keep the debate on technology for future.