Telecom and Organized Retail as Business Correspondent: An analysis of BC Model

Increasing the outreach of financial services has been on the mind of Reserve Bank of India for several years. Serious efforts are being taken to ensure financial inclusion to the unbanked and the under-banked. In Jan 2006, RBI introduced the strategically low-cost business correspondent model which had specific guidelines on who are eligible for being hired as BCs by banks. Business Correspondent model is no doubt an innovative medium of achieving some significant results in the field of inclusion.

Business correspondents are agents who can be hired by banks to provide a subset of banking services in places where it is not commercially or physically viable to set up branches in the present condition. Due to low margins in the proposed structure, for banks as well as BC, a lot of revisions to eligibility criteria have been made over the years where technology in the form of ICT has played a lot of role in bending the minds of review committees to bring these changes.

Earlier, only NGOs, Microfinance Institutions set up under Society or Trust act, Societies registered under Mutually aided Co-operative Societies Acts or the co-operative Societies Acts of States; Section 25 companies and post offices. Later in April 2008, specific details like holding pattern in the Section 25 companies by profit making companies was appended.

It was also observed (Rangarajan Committee) that for achieving sufficient numbers in the financial inclusion meter, BCs have to be placed in many villages which will be almost impossible if locally settled retired Government servants like postmasters, school teachers, ex-servicemen etc are not deputed/hired as BCs. Further it was suggested that NBFCs may be allowed to act as BCs providing limited services like savings and remittance on behalf of bank.

BCs are required to play a role from creating awareness, to selling the product to being the point of service for those customers throughout shoulder the responsibility.  However looking forward, the question outstanding is whether organized service providers like telecoms a better option than hiring individual BCs. Choosing an organized retail and telecom  over hiring individual BCs has its upside and downside, which needs to be analyzed carefully before selecting any option. The major advantages of a using telecom sector and organized reatils as BCs are: 

• Large and widespread network already setup
• Ease of policy compliance with the hiring Bank
• Established processes to easily monitor and evaluate and implement cash management system
• Likely to continue as an agent for longer period than independent individuals

But there are certain disadvantages that need to be taken care of while hiring these organized retails

• Adoption of Double Selling practice: because of thin margin, only if they buy their products, only will they provide banking service
•  Information Security of Customers: The data can be used by the company for its own benefit
• Volatility of the industry (telecom) can shut down operation of entire area/reason which can affect continuity of BC service
• Less attention to business: since it is not the main business, they can tend to ignore the business opportunities handling double pressure

However, it is to be kept in mind that setting up a BC network not only requires conquering geographical challenges which the Telcos and organized retails have achieved, but a dedicated human resource that keeps financial inclusion as priority. Additional backend, training et al would mean additional initial and continuous investments that these new entrants have to make to play BC to any bank or Govt.

It is important to shield the burning candle from winds outside, the risks for using telcos and organized retails needs to be carefully identified, their impact quantified and to put into place proper mitigation plans before they are hired as BCs.

-Chitra Nayak

Swabhiman: The Grand Financial Inclusion plan

Swabhiman (pronounced as  swaa-bhi-maan) meaning self-respect comes from Swa-(meaning Self) and -abhiman (meaning Respect or Pride) in Sanskrit language.

Swabhinman is the new Financial Inclusion Program that Government of India is planning to roll in the year 2011. The program targets opening of 5 crores no-frills accounts by March 2012 spanning over select 73,000 villages. The plan is not just to open accounts, but to keep them active by regular transactions. The basic idea here is to spread financial literacy while achieving financial inclusion. Government plans to use handheld computers and banking correspondent model to achieve scale and efficiency in the program. 

In an interview about Swabhiman, Shri K.V. Eapen, the joint finance secretary of India told media that banks are expected to popularize the electronics benefit transfer (EBT) scheme for efficiency of the program. EBT is mode through which the government currently makes payments to the workers involved in various public welfare schemes. Thus, Swabhiman will provide a platform for banks to launch their products and services like small overdraft facility, remittance, small loans and small deposits to the rural poor.

Swabhiman, though is in planning stage, has some assured benefits for the common man. A common man can now be included in the organized financial sector without the tedious paperwork.  It will not only ensure availing of a variety of financial services at doorstep but also easy enrolment to all public welfare schemes.

 Reaching out at such a grand scale can face a number of challenges that are meticulous in nature. Ranging from connectivity of handheld devices, geographical connectivity to literacy rate of the population can raise issues in smooth implementation of the program.  But, tackling these challenges and bottlenecks is now expected from Indian Government.

Government has surely come a long way since the days of implementing public welfare schemes without proper consideration of ground level realities. This means, the earlier top down approach of govt. towards development is now becoming more and more area specific approach. Increase in variety of work in MG-NREGA, implementation of SGSY- Special plan, launch of  RIDF from NABARD et al are examples of the recent changes that can be seen regarding change in approach of the govt.. These kind of changes are a proof to Governments increased concern and involvement in solving the individual ground level problems which were earlier oblivious at the centre level.

Thus, with a fool proof plan, GoI is all set to launch Swabhiman that will ensure smiles on the faces of those who are still unbanked.


By Chitra Nayak

AP MFI Bill: A Regulation?

In the state of unrest, the MFI bill recently passed in the state of Andhra Pradesh has proved to be a relief for the customers of MF industry.  The bill which clearly defines the collection period and registration rules for MFI branches was passed in December second week in response to complaints over high interest rates, aggressive loan recovery practices and overextended borrowers. So, while the customers rejoice the result, the microfinance institutions are relieved over the state Governments silence on putting a cap on interest rates till now.

It has been pointed out that since the issue of the ordinance two months ago, collections of microfinance institutions in Andhra Pradesh have dropped.  Also, microfinance institutions are also struggling with liquidity crunch due to reduced bank lending and lessened equity infusion in the sector.( Follow the article at: http://www.microfinancefocus.com/ap-microfinance-news/ap-govt-may-pass-microfinance-bill-tuesday?quicktabs_4=2)  As quoted in Business Standard- Spandana’s CEO Ms. Padmaja Reddy said that many MFIs will close down their businesses. Operating costs would increase and profits margins would spread thin, she added. The company's recoveries have fallen to 30-50 per cent in the last two months and no fresh group loans have been given. (follow the news at: http://business-standard.com/india/storypage.php?autono=418396)

While the bill is seen as disturbing to microfinance institutions, it is anticipated by the stakeholders that reduction in the number of repayment collection meetings per month to 1 will reduce a lot of overhead charges of travelling to the client centers which in-turn can either be seen as profit for the institution or, a factor for reducing the overall interest rate. It is also believed that this bill is, in a way, empowering the clients- especially the rural women.

But the basic questions here go unanswered. Is the bill of transitory nature as was the MFI ordinance that had come out in October this year? Is this bill achieving a win-win situation for both customers and service providers? And the answers here are not so simple. There are a lot of elements at play while we ponder over the state of things.

A lot of discussions are taking place at state and centre over the scope of bill and its outcomes. Even slightest gestures of customers to political parties are changing the fate of microfinance without knowing. 

I believe, in a move to revolutionize the microfinance industry, a lot of bills and amendments have to be passed before a true balance between social good and profit making is achieved.

-By Chitra Nayak

Financial Literacy: 5 Basic Questions Answered

What is Financial Literacy

Financial Literacy is the buzz word today. Many organizations are making serious efforts to promote it. A big information asymmetry exists which prevents many individuals to make informed choices about their current and future financial engagements.

Financial literacy is an informal understanding of risks and rewards involved in handling financial assets and liabilities. It is not a formal or certified education. It is the basic knowledge required to manage personal finance.

Why is Financial Literacy Important

It is said that prevention is better than cure. Prevention of financial crisis is necessary than its cure to save the individual, and to save the nation. With credit being available hassle free in the market, the thin line between need and desire is vanishing. Therefore, it is important to have knowledge and related skills to calculate the consequences before investment.

When and Who started Financial Literacy

There is no formal record of when was financial literacy started, but it has been gaining momentum in recent years. Organization for Economic Co-operation and Development (OECD), which was founded to stimulate economic progress and world trade, started a program in 2003 which was believed to mark the start of financial education. In India, RBI has been a key player in creating awareness of programs related to financial literacy.

How to achieve financial literacy

As the definition says, financial literacy comes with simple understanding of how finances can affect the present and future. A simple guideline described below can be followed to achieve financial literacy:

1. Set financial goals for a time-period (days, months, years)

2. Creating a budget for the same

3. Itemize the expenditures in a detailed manner.

4. Focusing and accordingly planning for high-budget expenditures

5. Basics of banking and investment

6. Plan for retirement

7. Know about Insurance and its premium

8. Be aware about taxes that might have to be paid

9. Understand inflation and interest in terms of financial assets and liabilities.

-Chitra Nayak

Corporate Social Engagement: A Strategical Move or a Need?

The clear definition of CSR is that, the Community is not just another stakeholder in our business but the very purpose of our existence.’

 Jamshedji Tata

Businesses are constantly growing conscious of their presence in the societal and environmental spaces. Effort to reduce their footprint on the environment and increase the same on society is visible throughout the globe by their small and big efforts. Here we’re talking about the hottest trend in industry- the ‘corporate social engagement’. Simply put, Corporate Social Engagement is a business entity’s engagement in its society, environment and community for achieving results that are beyond its scope of profit. According to Wikipedia, Corporate Social Responsibility/Engagement policy functions as a built-in, self-regulating mechanism whereby business would monitor and ensure its support to law, ethical standards, and international norms.

As the world is increasingly getting conscious about the energy and environment sustainability, corporate houses are getting more focused on their efforts to mainstream CSE.  Business entities are taking responsibility for the impact of their activities on environment as well as the customers, suppliers, employees, shareholders, communities and other stakeholders. These responsible acts have many methods and approaches. Among them, three main approaches which are commonly adopted by companies are discussed here. These approaches are:

Community-based development approach: In this approach, corporations work with local communities to better themselves. For example, the Shell Foundation's involvement in the Flower Valley, South Africa by setting up an Early Learning Centre to help educate the community's children as well as develop new skills for the adults has achieved a stupendous result.

Second is philanthropy. This includes monetary donations and aid given to local organizations and impoverished communities in developing countries.

The third approach is to incorporate the CSE strategy directly into the business strategy of an organization. For instance, procurement of Fair Trade tea and coffee has been adopted by various businesses including KPMG.

A Strategy or a Need

In recent times, to achieve a more integrated approach to Corporate Social Engagement, business houses have started incorporating social missions.  For example, social mission of Bharti Airtel is to get cell phones into the hands of the hundreds of millions of people in India who otherwise have no way to communicate with each other. Tata Motors has a similar goal with respect to providing low-cost transportation in the form of the Nano. The social mission of the pharmaceutical and healthcare company, Dr. Reddy’s, is to address the unmet medical needs of the poor in India as well as around the world. Hindustan Unilever’s “Project Shakti” uses microfinance principles to create a sales force in the poorest regions of the country.

While corporates are realizing that CSE is more than a mere voluntary act, some countries have turned it to a legislative requirement. The formal origin of social responsibility goes back to the era of industrialization where businesses were ‘expected’ to be active not only in alleviating societal problems but also in providing solutions to them. Since then, the form of social engagement has come to include many more things in its scope. But there has always been a divided opinion on existence of CSE. While one school of thought supports that the rise of industrialization is the root of many societal problems, the other believes that solving societal and moral issues is not the responsibility of corporate.

For some industries, it may look like a need to get involved in a corporate social act. It is said that the companies in these industries have a low threshold for CSR and that’s why have to abide by these kinds of social responsibilities. For others, its just a mere strategy to achieve the intended. But what makes companies strategize for CSE??

In the annual general meeting of CII in 2007, Prime Minister Manmohan Singh had addressed in his speech about the CSR as “corporate social responsibility must not be defined by tax planning strategies alone. Rather, it should be defined within the framework of a corporate philosophy which factors the needs of the community and the regions in which a corporate entity functions.”

Amidst all these hustle-bustle, there are various underlying reasons for companies to engage in such action. The main reasons of corporate social engagement could be:

·         Commercial Benefit: Increased visibility among consumers and employees

·         Green Washing: Focusing the attention of consumers on certain actions only. To reposition the company’s image in the market.

·         Political-social relationships: To enjoy certain social and political benefits.

The motives for CSR actions are often mixed, it is impossible to claim either one motive or another. There are no particular motives that can be authorized to have an advantage over another (Haugland & Nystad, 2006).

The long Term Achievement

To think of it, what differentiates these companies from others?? Well, companies with motives to really help the society, gain more than just mere good marketing. They gain a long term reputation and trust of people at large which seeps into their employees too. CSR first starts at home with ones’ own employees. These companies often have level 5 leaders heading the organizations. These are the companies that have modeled themselves in ways different from the norm; quite often, particular practices that work well enough in business terms to be genuinely embraced; charitable endeavors that happen to be doing real good, and on a meaningful scale. For them CSR is much more than a cosmetic treatment. 

-Chitra Nayak