Business Correspondence (BC) model or the third-party agent banking was launched in 2006 in India, with the intent of increasing the ambit of the formal banking sector. Since its inception in 2006, various banks have promoted the BC model in all corners of the country.
In the rural areas around Bangalore, FINO has partnered with a bank towards the extension of banking services through the BC model. FINO is delivering the BC services through “FINO Fintech Foundation” which is a section 25 company.
Recently members from IFMR Finance foundation (IFF) and IFMR Rural Finance visited the FINO Customer Service Points (CSP) in the area to understand better the working of their BC model and to interact with the FINO CSPs and their clients. The team visited the Ramanagar and Gulberga blocks near Bangalore along with the respective block-coordinators, and was guided by Mr. Sharan, District coordinator of FINO. The visit enabled us to have deeper insights into the pros and cons of the BC model.
The FINO BC model offers no-frill account services involving savings and withdrawals, few CSPs had also tried selling insurance products on a very small-scale. Each CSP at the client level reports to the Block Coordinator, who is in turn, headed by a District Coordinator. The CSP is a contract employee of FINO Fintech foundation, who is a local resident, and is given a fixed remuneration of Rs 750 plus a commission of 50ps on every transaction irrespective of the amount transacted. These CSPs work an average of 4 hours per day and have this job as either the only source of income or as a part-time business.
On an average each CSP handles around 700-800 clients in her/his service area. Each CSP is provided with a POS machine for transactions and has to deposit an initial amount of Rs 10,000 with FINO Fintech foundation (Rs 5000 for the POS and Rs 5000 for the CSP) as guarantee money. A transaction limit of Rs 5000 is imposed on the CSP and once the limit breaches, the POS machine of the CSP gets blocked. It would then require a visit by the Block Coordinator to collect the cash and unlock the machine to carry out further transactions.
The CSPs, with whom the team interacted, found it difficult to sustain the business, as the income obtained from the present BC model was difficult to cover the costs incurred; the door-to-door services provided by the CSPs added to their cost. Apart from this, only 30-40% of the clients were active which further reduced the commissions for the CSP. However it was feasible for CSPs who ran Kirana stores, as majority of their clients visited the store as part of their daily chores and also made transactions with the CSP; he made fewer door step services than other CSPs who were housewives or working in other companies.
On interactions with the clients, the team could infer that the transaction limits imposed on the CSP was a major hindrance to the clients in utilizing these services efficiently and frequently. Many a times, any client who wants to withdraw or deposit amount that is greater than the limit would have to inform the CSP prior hand, thus it would usually take around three days to complete the transaction, consequently undermining the efficiency of the system.
Currently dealing with a minimal set of services, FINO is looking to widen its base by including NREGA payments and Insurance to ensure the sustainability of the model for all the partners.
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Farzana Najeeb of IFMR Finance Foundation contributed to this post.
From Shylock to the neighborhood pawn-broker, money lenders have always been reviled for exploitative practices and prices in lending to the poor. However, for those of us in the business, we know that moneylenders are very often an important source of liquidity – price notwithstanding.
Let’s understand the “value proposition” of the moneylender in some more detail:
Flexibility in collateral and contract type: For a household with low-income and irregular cash flows, financial services should be flexible and convenient. Unfortunately, this is not the case with most formal financial institutions. In such a scenario, the money lenders provide loans that match these criteria, enabling access to credit for the urban and rural poor.
They function in close physical proximity to the borrower, enabling frequent contact and thus minimizing the need for traditional collateral. Collateral accepted includes agricultural land, jewelry, food grains and other moveable and immoveable assets providing the clients a wide range to choose from. Screening of clients by the moneylenders is highly subjective and based on personal relationships. The loans provided are usually short-term finance, ideal to meet consumption mismatches frequently experienced by the poor.
Timeliness: The instantaneous appraisal of the loan request and any-time availability of loan (since moneylenders keep cash at home) provides convenience to the clients in accessing the credit. Most importantly, money lenders are not fussy about the purpose of the loan (which can be even used for consumption purpose or to repay another loan) as long as they repay it.
Flexibility in repayment: Moneylenders not only offer doorstep repayment collection service but also accept various modes of repayment. In-kind repayment modes like providing goods (farm produce or other goods) and services (labor) are very common.
With all these advantages, what is the hue and cry about moneylenders? The major criticism against them is that they charge exorbitant interest rates from the poor, ranging from 70% per annum (Aleem, I 1990, Swaminathan, M.1991) and 10% per day for daily working capital. So with such a high interest rate and little operating expenses, you would think that money lending is an extremely profitable activity?
However the paper written by Antoinette Schoar of MIT and Rohit Mukkawar of IFMR compels us to understand this business from a money lender’s perspective. The paper sheds light on the internal dynamics and economic constraints of the money lending business. It is interesting to observe from the paper that the greatest constraint for the moneylender in expanding his business is – moneylender himself. The absence of delegation of decision-making to his employees in terms of selection of clients and the time involved in screening of clients (which is based on personal relationships and recommendation) prevents them from exploiting economies of scale in the business. Since lending decisions are based on personal relationship and knowledge about the borrowers, the area of operation for the moneylender gets restricted to a small geography – less borrowers to choose from and lend to! The cost of capital for the moneylenders is also high as they largely depend on their own funds. This, in addition to the prevalence of high default rates among the clients’ forces them to be choosy and limits their ability to expand.
In such a scenario, with clearly a gap in credit supply, newer money lenders see an opportunity and step in to plug the gap. However as the Schoar and Mukkawar paper suggests that difficulty in managing the portfolios by new moneylenders who are inexperienced as regards the intricacies of the business, forces many of them to leave the market. Hence in a world, where financial access relies on relationship and building track record with your lender, even good clients can be barred from credit after the moneylenders drop out.
The fact that the high interest rates are not just because of the monopolistic rent but due to many other factors like – high transaction cost, limited geographical scope for expansion of business, expensive screening of borrowers and cash collection from doorstep – should perhaps explain why most moneylenders are still small time business person and not the millionaires you might expect them to be!
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C.A Farzana Najeeb and Rohit Mukkawar contributed to this post.
IFMR Finance Foundation (IFF), which recently came out with a plan for commercial banks to deepen financial access using the Business Correspondent (BC) model , is now working on an action plan to roll out the model extensively across India. The action plan proposes to set up a large number of conveniently located village level touch points across the country to provide a full-range of services including savings, credit, insurance and payments that is viable for the BCs, the bank and the customers. The significance of the initiative can be gauged by the fact that of the 600,000 habitations in India, hardly 30,000 have a bank branch.
IFF is proposing two models – the minimum service model (savings, payments and insurance) and the full service model, which includes lending.
IFF, which is designing the models, including working out the business plan for the various models, is to be involved in identifying the BCs; selecting the training and technology partners; working out business plans for the various models that are being proposed; designing the channels, processes and products; and zeroing-in on appropriate geographies for implementation.
Key to the success of this massive BC programme that IFF is proposing for commercial banks is establishing healthy partnerships with institutions that have built strong track records in working with village based entities. CARE India, a Delhi-based humanitarian organization, is one such institution that connects with a multitude of village level NGOs and provides them with tools and facilities to effectively serve the rural population. The support provided by CARE, after a careful due-diligence, ranges from product design, training, and funding to advocating for policy changes in relevant areas of their work. Thus CARE’s partner NGOs could become potential BCs of the bank.
To explore the possibility of CARE’s partner NGOs becoming BCs, a workshop was conducted at IFMR’s Office at IIT Research Park on 18th May 2010. While the workshop was attended by 25 NGOs who work in as diverse fields as livelihoods, health and education, more than half of them were also into microfinance.
Suyash Rai of IFF set the stage of the workshop by providing an overview of the proposed BC model of financial deepening. The discussions that followed were extensive. While CARE’s Chennai head Devaprakash suggested that his organization could be involved in providing training tools and infrastructure, apart from actually being involved in training, the NGO partners flooded Suyash with questions ranging from implementation to impact. It was very obvious that the partners were keen to become BCs and wanted to clear doubts and concerns.
Suyash Rai presenting the BC model.
Interaction with NGOs after the presentation.
The questions and apprehensions flagged by the NGOs are significant inputs for IFF to formulate an effective, viable and successful BC model on the ground. Some of their concerns that included, “how will the BCs of one bank function alongside BCs of other banks in the same area?”; “will there be credit ceilings?”; and “how will the time spent by the BCs on rejected loan clients be accounted for?” provided insights into some of the operational issues that would be appropriately addressed for the proposed initiative to be taken to scale across the country. If you have ideas on improving the BC model, do share it with us in the comments below.
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Asha Krishnakumar, Farzana Najeed and Kirthi Rao contributed to this post.
Professor Ajay Shah of National Institute of Public Finance and Policy (NIPFP) visited IFMR recently, where he spoke about ‘Financial Distribution with Consumer Protection and Scalability’ at IFMR Business School and also visited Pudhuaaru KGFS, Thanjavur.
Prof. Shah emphasized that the distribution of sophisticated financial products with consumer protection is a problem and this problem is not typical to India, rather it is a worldwide phenomenon. He cited various examples of pension schemes, mutual fund and insurance products to highlight the fact that a typical consumer does not understand the fees/charges of financial services because of non-transparent and complicated tariff structures. For example, in India people hardly understand the charges and fees of mutual fund and insurance companies, as a result, consumers have to face bad outcomes many times.
Addressing the question of how to scale up the distribution of financial products while protecting consumers, he calls attention to the fact that there is a need to address the problems prevailing in policy as well as in practices. In the past, some of the government policies have not been conducive due to which scaling up of financial services had been restricted. One example was the nationalization of banks that stifled the competition in the banking sector. Similarly, by allowing customers to do transactions with other banks’ ATMs, the incentive of the banks to install ATMs in new (excluded) areas was undermined. Also, foreign banks are highly regulated in our country. Looking at these examples it seems that when government policies themselves restrict financial institutions to expand their services, addressing the problem of financial exclusion is not easy in near future.
Technological innovations in financial distribution are a key to achieve scalability, which Prof. Shah emphasized by saying that at this point, we have to think high tech – this is the only way to get scalability. In finance we do not need huge infrastructure, and to drive down the cost of financial management it is much less expensive than building any other infrastructure, such as roads, and hence we should encourage IT intensive solutions. For instance, mobile technology is a great example of driving down the cost. He supported the expansion of mobile banking, however, I believe it is prone to several types of frauds and therefore we first need a foolproof system to protect consumers before promoting mobile banking.
Taking on the government policy of fixed pricing for financial services and wages, he emphasized that India is a heterogeneous country and therefore the same price point system should not be practiced. Prices of financial services should be hyper local. He strongly argued that we should not standardize the prices and wages, and prices should be benchmarking local conditions/characteristics.
Financial distribution is all about handling risk and cash flow at the consumer and firm level. The poor struggle with so many risks in day-to-day life that the risk in financial services becomes trivial for them and they can let it go. Therefore, public policy response to protect the poor becomes crucial. Overall, Prof. Shah emphasized that financial distribution is possible with both scalability and consumer protection, and we don’t really have to compromise on one to ensure the other. I believe many of the points raised by Prof. Shah during the seminar are very relevant to financial inclusion, and offer several take away lessons for policy makers and practitioners to work on enhancing financial inclusion in our country.
Next day, he visited the Pudhuaaru KGFS where we discussed about the various services being delivered through the presence of KGFS in remote rural areas. While he appreciated our work, he also gave several valuable suggestions in some of our work areas. For example, on the insurance services we are providing, he suggested that we should conduct a high quality actuarial study of some households analyzing the risk for life, health etc. to build a world-class actuarial database, and then bid to insurance companies. This will give insurance companies an authentic database based on which they can price their products. Some other suggestions were regarding the mapping of KGFS branch data and innovations in some of our products. Certainly, these suggestions would help us in refining our work at KGFS.
Picture from left: Anita Sharma, Prof. Ajay Shah, Gurunath N, Anil SG and Sagar Thakar
We could see some parallels in Prof. Shah’s views and our principles of high quality origination. At IFMR Trust, we also believe in delivery of high quality financial services at the front end and trying to demonstrate high quality origination through KGFS model using latest technology in remote rural areas.
Indeed, both the seminar and the PKGFS visit by Prof. Shah were full of enthusiasm and learning for all of us.
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Anita Sharma from IFMR Trust, Advocacy, contributed to this post.
