The Reserve Bank of India on Tuesday allowed for-profit companies with large and widespread retail outlets to act as business correspondents. The move will both deepen and broaden financial inclusion. Non-banking finance companies, however, have been excluded from the list.
At present, only not-for-profit companies and individuals can work as BCs. In its final guidelines, the central bank also permitted a variety of individuals and organisations to act as BCs, subject to certain conditions.
Individuals that can now operate as BCs include: retired bank employees, retired teachers, retired government employees, ex-servicemen, public call office operators and agents of government small savings products. Self-help groups, NGOs, micro-finance institutions, co-operative societies, post offices and companies are also on the list, RBI said.
A host of companies like Bharti Airtel, which this month received a licence to start financial services on mobile phones, will benefit from the central bank's decision.
In its discussion paper last month, RBI had said that companies with a large and widespread retail network bring the larger resources, organisational strength and financial backing needed for a network of BCs. They also provide financial security.
A corporate is likely to continue as BC for a longer period than individuals, thus ensuring continuity of services. They have also developed efficient cash-management and retail-outlet monitoring systems, RBI stated.
Banks welcomed the proposal. ICICI Bank MD & CEO Chanda Kochhar described it as path-breaking because banks will now be able to partner with a variety of players that have rural distribution reach to scale up their efforts to provide enhanced access to financial services to unbanked sections of the population.
S K Mitra, president, agricultural and rural banking at Axis Bank, said his bank would shortly initiate a dialogue with reputed companies with a strong pan-India dealer network.
India Inc was also happy. A Reliance-ADAG group senior executive said that over 1.5 million telecom retailers could now become BCs. Just as significantly, the phone number of an individual could become his account number with the retailer.
"You can deposit money with the retailer, who will then transfer it to the bank and give the customer confirmation through the mobile phone. Similarly, if you want to make a withdrawal, the retailer can give you the money by debiting it on the customer's mobile wallet through the bank. Both retailer as well as the telco will make money on the transaction," a senior telco executive said.
RBI has stepped up its financial inclusion initiatives, as more than half the population still remains out of reach of a formal credit structure. According to RBI data, only 5 per cent of India's 600,000 habitations have access to a commercial bank, and only 40 per cent of the country's 1.1 billion population has a bank account.
While RBI did not assign any reasons for excluding NBFCs, sources said this would have no bearing on their eligibility for a private banking licence. A host of NBFCs are eagerly waiting RBI's guidelines to apply for such a licence.
What may have influenced RBI's decision against NBFCs is possible conflict of interest with deposit-taking entities. If non-deposit taking NBFCs are engaged only in deposit products and payment/remittance services, the objective of providing affordable credit as a major component of financial inclusion could be defeated.
There could also be conflict of interest if the NBFC provides its own loan product as principal and bank's loan product as agent.
The RBI guidelines said banks must carry out due diligence with regard to financial soundness, management and corporate governance, cash-handling ability, technology absorption capability, reputation and market standing before appointing a BC.
While BCs can work on behalf of more than one bank, a retail outlet or sub-agent of a BC will have to represent only one bank, it said. Retail outlets or a sub-agent should not be further than 5 kms from the base branch of a bank in metropolitan centres and 30 kms in other areas.
Banks may decide on a reasonable commission to be paid to a business correspondent, barring them from charging customers directly. It also disfavoured commissions to be linked to the number of clients served or transaction volumes.
RBI wants business correspondents to reach two-thirds of the country's 100,000 villages that have no access to banking services.
It recommended the BC model as a cost-effective alternative to the brick-and-mortar branch. The main targets include the elderly, infirm, disabled, women, and those without easy access to a branch.