Frills in the framework of banking-correspondent model
12 Aug 2010, 0442 hrs IST,Ahona Ghosh,ET Bureau
The RBI says doorstep banking for villagers is the ‘only model’ that can achieve financial inclusion. Banks, though, remain unsure about it as a business model.
In the village of Sudkoli, in Maharashtra’s Raigad district, 30-year-old Pradeep Raghunath Tambadkar is about to get on his motorcycle to go to work. As he revs his bike off the dirt road, he spots his neighbour, Mahesh Laxman Patil, in his small, tin-roofed PCO in front of a stretch of paddy fields. Patil is not only Tambadkar’s neighbour and PCO owner, he is also his bank. Patil is a ‘banking correspondent’ for the Bank of India. The bank does not have a branch in Sudkoli, it only has Patil to serve the needs of unbanked villagers like Tambadkar.
Tambadkar rushes to the PCO and hands Rs 200 to Patil. The wiry 21-year-old pulls out a contraption that resembles a credit card swipe machine. When Tambadkar sticks his left thumb on the machine, a female voice representing the Bank of India greets him in Marathi. Patil works the digits to record the Rs 200 deposit into Tambadkar’s bank account. The voice confirms the transaction in Marathi and prints a receipt. It all takes a minute.
Says Tambadkar, a sugar supplier who earns Rs 300 a day: “I’ve never had a bank account before. But now, I can deposit money any time.” Every 8-10 days, Patil goes to the nearest Bank of India branch, about 30 km from Sudkoli, to deposit the cash collected from his customers. “Once my collections reach Rs 10,000, I go to the bank to deposit it.”
For the 107 million rural households in India, who don’t have access to a bank, such doorstep service, delivered from a distance using technology, is their window to the banking system. The Reserve Bank of India wants the banking-correspondent (BC) model to be the popular window. ” This is the only model (to achieve financial inclusion),” says RBI deputy governor Usha Thorat.
So, in March 2006, the RBI asked all commercial banks to adopt the BC model to reach the unbanked. It asked them to provide a no-frills savings account, loans and remittance products. But the response of banks was lukewarm. The RBI pressed on. This March, it asked all banks, public and private, to submit their ‘financial inclusion plans’ till 2013 – and meet them. Since they wouldn’t go out and set up branches, banks would have to do it largely through the BC model.
Even as banks press ahead to meet their stated targets, they remain unsure of the commercial viability of the BC model given its target audience – the unbanked in India’s 6,00,000 villages. “They are below the poverty line and don’t have that much of a surplus,” says JK Sinha, chief general manager, SBI, which has opened 3.83 million no-frill bank accounts in about four years through BCs. It looks impressive in absolute terms. Yet, it dwarfs the 126 million accounts that SBI services through its 12,582 branches. “We are trying to make it (BCs) a viable business and open accounts,” says Sinha. “We debate it every morning.”
For banks, the debate is largely two-fold. One, how to make revenues from these accounts exceed the cost of servicing them. Two, how to manage a complex operation, a large part of which is outsourced – and hence, not directly under their control.
Unlike the branch model, in the BC model, the bank and the customer don’t talk to each other directly. A technology partner, with whom the BCs are attached, is the go-between. For instance, Patil, the PCO owner in Sudkoli, is not a Bank of India employee. He represents Integra Micro Systems, a technology partner. The largest technology partner is Financial Information Network and Operations (FINO), which has 8,000 BCs, who have so far serviced 17 million customers of 14 banks.
The technology partner, through a non-profit arm, recruits the BCs and gives them the handheld machines. The BC needs to have passed class X. Further, the BC should be able to read and write English, which is the language of operation on the machine, though it has voice commands in 14 regional languages. They undergo a basic training of two to three months. The BCs working in rural areas earn a monthly salary of Rs 1,500-3,000 a month. After six months to one year, they also start earning commissions, as an incentive to reach more customers and do more transactions. Banks, typically, pay them 0.5% of the transaction amount and Rs 10 per new
account.
account.
Anjali Shashikant Thakur, 25, is a BC recruited by Integra Micro Systems about a year ago. She covers four villages in Raigad district and handles 1,200 customers. Integra pays her Rs 1,600 per month. Further, as commissions, she is entitled to 0.3% of the transaction amount and Rs 5 for opening a new account. “I haven’t got that yet,” she laughs.
Till November 2009, BCs could only be individuals, and not other entities. This created its own problems. BCs, who go from village to village, reported loss of money. So, in November 2009, the RBI allowed natural cash-collection centres like kirana stores and petrol pumps to also work as BCs. “This made it easier to reach out to villagers,” says Dewang Neralla, director, Atom Technologies, a technology partner.
But issues remain. Banks don’t like it that even though their technology partners are the ones who hire BCs, they have to answer for delays and fraud. If a BC loses money or runs away with depositor funds, it’s the liability of the bank. NC Kulbe, general manager, Bank of India, who oversees financial inclusion at the bank: “Monitoring BCs is a challenge, as there are discrepancies in cash collections.”
Counters Manish Khera, CEO, FINO: “Banks are only making a noise because they don’t understand the ‘micro-customer’ and they want to take the easy way out by depending on us.” Some banks are now planning to hire retired regional senior-level bank managers to monitor agents, and do audits every six months. Says Khera: “No one has done any audit yet.”
Robin Roy, associate director, financial services, PricewaterhouseCoopers India, says banks have to be careful while choosing a technology partner. “They have to get it right the first time, or else they will not get any return on investment,” he says. Adds SK Mitra, president, agriculture and rural banking, Axis Bank: “We don’t want to work with too many BCs because there are governance issues. We will work with strong established agencies with a pan-India presence.”
The penchant of politicians for loan waivers has also made banks wary. However, says Mitra: “The waiver is only for larger farmers, with ticket sizes of Rs 25,000 and above. Going by the microfinance experience, the bottom-of-the-pyramid customer is unlikely to have high default rates.” The bigger headache for banks is generating profits from this segment. Says Manohara Raj, business head, microfinance, HDFC Bank: “The revenue potential of pure savings accounts is quite low.” Meanwhile, the cost – of funds, of paying the technology partner, of maintaining the account – is disproportionate to the revenues generated. A recent study done by the Consultative Group to Assist the Poor on the cost of providing banking services to the unbanked and under-banked in Africa, Asia and Brazil found that non-branch banking was only 19% cheaper than branch banking.
“It costs us Rs 200 per account per year,” says Sinha of SBI. “This business will not make profits at least for the next three years.” RBI’s Thorat disagrees. “If you do a combination of products, it definitely delivers a break-even in a year,” she says, adding that banks have to start seeing it as a business (See box: ‘This is the only model’).
Even technology partners gripe about the half-and-half approach of banks. Anurag Gupta, CEO of A Little World, a technology partner, says this business is about scale. It has invested Rs 60 crore in the business, but it hasn’t scaled up as desired. “Some of the banks have not worked closely with us,” he says.
Banks can’t wish away the BC model, as the push for financial inclusion is coming from the highest echelons of the government. Banks have also indicated to the RBI strong inclusion targets (See table: Banks and Financial Inclusion). Says Sinha of SBI: “The government wants us to do it, whether there is profit or not. We have to figure out a profitable model for ourselves.”
What may work for them is that there is interest building in this space. New players are coming into the business. Six months ago, for instance, TCS tied up with five business correspondent agencies (who, in turn, have 500 agents working for them). “Rural is the future market,” says Krishna Kumar, vice-president, banking, TCS.
They will innovate with technology. For example, currently, the handheld devices work in an offline mode, and have to be updated through the server of the technology partner every 1-2 days. In future, transactions can happen real-time, leading to more transactions and volumes. Companies like TCS and Axis Bank also want the RBI to further expand the BC universe to include companies that have an established retail network in rural areas – for example, FMCG and telecom.
Even banks are doing things. Bank of India and SBI, have opened financial training institutes to train BCs. When they enter a new village, they conduct awareness drives. Says SS Ghugre, general manager, financial inclusion, Union Bank of India: “The people in this segment have the ability to save. We only need to educate them as to how to do so.”
Women hold about 40% of the BC accounts in Union Bank of India. “Since it works on a fingerprint authentication system, their husbands can’t operate their accounts,” says Ghugre. Vishaka Viswas Patil, 35, is married to a paddy farmer in Sudkoli. She opened a no-frill account -her first bank account ever -through a Bank of India BC six months ago. “I wanted an account in my name and save money from my husband’s earnings,” says Patil. She has saved Rs 600 so far and has not informed her husband yet of this account – a revelation she makes hesitatingly.
Tambadkar and the two Patils are illustrative of the power of financial access. People like them pay 24-36% a year to microfinance companies or 48-60% to local moneylenders. They could sure use bank loans at 12-16%. Today, the BC model seems like the only way for a quick scale-up – provided banks see it the same way. Says SBI’s Sinha: “If the model doesn’t pick up in the next two to three years, we will have to change it.” Usha Throat would not like that.