Before committing to the banking-correspondent model, we need to thrash out the economics
M Rajshekhar, ET Bureau Mar 15, 2012, 06.52AM IST
These are the heydays for the banking-correspondent (BC) model.
Banks want to use them to extend banking
into villages. The government wants to use them to deliver welfare
payments. In most cases, these transactions will be routed through BC companies,
not directed from banks to village agents.
This confidence being reposed in the BC model is a tad premature. Travel down to the field and you see the model struggling. Given the low fees, villagers do not want to become BCs. The outcome?
Those seeing other advantages in becoming a BC, like the village sarpanch seeking to reinforce his hegemony over the village, are signing up. There are other problems. BC companies, compelled by hyper-competition, are starting to cut corners in the field while placing agents and terminals. State governments like Andhra Pradesh complain BC companies and banks are delaying payments to earn income on the float.
For their part, BC companies say their economics is hamstrung by the banks' unwillingness to offer products that villagers would find useful, and by the government's unwillingness to pay for payment delivery. But will the BC model start working smoothly once the payments issue is resolved?
Before that question can be answered, banks and the government need to define the level of service that will be provided to those banking with the BCs. How many transactions should they be able to make in a month: one, two or 10? How far should they have to travel to access a BC agent? These standards are undefined right now, and vary from bank to bank, state to state. And as Haryana's unhappy experience with pension e-payment shows, service standards can be shockingly low.
Minutes of a meeting between banks, BCs and the Haryana government say, "The infrastructure deployed by the business correspondent of the banks is grossly inadequatea¦ the average frequency of visit of the BC agent in the village has been once every 90 days and, in some villages, there has been no visit at all in the last six months."
The minutes also mention under-deployment of the point-of-service terminals. In 18 of the state's 21 districts, they say, under-deployment ranged between -73.9% and -99.9%.
This is unacceptable. Partly because the poor should not get a level of banking that is markedly inferior to what you and I get. If your withdrawal from an ATM results in your account getting debited but the machine not disbursing cash, your bank doesn't tell you to contact the company that manages the ATM. However, most banks treat no-frill-account customers as clients of a BC company.
There are other non-negotiables as well. To ensure the BC agent doesn't end up with exclusive control over the pipe through which welfare payments flow - the new architecture should be interoperable. Villagers should be able to access their account from any point-of-service terminal - the way we can access our accounts from any ATM. Further, to ensure villagers become BC agents, they need to be paid well.
Add up all these costs and only then will we know the real cost of delivery through the BC channel.
Now, that cost of delivery needs to be tested against another set of numbers. Today, the government finds BCs attractive because it thinks biometric verification will severely crimp corruption. But what is the quantum of that reduction? Take NREGA. Even if the payment is made through the BC, the employment records are still created by the sarpanch. So, corruption will not vanish entirely. At best, ghost workers will be excised from the rolls.
Compare this putative reduction with the cost of delivery and we will have the cost:benefit analysis for switching to the BC model.
The danger of not doing this due diligence is we might end up with a delivery channel that is expensive and/or fails to deliver welfare benefits to some of the most vulnerable constituents of this country. With elections two years away, that is a possibility UPA-II might want to avoid. Worse, by the time we realise that the new channel doesn't work, we might have disbanded the old system as well.
On the whole, India seems to cycle through financial inclusion models the way teenagers move through fashions: cooperatives, bank nationalisation, RRBs, SHGs, MFIs and BCs. We prematurely pin all our hopes on one model and try to roll it out across the country. Given the diversity that characterises India, it inevitably fails. And then we look for the next silver bullet.
The finance ministry is now talking of ultra-small branches in villages which bank staff will visit once a week. And the RBI is thinking of a way to get banks to oversee BC agents, and to use BC companies purely as technology service providers.
That is what is underway here as well. Little wonder that every five years, we start wondering how to solve the last-mile problem in Indian banking.
This confidence being reposed in the BC model is a tad premature. Travel down to the field and you see the model struggling. Given the low fees, villagers do not want to become BCs. The outcome?
Those seeing other advantages in becoming a BC, like the village sarpanch seeking to reinforce his hegemony over the village, are signing up. There are other problems. BC companies, compelled by hyper-competition, are starting to cut corners in the field while placing agents and terminals. State governments like Andhra Pradesh complain BC companies and banks are delaying payments to earn income on the float.
For their part, BC companies say their economics is hamstrung by the banks' unwillingness to offer products that villagers would find useful, and by the government's unwillingness to pay for payment delivery. But will the BC model start working smoothly once the payments issue is resolved?
Before that question can be answered, banks and the government need to define the level of service that will be provided to those banking with the BCs. How many transactions should they be able to make in a month: one, two or 10? How far should they have to travel to access a BC agent? These standards are undefined right now, and vary from bank to bank, state to state. And as Haryana's unhappy experience with pension e-payment shows, service standards can be shockingly low.
Minutes of a meeting between banks, BCs and the Haryana government say, "The infrastructure deployed by the business correspondent of the banks is grossly inadequatea¦ the average frequency of visit of the BC agent in the village has been once every 90 days and, in some villages, there has been no visit at all in the last six months."
The minutes also mention under-deployment of the point-of-service terminals. In 18 of the state's 21 districts, they say, under-deployment ranged between -73.9% and -99.9%.
This is unacceptable. Partly because the poor should not get a level of banking that is markedly inferior to what you and I get. If your withdrawal from an ATM results in your account getting debited but the machine not disbursing cash, your bank doesn't tell you to contact the company that manages the ATM. However, most banks treat no-frill-account customers as clients of a BC company.
There are other non-negotiables as well. To ensure the BC agent doesn't end up with exclusive control over the pipe through which welfare payments flow - the new architecture should be interoperable. Villagers should be able to access their account from any point-of-service terminal - the way we can access our accounts from any ATM. Further, to ensure villagers become BC agents, they need to be paid well.
Add up all these costs and only then will we know the real cost of delivery through the BC channel.
Now, that cost of delivery needs to be tested against another set of numbers. Today, the government finds BCs attractive because it thinks biometric verification will severely crimp corruption. But what is the quantum of that reduction? Take NREGA. Even if the payment is made through the BC, the employment records are still created by the sarpanch. So, corruption will not vanish entirely. At best, ghost workers will be excised from the rolls.
Compare this putative reduction with the cost of delivery and we will have the cost:benefit analysis for switching to the BC model.
The danger of not doing this due diligence is we might end up with a delivery channel that is expensive and/or fails to deliver welfare benefits to some of the most vulnerable constituents of this country. With elections two years away, that is a possibility UPA-II might want to avoid. Worse, by the time we realise that the new channel doesn't work, we might have disbanded the old system as well.
On the whole, India seems to cycle through financial inclusion models the way teenagers move through fashions: cooperatives, bank nationalisation, RRBs, SHGs, MFIs and BCs. We prematurely pin all our hopes on one model and try to roll it out across the country. Given the diversity that characterises India, it inevitably fails. And then we look for the next silver bullet.
The finance ministry is now talking of ultra-small branches in villages which bank staff will visit once a week. And the RBI is thinking of a way to get banks to oversee BC agents, and to use BC companies purely as technology service providers.
That is what is underway here as well. Little wonder that every five years, we start wondering how to solve the last-mile problem in Indian banking.
