Banks jittery over changes in banking correspondent model
M Rajshekhar, ET Bureau May 12, 2012, 01.38AM IST
NEW DELHI: In a bid to improve the economics of rural banking, a division of the finance ministry is driving a radical change in the business of banking correspondents-people who move around with handheld terminals and essentially bring the bank home.
That "suggestion", which nervous banks are seeing as a directive and are implementing, is a package of contradiction: it increases penetration, but stifles competition; it promises to breathe new life into the struggling industry, but threatens to kill small BC firms; it presses BC firms to invest more, but doesn't guarantee them business.
Under the package, the department of financial services (DFS) has split the country into 20 clusters. Large states like Maharashtra will have one cluster each. In the case of smaller states like Punjab and Haryana, more than one state will be clumped together to form a cluster. Each cluster has a lead public sector bank, which will appoint a BC firm to service customers of all PSU banks in the cluster.
This is different from the current system in which every bank has its own banking correspondents. Industry players are unsure what the new system means for the old one, but they agree this is a radical change.
The banking correspondent industry currently has revenues of Rs 250-300 crore, but is looking at a Rs 6,000-crore opportunity once the government makes good on its intent to deliver all Rs 3,00,000-crore of welfare benefits - subsidies, payments and special schemes - directly into bank accounts of beneficiaries through banking correspondents.
The finance ministry has not specified whether all these payments will flow through the designated bank and the BC for the respective cluster. "How am I expected to figure out how much to bid when I don't know how much welfare money will flow through this?" asks a senior manager at Bartronics, a Hyderabad-based BC firm.
However, a senior banker at the State Bank of India says the understanding is that the government will route welfare benefits through the designated entities and pay BCs a fixed fee. Both of them wanted to remain anonymous for fear of antagonising the department of financial services.
Banks are nervous because the new arrangement creates a monolithic BC firm. "They might blackmail us," says the SBI banker. "And if the BC firm fails to deliver, the entire financial inclusion programme will come to a standstill."
"It (monopoly) is not something that should be discussed now, because for the last six years, we have been trying out various execution models," counters Manish Khera, managing director of FINO, India's largest BC firm. "This is one more model and we feel it's not a bad way as long as it serves the purpose of financial inclusion."
KC Chakrabarty, the deputy governor who is in charge of financial inclusion at the Reserve Bank of India, the banking regulator, says a BC firm "dictating terms" to a bank is a possibility, but it's not an immediate question for the regulator. "If the banks' businesses or consumers start suffering, we will look into this," he adds.
To prevent a countrywide monopoly, the SBI requests for proposals says, the number of clusters for a BC firm will be capped at six.
Despite those reservations, lead banks are putting out request for proposals (RFPs). State Bank of India, the lead bank for Maharashtra, put out its RFP on April 10. RFPs for another 19 states were uploaded on bank websites on May 7. The SBI official says agreements with BCs will be signed by end-July.
According to DFS secretary DK Mittal, the finance ministry is not arm-twisting banks, and that this is not even a directive. "From time to time, the department makes suggestions to banks. It is up to them to accept it or not," he says. "We thought this is one way to improve the viability of BCs. That's all."
"All (BC) players are running in losses," says the Bartronics manager. This is despite the fact that banks have made BCs the mainstay of meeting their financial inclusion targets. According to RBI numbers, of the 100,000-odd banking locations in India, about 70,000 are covered through BCs.
Besides financial viability, the other issue with the BC model has been inconsistent service. BC firms not having enough agents, BCs not visiting villages regularly, BC firms delaying payouts to beneficiaries to earn interest for themselves are some of the challenges the model is facing.
This is partly due to the absence of service standards. For the first time, some common service standards are being defined. "It is good to mention what you want with measurable standards," says Khera of FINO. "Or, else anything I do will be short of expectations."
For example, the SBI request for proposals makes it mandatory for the BC firm to have at least one BC agent in every gram panchayat, which is roughly an area of 5-10 km.
Customer authentication will now need to be done online using biometrics, as against the current system of offline, smart card-based. Also, the new system reduces the scope for a BC firm to hold on to customer payments to earn interest for itself. It does so by making it mandatory for customer accounts to be held and maintained with the bank, and not the BC firm, as it happens currently in some cases.
BC firms will have to now invest more in agent presence and in shifting from offline to online authentication. This shift does not perturb Khera. "In this business, 10% of the cost is technology, 90% is people and processes," he says. "I still maintain that my hardware is best suited for this country, but for now, I am going to play along."
The biggest incentive to stay in, or enter, this business at this point in time is handling the 3,00,000-crore of welfare benefits the government has promised to move electronically. This could even change the profile of BC firms and lead to M&As. "It's likely that companies with deep pockets will bid," says the Bartronics manager. "Or, the BC companies might try and raise money on the back of the contracts they win."
