September 03, 2015
Expectations for the business correspondent model in India have been high from the start. For a country of its size, with a significant unbanked population in remote and rural areas, allowing agents or correspondents to offer services on behalf of banks seemed like an intuitive way to counter challenges of access. Delivering on the promise of this model though, has not been easy. India’s financial sector continues to be dominated by banks, with regulatory barriers limiting the role and scope of agents.
This is gradually changing. Non-Bank Finance companies (NBFCs) are now permitted to act as business correspondents. The Pradhan Mantri Jan Dhan Yojana (PMJDY), a new government scheme to take banking facilities to every household has spurred the opening of 125 million accounts in the space of five months. And, significantly, the government is now offering an incentive of INR 5,000 per month to agents who provide the last link between clients and the bank. This is primarily aimed at incentivizing business correspondents in rural, remote areas that face viability issues.
The business correspondent model itself has also expanded from savings alone to include credit. This has made it an attractive option for NBFCs as it is a natural extension of their existing business model. Banks are also demonstrating an increasing interest in this model. Leading banks including Axis Bank, YES Bank and IndusInd Bank are among those that have significantly enhanced the scale of their business correspondent operations. From their perspective, the model offers a scalable, cost-effective way to reach underserved clients and meet the regulator’s financial inclusion targets. At the same time, banks are able to retain control over know-your-customer (KYC) norms, operational processes and credit decisions.1
Since the regulations came into effect, microfinance institutions structured as NBFCs have eagerly signed up as business correspondents of banks. We know from our experience working with Cashpor Micro Credit in Uttar Pradesh that this model offers great promise for microfinance institutions.
Earlier this year, we partnered with MetLife Foundation to help another microfinance institution, based in Uttar Pradesh, become a business correspondent. Our two-year project with Margdarshak Financial Services Pvt Ltd, which will be managed by Grameen Foundation India, aims to create sustainable and viable banking services, including savings, for more than 40,000 poor, female clients.
For Margdarshak and other microfinance institutions, making a successful transition to this model requires them to address five key issues.
- Defining roles and responsibilities
Unlike a microfinance institution’s standalone business model, the business correspondent model is a partnership where clients are jointly served by two entities. Though clients are technically on the banking partner’s books, the business correspondent (microfinance institution) is the face of the bank to the clients. Additionally, many banks are still testing the viability of this model, and try to contain costs where possible. As margins are low, business correspondents themselves tend to focus on their own sustainability and limit costs where they can. Given the complexities of serving the poor, this can lead to ambiguity and misunderstandings around questions such as which partner should be responsible for investing in, and managing the process of marketing to poor clients, offering them mobile and financial education, or addressing their grievances.
- Integrating technology systems
The scale of data sharing involved in a business correspondent partnership necessitates robust technology integration between microfinance institutions and their banking partners. The resulting automation of data flows between the two entities can significantly increase the number of clients and transactions, reduce processing times, improve productivity and enhance accuracy. However, technology integration must not be perceived as the banking correspondent’s responsibility alone, the bank must be an equal partner in this effort. If not, this could limit the amount of investment made into the integration effort, resulting in a haphazard solution that negatively impacts both channel productivity and client experience.
- Making operational changes
The most significant change that microfinance institutions that become business correspondents must prepare for is the introduction of an additional key stakeholder in their operations – the banking partner. For example, credit decisions formerly taken at the level of a microfinance institution’s branch or head office, typically now have to be routed to the banking partner for approval prior to sanctioning the loan. Know-your-customer (KYC) norms, documentary requirements, reporting templates and processes may need to be customized to the banking partner. The complexities of course increase manifold if a business correspondent ties up with multiple banking partners. As Rahul Mittra, Margdarshak’s managing director said, “A key lesson that we learned is that unless properly planned for and managed in advance, operational inefficiencies can creep in, leading to cost-overruns, processing delays and dissatisfied clients.” For a sector that relies so heavily on personal relationships with clients, the latter is a particularly bad outcome.
- Building staff capacity and motivation
Making the transition from selling credit alone, to offering a wide array of services for clients can be particularly challenging for employees. Employee “buy-in” is key to ensuring a successful transition to the business correspondent model. Unless employees are made aware of and are kept engaged with the planned change, motivation levels can flag leading to negative outcomes. The management team will therefore need to ensure that they personally demonstrate an unwavering commitment to the business correspondent model, and actively communicate the rationale for the planned transition. They will need to focus on continuously engaging with employees, soliciting feedback and addressing concerns. They will need to plan for and invest in training staff on the new products and processes. Key responsibility areas and incentives for individual employees may also need to be modified to ensure that they are aligned with overall organizational goals. This blog post discusses how microfinance institutions can maximize their chances of a successful transition through effectively managing the change process.
- Managing client expectations
Managing client expectations with the new model can also be tricky. As Rahul Mittra puts it, “Banks typically have stringent documentary requirements , which our clients are not used to. We therefore spend considerable time clarifying the benefits of this model to clients, explaining that they will have access to a much wider range of products and services and higher loan sizes. This helps to make the case for why they should put in the additional effort needed at the application stage.”
An additional challenge is posed by operational modifications which can have undesirable impacts – for example, a microfinance institution and its banking partner may agree on a lower repayment frequency of 30 rather than 15 days. While this might help from the perspective of streamlining coordination between the two entities better and lead to possible operational and cost efficiencies, the microfinance institution will need to guard against any dilution in group cohesion or the relationship that loan officers form with individual clients, which could come about as a result of fewer group meetings.
In upcoming posts, we will share learnings and insights from our journey with Margdarshak, as we help it transform itself from an organization focused on credit alone into a sustainable and scalable business correspondent of a commercial bank. Drawing from our experiences in this project, we will look at some of the issues mentioned above in more detail and discuss specific steps that microfinance institutions can take to mitigate these challenges.
1 For example : The Reserve Bank of India typically requires only one permanent or local address proof to open a no-frills account, but banks tend to be more conservative, and often ask for a proof of identity as well.