Microfinance Institutions as Business Correspondents: What to Negotiate with Banks

In recent announcements, the government of India has unveiled ambitious financial inclusion plans of which the Business Correspondent (BC) model is a key piece. Over the next several weeks, Grameen Foundation India (a wholly-owned subsidiary of Grameen Foundation) will post a series of blogs that discuss this model and how to make it work for promoting financial inclusion in India.

With the recent circular by the Reserve Bank of India (RBI), allowing non-banking financial companies (NBFCs) that do not accept deposits to be authorized as business correspondents (BC), there is no doubt that NBFC-MFIs¹ stand to gain a lot. It would be prudent for such microfinance institutions (MFIs) to consider this opportunity seriously and explore a partnership with a reputed bank. 

Grameen Foundation India (GFI) enables access to appropriate financial services for the poor. As part of our work, we foster innovative partnerships that can lead to a more effective delivery of financial services. For example, GFI worked closely with Cashpor Micro Credit as it transformed from a credit only MFI to an MFI-BC that offers multiple financial products.  In this post, we will discuss possible questions, from an MFI perspective, on how to create a successful BC partnership with banks. 

Why partner with a bank and offer services as a BC?

• MFIs can offer other financial products like savings, remittances, and pension to their existing customer base, using their client relationships and business infrastructure. 
• A bigger product portfolio can lead to increased customer engagement and hence enhanced customer loyalty. 
• New products can provide an additional revenue stream for the MFIs. 
• Partnership with a reputed bank will also enhance the brand value of the MFI.

How do you select a bank to partner with?
Many MFIs assume that they have little choice in selecting bank partners and that banks have the upper hand in deciding which organizations to appoint as business correspondents. However, many banks are currently appointing business correspondents and it would be a prudent strategy for MFIs to identify the ones that are suitable and approach them. A long term sustainable partnership can be built if there is a common vision and willingness to be flexible. Some points to keep in mind while selecting a bank partner are:

• The bank’s reputation and how active it is in the financial inclusion space.
• The bank’s experience in implementing the banking corerspondent model and delivering the kind of services that the MFI wants.
• The products the bank is willing to offer (in the short term and long term).

What should you negotiate?
To build a long-term relation, it is essential that the partners work together for mutual benefit. The earlier you discuss the terms and conditions, the better. A few important points MFIs need to negotiate with banks are listed below:

• Products to be offered, where and to whom—There is a tremendous need for products like savings, remittances, and pensions. Once an MFI has determined the demand for other financial products, it needs to discuss the appropriate products that could be offered in partnership with the bank. Also, MFIs must identify districts and villages where they can offer these services given the bank’s geographic preference and presence. They also need to determine whether agents appointed by the MFIs would be expected to service the MFIs’ clients, as well as others in the community who did not open their account at the agent outlet. This will have a considerable impact on agent network development, training and management because most MFI operations are set up to serve their clients exclusively.
   
• Revenue Sharing—The profit margins in offering financial services to low income people are very low, so it is important that the MFI understands the business model. For example, MFIs can negotiate fee structures, ranging from fixed monthly fees for each outlet, to monthly fees for each outlet that are tied to performance indicators, to incentives for the overall portfolio (based on the bank’s policies). Variable components may include commissions for the number of accounts that are opened or the number of transactions that are conducted, or some combination of the two. The MFI should also discuss any fees the bank wants to charge the customers and evaluate if their customers are willing and able to pay those. MFIs must also discuss the frequency of incentive payment to the BC as in some cases there are significant delays which might lead the model to unravel. 
   
• Division of Roles and Responsibilities—This is a very critical aspect and can cause a lot of heartburn once the relationship is underway. It would be prudent to discuss respective roles and responsibilities particularly in areas of:
       -Client education and marketing—ideally resources and materials should be developed jointly and then delivered by the MFI.
       -Customer grievance redressal mechanisms and escalation paths.
       -​Interaction with and generating support from local bank branches, as needed.
   
• Other negotiation points – Some other points that need to be discussed are:
       -Joint goals and projections – to be aligned on key success criteria.
       -Target turn-around-times (TATs) for various processes.
       -Technology options – mobile vs. smartcard.

It is important to recognize that trust and confidence in the partnership can be built over time so if both organisations share the same vision, the opportunity should not be missed. However, MFIs should try to avoid jumping into a pilot without clarifying the points discussed above as it can be a costly mistake.

In the next post, we will discuss the various operational challenges that MFIs will face to make this venture a successful model.

To learn more about Grameen Foundation India’s work, visit //grameenfoundation.in/

¹NBCF-MFIs are regulated microfinance institutions that provide loans but are not allowed to accept deposits.