Facilitating financial inclusion

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Facilitating financial inclusion

Monday, 07 January 2019 | Moin Qazi

Facilitating financial inclusion

Opening of bank accounts may not ensure access to financial services in remote areas. Bank agents can provide last-mile connectivity, armed as they are with better financial technology

India has traditionally been an under-banked country. The existing banking system doesn’t work for the poor and those in remotely located areas because most transactions are conducted in cash and ‘brick and mortar’ outlets make services expensive. Banks, utility companies and other institutions pass along the costs of handling cash transactions. And those, associated with storing, transporting and processing cash, pass it to their customers. It becomes hard for low-income customers to absorb the costs. The global revolution in technology, along with rapid advances in digital payment systems, is creating opportunities to connect poor households with affordable and reliable financial tools through mobile phones and other digital interfaces. In recent years, technology has helped close the financial inclusion gap. Digital finance is now the new mantra which India has embraced enthusiastically, and with good reason.

The most important and revolutionary technology-driven model for efficient last mile delivery of financial services in our country is the business correspondent model — an equivalent to the agent network in Kenya. The business correspondent model is typically an agent or an extended arm of the bank — an important piece in the financial inclusion circle and a key touchpoint. The model was introduced in 2006 by the Reserve Bank of India (RBI) to allow banks to have third-party, non-bank agents to extend their services right at the people’s doorstep. Agents are a very important resource for India’s transition to digital-based financial inclusion. They act as a bridge between financial service providers and last mile customers, not only in a practical sense as transaction facilitators, but through their human touch and personal interface.

Being technology driven, the business correspondent model has played a critical role in opening large number of Jan Dhan accounts. Business correspondents are typically grassroot  entrepreneurs who serve the customers on behalf of the bank. Since they belong to the same community, they have local knowledge, greater understanding of the issues specific to the rural poor and enjoy greater acceptability amongst them. They have flexibility in operations, which provide a level of comfort to their clientele and are, therefore, better able to serve the population .They take banking to the people rather than making them visit the banks. Historically, the biggest problem for banks has been the high costs associated with serving low-income people. Since business correspondents work on low-cost models and deliver almost at the doorstep, access has become affordable. Customers don’t have to spend money to travel to a bank or take time away from work, which would mean loss of a day’s wage. 

A study by Anjini Kochar, a Stanford University scholar, published in the Journal of Development Economics, highlighted the role of business correspondents as key drivers of financial inclusion. Kochar showed how business correspondents have helped increase savings and other financial outcomes of rural households. Using data of approximately 7,000 households in the south western State of Karnataka, the writer compared savings data before and after the launch of the business correspondent policy. She found that business correspondent coverage, increased annual household savings by roughly Rs 15,500 on an average. Business correspondents, Kochar explained, improve total household savings largely because their use of mobile technology, through point of service devices, significantly reduced costs incurred by rural households in accessing financial services.

However, in India, the business correspondent model remains relatively underdeveloped. The key point is that the commissions of banking correspondents are low and the Government is not willing to consider this issue. Recent research by the Helix Institute of Digital Finance revealed that in the business correspondent model, Indian agents earn a median income of $52 per month, compared to agents in Kenya who earn $192 per month.

Managing the agent network is most critical for the success of this model. Agents conduct cash-in and cash-out (CICO) functions, enabling customers to convert cash into electronic money and back again in convenient locations. In the eyes of the customer, the agent is the face of the company. This means that the agent can either build or destroy trust and credibility. Many providers focus on building agent networks as fast as possible, without paying careful attention to the agents’ business case and profitability. Experts suggest three key tenets in managing an agent network: (1) grow customer base and the network in tandem; (2) understand agent economics and risk — the business case for agents is not that simple and (3) enroll agents who have the right skills and dedication, and prepare to train and retrain.

For the financial inclusion industry to be able to capitalise fully on the benefits of digital financial services, it is important that the accompanying risks are understood and adequately addressed. New technology is not only delivering considerable benefits to the financial inclusion market, but also creating new risks. Though these risks cannot be eliminated, they can be mitigated. We need to keep in mind concerns of security, affordability  and safety of these new financial channels. With many opportunities provided by ground-breaking technology and innovative business operations, also comes new risks which relates to implementing digital financial services that extend far beyond operational and technical risks. Loss of privacy is the most obvious risk. Indeed, despite efforts to create all safeguards, it is all but inevitable.

It is now becoming clear that business correspondents may not be able to handle the entire range of banking services, particularly credit functions. It is only larger entities, with competent manpower and proper logistical support, that can handle the credit functions required for modern banks. Efforts must be made to train business correspondents and enlarge their responsibilities in a graduated manner. When the business correspondents reach a higher level of turnover, they can be endowed with commensurate financial responsibilities. We also need a graded system of certification of business correspondents, from basic to advance training, so as to arm them with equivalent financial tasks.

Some of the urgent reforms that can improve the efficacy of the business correspondent model are:

n Establish a Self-Regulatory Organisation (SRO) for business correspondents. The SRO would help establish standard rules and formulate a code of conduct to establish effective monitoring and supervision. It would also act as the legitimately recognised interface between BCNs, banks, the RBI and the Government.

n An independent agency should be given the task of undertaking geo tagging and GPS mapping of agent locations to enable better monitoring and supervision of agent points.

n Reduce time required for transactions to bring down incremental costs for agents, thereby enhancing viability of their operations. This can be facilitated through Straight Through-Processing by riding on national digital infrastructure, having a unified KYC, simplified processes, and workflow-based solutions.

n Enable agents to source credit with innovative risk-sharing mechanisms and facilitate data analytics based digital credit models. This can boost revenue, make available investments for upgrading technology and make credit more inclusive.

n Improve compensation structures to enhance agent viability. It could be a combination of time, fixed and variable compensation. The compensation can be linked with various performance benchmarks, including customer ratings. The agents should also be supported to build adjacent revenue streams.

Business correspondents need to be adequately incentivised. They require fixed investment and substantial upfront costs, scale is necessary to recoup the investment. Unit costs decrease as more value flows through the systemfixed costs are hard for small providers to shoulder. We will need a larger force of agents, educated, motivated and savvy enough to carry out businesses on behalf of banks in the heartland of India. It is, therefore, imperative that we design a comprehensive policy that covers various aspects of their services. Considering the work required for on-boarding customers and orienting them to actively use digital services, their compensation appears to be hardly worth the effort. On account of this, business correspondents tend to favour large and densely populated villages.

(The writer is Member, NITI Aayog’s National Committee on Financial Literacy and Inclusion for Women)

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