Business Correspondent Model in India — Road Ahead

Origins and Evolution of the Business Correspondent Model

In 90s and early 2000s, microfinance companies began to take shape in India. Banks found the business correspondent model to be an effective entry point into the same market where these microfinance companies operated. Initially, this model relied heavily on physical presence and direct interaction with customers, gradually gaining momentum from 2005 onwards.

The fundamental concept behind the business correspondent model involves forming partnerships between financial institutions and end customers. These partnerships are essential as business correspondents serve as intermediaries or representatives for both parties, fostering collaboration and complementarity.

In areas where banks were previously unable to extend their reach into new segments, the business correspondent model stepped in to assist financial institutions in serving customers located at the furthest reaches or the base of the socioeconomic pyramid. This model effectively fulfilled their financial requirements, acting as a vital support system. However, as technology has progressed significantly, the role, responsibilities, and fundamental structure of the business correspondent model have evolved. Consequently, the model has diversified into three main categories: physical, digital, and a combination of both, reflecting the changing landscape of financial services.

Adapting to Changing Landscape

If you try to understand the current landscape of financial services in India, you will notice that financial institutions have adopted certain strategies to serve their customers. They’ve either acquired microfinance companies or started their own microfinance operations, or enhanced their digital capabilities to reduce reliance on areas where the business correspondent model was active. This shift in approach has been prompted by advancements in technology, which have significantly reduced customer acquisition and service costs. Also, due to the decreasing foot traffic in bank branches as more people fulfill their financial needs digitally, banks have shifted away from traditional business correspondent models.

Challenges and Dilemmas in Financial Services

However, a major challenge arises concerning the differing needs of customers based on their socio-economic status. While those with higher incomes or better banking relationships prefer digital services, those in lower socio-economic brackets often require physical touchpoints for assistance. This presents a dilemma for financial institutions as the cost of operating physical branches for these customers is high. Consequently, business correspondent models are adapting to meet these needs, albeit facing increasing competition from established financial institutions.

Impact of Technological Advancements

The introduction of Aadhaar and advancements in payment systems, such as Aadhaar-enabled payment services, has led to a significant shift in operating strategies in India, particularly concerning the business correspondent model.

Emergence of Loan Service Providers (LSPs)

Alongside these technological advancements, a new category of enterprises called Loan Service Providers (LSPs) is emerging. This development presents fresh opportunities for financial institutions, allowing them to diversify their partnerships beyond the traditional business correspondent model. However, it’s important to note that LSPs primarily operate from a digital perspective, focusing on customer acquisition, underwriting, and initial service provision, rather than ongoing customer relations.

Collaboration between Business Correspondents and LSPs

This is where the strength of the business correspondent model lies, as it possesses informal market and customer intelligence. Instead of competing with LSPs, business correspondents can complement their services, particularly in customer support. While some argue that the business correspondent model may evolve into LSPs, I believe that these two models will coexist and yield greater benefits through collaboration.

Redefining the Role of Business Correspondents

The future trajectory of the business correspondent model necessitates a shift in how financial institutions perceive them, moving away from regarding them merely as agents in the field. Instead, they should be acknowledged as genuine partners in the financial ecosystem. Capacity building emerges as another crucial aspect requiring heightened attention from financial institutions. It’s imperative to empower these partners adequately so they can effectively deliver a comprehensive suite of services to end customers. In the current Indian landscape, individual efforts alone are insufficient to achieve desired outcomes. Success hinges upon fostering partnerships and treating collaborators as true equals, whether they are business correspondents, loan service providers, or fintech entities.

Regulatory Considerations and Future Directions

Another critical step involves the Reserve Bank of India consolidating all business correspondent guidelines into a unified master directive, similar to those governing NBFCs and other financial institutions. Furthermore, recent guidelines from the RBI underscore the need for establishing a dedicated self-regulatory organization for business correspondents to enhance regulatory compliance and engagement. Additionally, regulatory flexibility must be extended to business correspondents to enable them to offer a wide array of financial services. With the emergence of technologies like account aggregators, the business correspondent model presents an opportunity for all financial institutions to venture into unexplored territories and reap the associated benefits.

Reference Links:

Discussion Paper on Engagement of ‘for-profit’ Companies as Business Correspondents

Financial Inclusion by Extension of Banking Services — Use of Business Correspondents (BCs)

Section 23 of Banking Regulation Act, 1949 — Master Circular on Branch Authorisation