By IMTFI Researcher K.V. Nithyananda
To promote financial inclusion in India, the Reserve Bank of India (RBI), in 2006, proposed the Banking Correspondent (BC) model. Under this model, a lead banker is identified in each district to coordinate overall banking activities including the implementation of the BC scheme. Indian Overseas Bank (IOB) is the lead banker in Trichy District of Tamil Nadu, India. Other banks, including State Bank of India (SBI), Indian Bank, Canara Bank, ICICI Bank, HDFC Bank, also take part in the operations of BCs in this district. This post draws from data collected through a combination of a questionnaire as well as open-ended interviews with BCs in Trichy to discuss the acute financial, social and political challenges BCs face and to demonstrate why the RBI needs to seriously re-examine the design of the BC business model in India.
Demographics and Economic Profiles of Banking Correspondents
43% of the BCs in Trichy were female, while 56% of them were male and included one NGO. Even though the RBI envisioned the scheme to provide part-time earning opportunities for women within a particular village or locality (and also because the microfinance industry catered predominantly to women clients), we found that men dominated BC activities. The woman of the household often acquired the BC license but the male member (husband, father, brother, etc.) would implement the operations on a full-time or a part-time basis. Bank officials reported that in order for BCs to generate revenue, they were authorized to conduct operations in about 3 to 10 villages around their primary village. On average, each BC in Trichy region was managing about 1000 client accounts. This required travel, often at odd times that only men could fulfill due to India’s predominantly patriarchal society.
The caste profile was the most interesting factor of our study. We found that only 25% were upper caste and the rest were Other Backward Castes (OBC), Scheduled Castes (SC), Muslims and Christians (See Figure 1). Village elders informed us that since BC services were provided to people of all castes at their doorsteps, this meant physically traveling to the segregated localities of Scheduled Castes (SC), Scheduled Tribes (ST), Muslims, and Christians. Social norms however, prohibit upper caste people from going to these localities. In addition, lower caste people were very eager to overcome their economic hardships and were willing to work hard and explore all opportunities available to them.
For the male BC interviewees, 70% reported that it was their primary economic activity whereas for 82% of female BCs it was their only economic activity. The remaining 25% of male BCs rely predominantly on running their own kirana (grocery) shop or carrying out farming and agriculture, 4% of them depend primarily on their pension for their livelihood, while the remaining 1% are employed with other organizations for primary livelihood.
Of the remaining 18% female BCs who have alternate sources of income, 16% carry out their own business, which could be in the form of photocopy shop, mobile recharge shop, kirana (grocery) shop, or other economic activities, while 2% work with another organization on a full-time employment and carrying out the BC activities on a part-time basis.
Financial and Economic Welfare Aspects of Banking Correspondent Business
About 70% of BCs were associated with Indian Overseas Bank (IOB), the lead banker for the Trichy region in implementing the financial schemes promoted by the Reserve Bank of India (RBI). We also collected information from other banks like State Bank of India and Canara Bank, but private sector banks like ICICI Bank and HDFC Bank were reluctant to share information about their BC operations. Most BCs had been associated with their institutions only for about 2 – 3 years for two reasons. First, if the BCs found that their organization was not sharing the losses or being helpful in developing clients, there was a habit of leaving and joining other financial institution/service providers. This was the case for many BCs that had shifted out of the State Bank of India. Second, the RBI has now begun pushing this scheme very aggressively and financial institutions only recently became active in implementing it.
Though the RBI has been promoting the business of BC (also as a means of economic welfare for the BCs), it has not been very remunerative for the BCs. Our sample revealed that each BC was able to earn an average gross revenue of around Rs.7,000 per month. But BCs also incurred all operating costs related to running their business and 79% of the BCs had in fact suffered financial losses. BCs operate on an “Earn while you learn” model where they get training while running the business. As a result most BCs did not yet have a sufficient number of clients who trusted them with their accounts or money. Very few BCs had the large client base needed to make regular profits.
A study conducted by the RBI in 2009, showed that BCs have to make a cash deposit of Rs.5,000. This deposit is collected to ensure that BCs have the necessary permits, to provide access to the technological inputs (including software, machines, etc.), and also to safeguard the bank against possible default by BCs. But our study found that Trichy BCs on average made deposits of around Rs.33,951, significantly higher than the RBI data.
Moreover, BCs invested resources towards premises, laptops, scanners, printers, and other hardware equipment (average of Rs.49,073). Many BCs have invested close to Rs.3,00,000 for setting up of the BC business. Assuming an interest rate of 12% per annum on this investment, a monthly interest charge of Rs.850 is used as notional interest cost in assessing the true financial health of BCs (See Figure 2).
The data shows that BCs, on an average were incurring losses to the extent of Rs.1800. It is disheartening to note that most BCs have had to cover for these losses themselves, either by borrowing funds or by pledging gold or agricultural property. They invariably used their own funds and also borrowed funds to manage the liquidity in the business. Only 16 out of 143 BCs indicated that the bank or the financial institution made good the losses they suffered by reimbursing their expenses or paying them additional commission.
BCs also faced other hardships, most of which are generally underestimated by researchers. Some BCs complained that their customers visited at all times, unlike banks that have restricted hours of operation. In such circumstances, BCs would lend from their personal money and go to the client’s place the following day to get the transaction ratified. In some circumstances BCs’ money would get blocked. Many BCs were also banished from their villages by political leaders. At times villagers thought that BCs were stealing the bank’s money. Relationships between local elected officials (Panchayat presidents who are eager to show off their influence in the region and who were often also operating as local money lenders) and BCs (who are obliged to apply the methods and guidelines of their employer in terms of account opening, pension payments, etc.) were also fraught with tensions. There were many instances where BCs were threatened, manhandled, and even beaten up by local elected representatives.
Concluding Remarks
In many ways, the life of BCs in Trichy district is not what the RBI envisions. They have been made to suffer undue financial hardships; they have been braving threats from local politicians, and also getting a tarnished reputation. In such circumstances, the high turnover of BCs is not surprising. Given this scenario, the financial viability of the business model proposed by the RBI and implemented by the banks needs to be re-examined to avoid a systemic collapse and prevent corruption that could bring disrepute to the entire scheme of BCs, the bank operating the scheme as well as the RBI.
Read K.V. Nithyananda and Cyril Fouillet's Final Report.
 |
| Data Collection |
Demographics and Economic Profiles of Banking Correspondents
43% of the BCs in Trichy were female, while 56% of them were male and included one NGO. Even though the RBI envisioned the scheme to provide part-time earning opportunities for women within a particular village or locality (and also because the microfinance industry catered predominantly to women clients), we found that men dominated BC activities. The woman of the household often acquired the BC license but the male member (husband, father, brother, etc.) would implement the operations on a full-time or a part-time basis. Bank officials reported that in order for BCs to generate revenue, they were authorized to conduct operations in about 3 to 10 villages around their primary village. On average, each BC in Trichy region was managing about 1000 client accounts. This required travel, often at odd times that only men could fulfill due to India’s predominantly patriarchal society.
 |
| Figure 1. Caste Profile of the BCs |
For the male BC interviewees, 70% reported that it was their primary economic activity whereas for 82% of female BCs it was their only economic activity. The remaining 25% of male BCs rely predominantly on running their own kirana (grocery) shop or carrying out farming and agriculture, 4% of them depend primarily on their pension for their livelihood, while the remaining 1% are employed with other organizations for primary livelihood.
Of the remaining 18% female BCs who have alternate sources of income, 16% carry out their own business, which could be in the form of photocopy shop, mobile recharge shop, kirana (grocery) shop, or other economic activities, while 2% work with another organization on a full-time employment and carrying out the BC activities on a part-time basis.
Financial and Economic Welfare Aspects of Banking Correspondent Business
About 70% of BCs were associated with Indian Overseas Bank (IOB), the lead banker for the Trichy region in implementing the financial schemes promoted by the Reserve Bank of India (RBI). We also collected information from other banks like State Bank of India and Canara Bank, but private sector banks like ICICI Bank and HDFC Bank were reluctant to share information about their BC operations. Most BCs had been associated with their institutions only for about 2 – 3 years for two reasons. First, if the BCs found that their organization was not sharing the losses or being helpful in developing clients, there was a habit of leaving and joining other financial institution/service providers. This was the case for many BCs that had shifted out of the State Bank of India. Second, the RBI has now begun pushing this scheme very aggressively and financial institutions only recently became active in implementing it.
Though the RBI has been promoting the business of BC (also as a means of economic welfare for the BCs), it has not been very remunerative for the BCs. Our sample revealed that each BC was able to earn an average gross revenue of around Rs.7,000 per month. But BCs also incurred all operating costs related to running their business and 79% of the BCs had in fact suffered financial losses. BCs operate on an “Earn while you learn” model where they get training while running the business. As a result most BCs did not yet have a sufficient number of clients who trusted them with their accounts or money. Very few BCs had the large client base needed to make regular profits.
A study conducted by the RBI in 2009, showed that BCs have to make a cash deposit of Rs.5,000. This deposit is collected to ensure that BCs have the necessary permits, to provide access to the technological inputs (including software, machines, etc.), and also to safeguard the bank against possible default by BCs. But our study found that Trichy BCs on average made deposits of around Rs.33,951, significantly higher than the RBI data.
 |
| Figure 2. Financial Health of the BCs |
The data shows that BCs, on an average were incurring losses to the extent of Rs.1800. It is disheartening to note that most BCs have had to cover for these losses themselves, either by borrowing funds or by pledging gold or agricultural property. They invariably used their own funds and also borrowed funds to manage the liquidity in the business. Only 16 out of 143 BCs indicated that the bank or the financial institution made good the losses they suffered by reimbursing their expenses or paying them additional commission.
BCs also faced other hardships, most of which are generally underestimated by researchers. Some BCs complained that their customers visited at all times, unlike banks that have restricted hours of operation. In such circumstances, BCs would lend from their personal money and go to the client’s place the following day to get the transaction ratified. In some circumstances BCs’ money would get blocked. Many BCs were also banished from their villages by political leaders. At times villagers thought that BCs were stealing the bank’s money. Relationships between local elected officials (Panchayat presidents who are eager to show off their influence in the region and who were often also operating as local money lenders) and BCs (who are obliged to apply the methods and guidelines of their employer in terms of account opening, pension payments, etc.) were also fraught with tensions. There were many instances where BCs were threatened, manhandled, and even beaten up by local elected representatives.
Concluding Remarks
In many ways, the life of BCs in Trichy district is not what the RBI envisions. They have been made to suffer undue financial hardships; they have been braving threats from local politicians, and also getting a tarnished reputation. In such circumstances, the high turnover of BCs is not surprising. Given this scenario, the financial viability of the business model proposed by the RBI and implemented by the banks needs to be re-examined to avoid a systemic collapse and prevent corruption that could bring disrepute to the entire scheme of BCs, the bank operating the scheme as well as the RBI.
Read K.V. Nithyananda and Cyril Fouillet's Final Report.
No comments:
Post a Comment