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Business News/ Companies / Firms take business correspondent route to gain banking expertise
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Firms take business correspondent route to gain banking expertise

Firms take business correspondent route to gain banking expertise

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Mumbai: The financial services arms of some large conglomerates have either tied up with banks to become so-called business correspondents (BCs) or are looking to do so, which allows them to learn the ropes and puts them in a position to set up banks, if they want to, if and when the regulations allow this.

While most such financial services firms are experienced in lending to borrowers, they are not allowed to take deposits from the public, an essential banking function where they need to build expertise in order to compete for banking licences.

These BCs are essentially agents of a bank that set up small branches to extend services such as opening accounts, mobilizing deposits, accepting remittances, making remittance payouts and originating loan proposals on behalf of the bank, and are a part of a larger financial inclusion thrust. The firms that act as BCs also distribute their own financial products through these outlets.

Aditya Birla Financial Services Group (ABFSG), part of the cement-to-telecom conglomerate controlled by Kumar Mangalam Birla, is evaluating an entry into the field, besides assessing the feasibility of various models.

Banks, at their end, benefit from engaging BCs as last-mile operators to cater to small-ticket customers and to include far-flung regions of the country under the banking system. The agents are attached to the nearest bank branch, which records both assets and liabilities generated from these BC transactions on its books.

“Sometimes it is difficult for us to utilize our own resources to offer banking services to customers since they may be too far away...or the ticket value of the transaction may be too small," a senior SBI official said on condition of anonymity. “In such situations, it is useful to have a business correspondent."

While several entities such as cigarette maker ITC Ltd, consumer products company Hindustan Unilever Ltd and oil marketer Bharat Petroleum Corp. Ltd have been acting as rural agents for banks, financial services firms are seen entering this space to map the banking landscape and to gauge challenges. Besides bringing in extra business for partner banks at a minimal incremental cost, the new breed of BCs will also bolster the Reserve Bank of India’s (RBI’s) push for financial inclusion across the country’s 600,000 villages, said experts.

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Explaining that BCs were currently operating mostly in areas with scanty banking services where the regulator wanted to “foster financial inclusion", Ashvin Parekh, a partner and national leader for financial services at international audit and consulting firm Ernst and Young (E&Y), said, “Any BC going into these geographies gains knowledge of the local market while trying to acquire customers. Though the initial efforts may be on behalf of other financial institutions, eventually these BCs can leverage these relationships and experience for their own businesses as some of them may go on to become banks."

Vikrant Gugnani, director of Reliance Money (an R-Cap subsidiary) and the executive overseeing the group’s banking agent initiative, said he intends scaling up the existing 30 “kiosk branches" to around 500 by the end of this year. These kiosk branches, Gugnani said, are akin to the extension counters of banks found attached to educational institutions or offices that offer basic banking services. Reliance is utilizing the franchisee outlets of its money transfer business Reliance Money Express and branches of Reliance Money Infrastructure Ltd to offer banking services. The agents are being trained in offering banking services with the help of professionals from Reliance Securities and SBI.

“It has been less than four months since we went live. The agreement with SBI was signed in October 2011, but we rolled out the services in January this year," Gugnani said, explaining that the integrated system was being tested in the intervening period. The firm is evaluating the “stability" of its model and conducting “an audit to validate (its) effectiveness". Reliance Money Infrastructure Ltd, a Reliance Capital subsidiary, is executing the model.

The SBI official cited above said some of the firms acting as BCs were doing it purely to earn transaction fees, while some others that are part of larger businesses were doing it for “some larger corporate interest".

The co-branded kiosks of Reliance and SBI are handling around 20,000 transactions every month, Gugnani said. They earn a fee of Rs15-20 for every remittance transaction and around Rs15 for every deposit. Conceding that the fee revenue was “not substantial in itself", Gugnani said it fitted in well with their rural marketing strategy. “We can utilize the relationship...to cross-sell our other products. Also, we gain experience in taking deposits, which will help while bidding for a banking licence. If we can open bank branches (later), then these kiosks and the relationships with local customers will help," he said. “A rural market is all about relationships."

The financial services outfit is also looking to channel synergies from group telecom company Reliance Communications Ltd (R-Com) to take the BC model beyond physical kiosks into the mobile banking segment. It plans to equip agents running the outlets with an R-Com mobile handset and connection. For kiosks run under partnership with SBI, it has provided R-Com’s CDMA tablets to agents wherever its 3G network is available since they are “cheaper and faster" than regular computers.

Others are thinking along the same lines. ABFSG, the financial services business of the diversified Aditya Birla Nuvo Ltd, is weighing an entry and is currently studying the viability of various models before going in for a possible bank tie-up. “It is a work in progress. Once the models have been pinned down, we will initiate talks with the banks. It will serve as building blocks for us when the banking licences are given out. The key parameter is how to reduce the cost of delivery" and make it profitable, according to a senior Aditya Birla Group executive. The company is also looking to leverage its internal network—UltraTech Cement Ltd distributors or Idea Cellular Ltd outlets, for instance—to reach out to farmers and other rural customers, added the executive.

Back in August 2010, RBI had first mooted the idea of allowing corporates to act as BCs in a discussion paper, counting on their ability to employ “larger resources, higher organizational strength and financial backing" as a boost for the bank agent model. Moreover, big companies would be wary of reputational risk and hence efficiently monitor their agents, the regulator had noted. A month later, on 28 September 2010, RBI allowed their entry.

Both experts and stakeholders caution that the challenges are substantial. A spokesperson for the largest pure-play BC company, Financial Inclusion Network and Operations Ltd (Fino), said in an email response that a lack of infrastructure and mainstream support created difficulties in servicing remote locations. “It also involves understanding local dynamics, terrain and working with all the stakeholders... Not to forget that in a country like India, it is said that language, cultures and beliefs change every 10-15km," he added. Fino services more than 48 million customers through 27,000 agents and transaction points.

E&Y’s Parekh doesn’t see “any structural risks to the BC model", but points to “some operational risks such as those attached to carrying cash". “However, these are usually well mitigated through measures like transit insurance," he said.

Reliance Money’s Gugnani is aware of these issues. Getting proof of residence and identity are the biggest hurdles encountered in rural areas. “We are not aggressively marketing now as we are still in the learning stage. But we will do so in the future," he said.

This is a corrected version of the story that was posted earlier

bhuma.s@livemint.com

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Published: 12 Jun 2012, 01:15 AM IST
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