Mumbai: India’s banking landscape may change with large corporations joining hands with commercial lenders to play the role of banking correspondents (BCs), a proxy for bank branches.
About half of India’s adult population does not have access to banking services such as deposits and loans, and for every 14,000 people in the country of 1.2 billion population, there is only one bank branch, but this may change now with the nation’s largest lender State Bank of India (SBI) tying up with corporations to spread banking services.
It has already tied up with Hindustan Unilever Ltd (HUL) and Bharti Airtel Ltd, and is in advanced talks with about 30 large corporations, including ITC Ltd, Bharat Petroleum Corp. Ltd (BPCL), Bharat Sanchar Nigam Ltd (BSNL) and Tata Consultancy Services Ltd.
HUL has some 40,000 sales agents, BSNL has a presence in 150,000 centres and BPCL has 8,700 outlets across the country.
If this network is used, their consumers will get the benefit of banking services. Currently, the Indian banking industry has 72,000 branches.
With 13,000 branches and 25,000 ATMs (automated teller machines), the SBI group roughly accounts for a quarter of the assets of India’s banking system, but still does not cover every village in the country.
While the involvement of companies will spread banking services, the bank will get access to cheaper deposits, a critical component of a bank’s profitability. In a rising interest rate scenario, cheaper deposits are essential for banks to control the cost of funds.
A BC is a representative or an agent of a bank authorized to offer basic banking services to customers such as savings products and remittance facilities on behalf of the respective banks. Typically, such agents can be individuals or institutions.
Indian banks have so far been relying on retired bank officials, teachers, kirana (neighbourhood grocery shops) and medical stores, and non-profit firms to operate as agents, but have not seen much success through these channels as they lack an organized network.
For instance, SBI so far has mobilized only around Rs 37 crore of deposits through its 14,000 BCs from around five million accounts through the channel. Such accounts are called no-frills accounts where an account holder doesn’t need to keep a minimum balance.
Indian banks had 50.6 million no-frills accounts at the end of March, according to Reserve Bank of India (RBI) data.
“These companies, by virtue of their pan-India presence through branches or outlets, can effectively transmit the benefit of banking services to rural customers. For SBI, this will be a mechanism to reach out to customers primarily in rural sectors,” said Jayanta K. Sinha, chief general manager (rural business) at SBI.
Presently, SBI has nearly 70% of its total branches in rural areas, which account for 35% of its Rs 8.3 trillion deposits and 25% of Rs 6.3 trillion loans, as of December-end. BCs operate through point-of-sales machines, besides mobile and Internet-based technologies. Customers approaching the bank through BCs have the benefit of simplified know-your-customer norms.
Financial inclusion has been high on RBI’s priority list and the central bank has directed banks to provide basic services in all villages with a population of 2,000 and above by 2012. RBI deputy governor K.C. Chakrabarty recently said India has the highest number of households (145 million) excluded from banking; and only 50,000 of 600,000 villages have bank branches.
In September, RBI had allowed banks to appoint for-profit organizations, including large corporate bodies, as BCs in areas where their reach is limited.
Analysts see the SBI move as a logical step to reach out to the rural masses, but they are sceptical about the viability of such projects given the low value proposition. They also point out the lack of uniformity in different models adopted by different banks to reach out to rural clients.
“It is too early to comment on the feasibility of any such projects. However, if it takes off, it helps both the bank and the corporate,” said Saikiran Pulavarthy, an analyst with Indiabulls Securities Ltd.
If other banks too start offering loan products to rural borrowers, this could pose stiff competition to microfinance institutions (MFIs) and self-help groups, who also cater to the same set of clients. But senior MFI executives ruled out any such impact.
“What is important for the poor is timely availability of money and how fast they can avail of that,” said Chandra Shekhar Ghosh, chairman and managing director of Bandhan Financial Services Pvt. Ltd. “Besides, they trust established channels like MFIs as compared with BCs. Therefore, even if banks opt through corporate channels, I do not see a challenge.” As of 31 March, Bandhan had a loan book of Rs 1,495 crore.
The central bank said corporations with a large retail network would bring in larger resources, organizational strength and deeper pockets essential for a large network of BCs, besides providing financial security to the respective lender. RBI norms permit a BC to operate within 5km of a branch in urban areas and 30km in rural areas.
Typically, banks pay a commission of around 0.5% of the value of a transaction to BCs on a monthly basis, based on the value of business they garner.
Analysts said large corporations with an established network and trained staff have the advantage of discovering a new business model to add to their clientele and income, while for banks, this can be an effective model to add cheaper deposits.
“The bank can leverage the reach of the corporate in rural areas and it opens up a new business opportunity for firms that have seen a saturation in their businesses,” Pulavarthy said. “Having said that, the challenge remains on how to make it cost effective and profitable.”
HUL did not want to comment on the story while the email sent to BPCL remained unanswered.