Mumbai: A panel of the Indian central bank has recommended that owners of provision stores and medical shops, public call office (PCO) operators, petrol pump owners, insurance agents as well as retired teachers should be allowed to act as business correspondents or BCs for banks in rural and semi-urban areas to extend the reach of banking services.
The Reserve Bank of India (RBI) put the recommendations of the panel on its website on Wednesday, but it is not clear when the central bank plans to implement them.
Once implemented, they will likely increase the coverage of banking services in India. Currently, only 5.2% of India’s 650,000 villages have bank branches.
There are close to 32,000 branches in rural India.
The BC model is critical to financial inclusion but it has not yet taken off for operational reasons. Currently this model allows non-governmental organizations, self-help groups, microfinance organizations, farmers’ clubs, post offices, cooperatives, panchayats and many others, including IT-enabled rural outlets of companies and insurance agents, to act as intermediaries on commission.
A recent study by Skoch Development Foundation, a strategy and management consultancy, based on 28 financial inclusion projects and a large banking correspondent project in Andhra Pradesh, has found that the BC model is not commercially viable. The gap between what the banks are paying BCs or vendors and what actually such entities spend in two years, works out to Rs26.25 per account.
Once owners of provision stores and PCO operators are allowed to work as intermediaries, they will not incur additional costs to reach out to customers and hence the operational cost will come down.
In January 2006, RBI had first permitted banks to use intermediaries as BC for providing financial and banking services at places other than bank premises. As the traditional brick-and-mortar branches could penetrate remote areas of the vast country to only a limited extent, this model provides banks with an option to provide services in inaccessible areas in a cost-effective manner.
RBI deputy governor K.C. Chakrabarty in a recent speech said 45.9 million farmer households out of a total of 89.3 million households do not have access to credit either from institutional or non-institutional sources and only 17 credit accounts and 54 saving accounts are there per 100 persons.
According to him, only 13% the population in rural India earning less than Rs50,000 a year is borrowing from banks.
The working group wants banks to use the distribution model for the full range of financial activities.
With the Union and state governments planning to route various government payments through the banking system, the BCs could be the ideal vehicle for the banks to handle the huge volumes of low-value transactions, the RBI panel said.