If the Reserve Bank of India (RBI) accepts the recommendations of an internal panel, owners of petrol pumps and fair price shops; grocers and chemists; public call office operators; insurance agents; jobless rural youth; retired teachers and even existing bank borrowers with a good track record will be allowed to spread banking services.
Until now, only not-for-profit organizations, microfinance institutions, post offices, non-banking finance companies and retired bank as well as government employees and ex-servicemen have been allowed to channel banking services, acting as proxies for banks in rural and semi-urban India.
But they are not too excited about spreading doorstep banking because the commission banks pay is not enough to cover even their cost of operations. Apart from the cost of insurance and security for cash in transit, they need to spend money on transportation and power generator kits and batteries (many villages are without electricity). Many of them have reported losses and suspended operations.
The intermediaries chosen to spread banking are called business facilitators and business correspondents. The job of the facilitators is to identify borrowers, process loan applications and create awareness about savings and banking products. Correspondents handle money directly, collecting deposits, disbursing loans, accepting loan repayments and also selling mutual fund, pension and insurance products.
Once the owners of petrol pumps, provision stores, pharmacies and fair price shops, which sell government-subsidized wheat, rice, kerosene and sugar, and others who are already running business establishments become correspondents, the cost of intermediation will come down. They will not be required to reach out to customers because consumers anyway visit them.
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Since the inception of the banking correspondent model in January 2006, the entire focus seems to have been on opening no-frills accounts that require very low or zero minimum balance, and not on the spread of banking services. Even before banking correspondents were employed, Indian banks were offering such accounts, but the speed at which they are being opened now has increased dramatically. From 489,497 in March 2005, the number of such accounts had risen to at least 33 million by March 2009, primarily driven by public sector banks. But many of these accounts are not functional. A recent study by a strategy and management consultancy firm has found that only 11% of 25.1 million such basic banking accounts, opened between April 2007 and May 2009, are operational.
These correspondents are indeed critical for expanding the scope of banking services in rural India, as 45.9 million farmer households out of 89.3 million do not have access to credit. Only 17 persons out of every 100 in rural India have access to bank credit and 54 have savings accounts. In the lower income bracket (earning Rs50,000 or less every year), just about 13% have taken bank loans. There are close to 32,000 bank branches in rural India (around 40% of the entire branch network), but they cover only 5.2% of the country’s 650,000 villages.
One way of making the banking correspondent model commercially viable could be using these intermediaries to sell loan products. Even though they are allowed to do so now, the primary focus is on deposits. Once the correspondents start giving loans, they can earn more. Banks will employ more business correspondents and even go for brick-and-mortar branches, if RBI makes some fundamental changes in rural banking policies.
First, RBI needs to abolish the cap on interest rates charged on small loans of up to Rs2 lakh. For farmers, access to credit is more important than the cost of credit because, anyway, they pay very high interest rates to local moneylenders. If banks are free to price small loans, they will start looking at rural banking as a business and social responsibility. They will also be able to offer higher commissions to the correspondents. Second, RBI can allow them to follow a differential deposit rate policy. In other words, they should be allowed to offer lower interest rates to depositors in remote villages where the value of money is cheaper. This will bring down the cost for banks. Third, they should also be allowed to offer differential wages to employees. Under the industry-wide wage pact, an employee working at a remote village in Uttar Pradesh gets almost the same salary as a counterpart at Mumbai’s Malabar Hill branch.
Finally, banks should be allowed to sell rural branches to foreign banks and swap with local counterparts. Since not too many rural branches have loan books, valuation of such branches will not be easy. Typically, certain branches of a bank collect deposits and other branches use these funds to give loans. Each deposit brought into a bank has a value and every loan also has an underlying cost of funds and is not just interest income. So, banks need to put in place a transfer price mechanism by assigning a value to each deposit and cost to each loan account. Foreign banks will not say no to rural branches if they are convinced about business prospects, and many rural pockets offer them in abundance.
Tamal?Bandyopadhyay keeps a close eye on all things banking from his?perch as Mint’s deputy managing editor in Mumbai. Please email comments to firstname.lastname@example.org