Mumbai: Indian companies are cautiously welcoming the Reserve Bank of India’s (RBI) decision to allow for-profit firms to raise deposits, disburse tiny loans, recover bad loans and sell microinsurance, mutual funds and pension products on behalf of banks, despite the lack of clarity on how profitable such initiatives will be.
Banking analysts have welcomed the move as a step in the right direction in a country where half the population has no access to banking services.
RBI announced through a notice on its website on Tuesday that it would allow companies, along with individuals, non-governmental organizations, cooperative societies and post offices to work as business correspondents for banks. It barred non-banking finance companies (NBFCs) from doing so.
Most companies are still figuring out the details of the central bank’s decision. Five of the eight companies Mint contacted said they are still studying the notification.
Only oil marketing company Bharat Petroleum Corp. Ltd (BPCL) already has a pilot project on at Mangalore through which it provides banking products for their customers.
“It’s still very new for us at a month old, so we can’t share details. We have tied up with Corporation Bank, UTI and LIC (Life Insurance Corp. of India) to introduce insurance, pension and savings bank products to our customers from our retail outlet. But it could be a serious opportunity for us,” said S.K. Joshi, executive director, finance at BPCL.
BPCL’s peer Hindustan Petroleum Corp. Ltd (HPCL) is still “examining the notification,” said K.V. Rao, executive director, finance at HPCL.
Opening up the business correspondent space to a profit-making model was necessary because otherwise, after a point there would have been no investments in the sector, said Robin Roy, associate director, financial services at audit and consultancy firm PricewaterhouseCoopers. “Of course for companies the sheer scale and inventory for this is completely different but this will ensure that only the serious players come in.”
Oil marketing companies, which already have a strong retail network in rural areas, consumer product companies, and telecom companies with a strong marketing presence in the Indian hinterland, are expected to be front-runners for partnerships with banks.
A. Mahendran, managing director at Godrej Consumer Products Ltd said it is too early for this company to comment on the model. “We have still to meet and look at the opportunity.”
Spokespersons for consumer goods company ITC Ltd and telecom firms Bharti Airtel Ltd and Vodafone Essar Ltd said their companies were yet to examine the guidelines in detail.
One reason for the cautious approach could be because the revenue model is not yet clear.
Sameer Kochhar, president of the Skoch Development Foundation, a non-profit research company, said allowing established for-profit companies to act as business correspondents of banks alone would not address the profitability and viability issue.
“It is still not clear as to where the profit will come from and who will bear the cost of transactions,” he said in a press release.
Skoch said costs for business correspondents, or BCs, are not sustainable in the short to medium term. A recent analysis of costs done by Skoch found that, at the end of two years, the gap between costs and what banks actually pay their BCs is between Rs 26.25 to Rs 73.45 per account.
Still, “most of the companies will not find it viable in the present set up unless they have a strong set up in the area already and BCs can complement their existing business,” said an executive director at a public sector bank, who spoke on condition of anonymity because he does not want to comment on the RBI action.
However, volumes could make a difference, argued Vaibhav Agarwal, vice-president (research) at brokerage Angel Broking Ltd.