RBI lets NBFCs work as banking correspondents

Mumbai: The Reserve Bank of India (RBI) on Tuesday permitted banks to appoint non-banking finance companies (NBFCs) which do not accept deposits as their business correspondents (BCs), a move which could help extend banking services to remote areas.

Commercial banks hire BCs to offer basic banking services in areas where they do not have branches. The BCs act as agents of the parent bank.

NBFCs have been seeking permission to be BCs for long, claiming they are well-positioned for the task. But RBI has so far been wary of about possible conflicts of interest between the NBFC and the bank.

As of now, banks appoint individuals, small grocery stores and private enterprises as BCs.

Early this year, an RBI committee headed by Nachiket Mor had recommended that the scope of BCs be expanded and suggested the possible inclusion of new entities as BCs.

As per the new rules, even microfinance institutions operating as NBFCs (NBFC-MFIs) can operate as BCs.

The central bank also issued rules for appointing non-deposit taking NBFCs (NBFC-ND) as their BCs. Banks and NBFCs operating as their agents, should ensure that “there is no co-mingling of bank funds and those of the NBFC-ND appointed as BC,” the RBI said.

Also, there should be a specific contractual arrangement between the bank and the NBFC-ND to ensure that all possible conflicts of interest are adequately taken care of, the RBI added.

Banks should also ensure that the NBFC-ND does not adopt any restrictive practice such as offering savings or remittance functions only to its own customers and forced bundling of services offered by the NBFC-ND and the bank does not take place, RBI said.

The apex bank also scrapped an existing distance criterion applied to BCs. Under current norms, every retail outlet/sub-agent of a BC is required to be attached to and be under the oversight of a specific bank branch within a distance of 30 km in rural, semi-urban and urban areas, and 5 km in metropolitan centres.

“With a view to providing operational flexibility to banks and in view of the technological developments in the banking sector, it has been decided to remove the stipulation regarding distance criteria,” RBI said.

RBI’s move is critical for NBFCs operating as microfinance institutions (MFIs) since they are now permitted to operate as a BCs. Becoming a BC will enable MFIs offer a host of services such as savings products and money transfer facilities to low-income segments, which were previous excluded from commercial banking services, said Vijay Mahajan, chairman of Basix Group, an MFI.

MFIs are companies that offer small loans to poor customers at an interest rate of 24%-36% and source money from banks to do business. NBFC-MFIs constitute a lion’s share of the microlending market in terms of loan assets.

“This (permission to operate as BCs) is something we have been asking to RBI since 2006. Allowing NBFCs to act as BCs will certainly bring down the transaction costs since we have our staff and infrastructure already in place,” Mahajan said. BCs can charge a small fee for transactions.

Promoting financial inclusion, or the process of spreading banking services, is critical in India, where more than half of the adult population still do not have access to banking services.

RBI first introduced a three-year financial inclusion programme in April 2010 that saw banks opening outlets in 200,000 villages. Subsequently, it launched the second phase of the programme for 2013-16.

The central bank is also planning to come out with dedicated banks called payments banks, another recommendation of the Nachiket Mor panel. Such banks will accept deposits of up to Rs50,000 from borrowers and offer transaction services but will not offer credit.