Financial Modelling for Business Sustainability: A Study of Business Correspondent Model of Financial Inclusion in India
Access to finance by every section of the society is a prerequisite for achieving inclusive growth in any economy. The World Bank–Universal Financial Access (UFA) 2020 Overview (The World Bank, 2018) on financial exclusion depicts that India stands at 20.6 percent of the world’s two billion unbanked population, followed by China (11.6%) and Pakistan (5.2%) in the Asian region. Further, the World Bank Findex (The World Bank, 2014) survey shows that out of 1.2 billion Indian population, only 53 percent of Indians are financially included.
To make progress in financial inclusion, historically, Indian banks have favoured expanding their a number of brick-and-mortar branches over deploying branchless technology.
The banks have relied on business correspondents (BCs; i.e., third party agents) to reach the unbanked population in remote and unbanked villages. In 2006, the Reserve Bank of India (RBI) devised the BC model (Basu, 2006). The model not only aims to provide an alternative banking channel to millions by making financial services accessible for the un-/underbanked population through a branchless banking facility but also supports the national agenda for employment generation (RBI, 2008).
The corporate BCs (also known as the BC network managers [BCNM]) act as a middleman and distribute the banking products with the help of multiple Customer Service Points (CSPs) or commonly referred to as agents or Bank Mitras. These Bank Mitras are the micro- or nano-level entrepreneurs, usually small shop owners or freelancers in the rural and semi-urban areas. The CSP agents act as the retailing points for delivering the banking services at locations other than a bank branch or ATM. The CSP agents are enabled to provide a defined range of banking services at low cost, hence are instrumental in promoting financial inclusion (Mehrotra, Tiwari, Karthick, Khanna, & Khanna, 2018). As an opportunity, most of the CSP agents join this BC banking business to supplement their existing income.
The banking products for financial inclusion offer the Bank Mitras a reasonable return on their investment, and there are 1.26 lakh Bank Mitras delivering branchless banking services in different Sub Service Areas (SSA; PMJDY, 2019). An SSA consists of three to four villages having a combined average population of 1,600 to 1,800 (SLBC, 2019). Besides, as of November 2019, the progress of such a huge network of branchless banking using the CSPs or the Bank Mitra network in rural India reports that there are 37.55 crore beneficiaries banked having ₹107,172.54 crore balance in their accounts (PMJDY, 2019). Moreover, the latest available data on the number of bank branches in rural areas show an increase from 28,583 in March 2011 to 48,834 in March 2019 (RBI, 2019); while the number of branchless banking outlets (including ATMs) in rural India has risen from 34,316 in March 2010 to 547,233 and 518,742 in March 2017 and 2018, respectively (RBI, 2018, Table IV.25, p. 80). Such progress shows an impressive outreach of banking services through branchless banking.
However, the growth rate represented in these numbers do not take into account the number of CSP agents who are dormant (Kale, 2016). Moreover, a study conducted by Mehrotra et al. (2018) found that while the banking industry is employing more agents, customer growth is slowing down.
One of the possible reasons could be the rise of over-the-counter (OTC) remittance transactions. It also indicates that the CSP agents are not able to generate enough customer registration or transactions. The results have a direct effect on the CSP agent return on investment and profitability. Besides, the CSP agents face a wide range of issues and challenges with respect to the product they offer, kiosk costing (fixed and operational), liquidity management, inadequate support from the banks, small profit margin, financing for working capital management, technology-related issues, marketing and communications, customer dissonance and service, low profit margin, etc.
In this context, it is important to note that if the CSP agents earn more from the prior business than from the existing BC model operation, then he/she would be unwilling to commit more time since it is less profitable. While the operational process of the CSP agents holds potential, research indicates that the policy has not taken off in the way it was envisioned (ACCESS, 2014; Basu, 2006; Bhanot, Bapat, & Bera, 2012; Bihari, 2011; Kapoor, 2014; R. Pal & R. Pal, 2012; Singh et al., 2014).
As a result, both the supply side (e.g., banks) as well as the demand side (e.g., beneficiaries) are struggling for smooth operational efficiency of the financial inclusion drive. Different studies envisage that the existing BC guidelines do allow just enough space for the improvement as well as a possibility for bringing a sustainable business model for the BC agents (R. Pal & R. Pal, 2012; RBI, 2015a, 2015b). Based on the multiple issues and challenges with the BC model of business operation, the study raises the research questions: Is the BC model of financial inclusion financially sustainable? Is there any scope of making the model more sustainable?
BANKING INDUSTRY AND FINANCIAL INCLUSION IN INDIA AT A GLANCE
In India, nationalization of banks in 1969 marked the beginning of the process of financial inclusion (RBI, 2008). Following this, to promote financial inclusion, India adopted a number of other strategies such as setting up regional rural banks (RRBs), mandatory priority sector lending (PSL) by commercial banks, lead bank scheme, introduction of no-frill account (NFA), linking self-help groups (SHGs) to banks, kisan (farmer) credit cards, provisioning of doorstep delivery of financial services through approved banking/BCs.
The Rangarajan Committee (RBI, 2008, p. 297) on financial inclusion in India defined it as a process of ensuring access to financial services and timely and adequate credit where needed by vulnerable groups such as weaker sections and low income groups at an affordable cost.
In India, despite several steps taken by the government to accelerate financial inclusion, the status remains dismal. Existing empirical studies show that financial inclusion helps poor households (HHs) and the informal sector to improve their standard of living and paves the way for achieving higher economic growth (Bittencourt, 2012; Bruhn & Love, 2009; Rajan & Zingales, 1998). Moreover, an inclusive financial system helps in reducing poverty and income inequality (Beck, Kunt, & Honohan, 2009; Mukhopadhyay, 2016).
However, poor HHs continue to languish under financial exclusion due to limited availability of financial products that match their diverse financial needs and varying income–expenditure patterns. Such financial exclusion entails larger transaction and opportunity costs for the poor. Hence, the Committee on Comprehensive Financial Services for Small Businesses and Low Income Households argues in its report that financial inclusion can be said to be complete only when there is access to a suite of appropriate products and services for all the financial needs of a HH or enterprise (RBI, 2016).
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