Business correspondent channel for financial inclusion: The viability of the Business Correspondent (BC) channel in India is facing significant challenges, prompting the government to take corrective steps. The Department of Financial Services (DFS) has scheduled a meeting of the monitoring committee on January 21 to address key issues, including the payment of fixed commissions to BCs in rural areas and the waiver of penalties. The meeting will also explore the possibility of establishing an infrastructure and equity fund for corporate BCs by leveraging resources from NABARD’s Financial Inclusion Fund and the RBI’s Payments Infrastructure Development Fund.
Introduced nearly two decades ago, the BC model was designed to bridge the gap between formal banking services and underserved populations, particularly in rural areas. Challenges such as physical distances and linguistic barriers have historically restricted access to organised finance for many. BC networks address these gaps by offering ‘Doorstep Banking Services’ that bring financial services directly to rural populations.
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The business correspondent model
By partnering with local agents, banks have extended their reach beyond traditional branches, offering essential services like cash deposits, withdrawals, and money transfers to remote communities. This model has been instrumental in promoting financial inclusion, enabling millions of Indians to access banking services for the first time.
The importance of Customer Service Points (CSPs) became especially evident during the Covid-19 lockdown. By delivering essential banking services locally, CSPs ensured rural communities could access financial services without major disruptions, mitigating the impact of the lockdown.
Challenges faced by business correspondents
Despite its critical role, the BC model is under strain due to several challenges. Commission rates have remained stagnant, failing to keep pace with inflation and rising operational costs, which has reduced profitability for agents. Many BC agents are leaving for better-paying opportunities in the e-commerce sector, where companies like Amazon, Flipkart, and Blinkit are actively recruiting talent.
Additionally, banks, while benefiting significantly from BC services by reducing branch operation costs, often fail to provide adequate support to BCs. For example, incentives for Direct Benefit Transfers (DBTs) are not passed on to BC networks. Moreover, punitive measures such as fines for inactivity or operating on another bank’s platform further discourage agents.
Banks impose harsh penalties, including fines of Rs 1,000 per month for inactivity exceeding two months and Rs 10,000 for using another bank’s platform. This creates an unsustainable model that disincentivises long-term participation in the financial inclusion ecosystem.
Government initiatives to support BCs
The upcoming meeting will revisit several issues raised by the Business Correspondent Resource Council (BCRC), including the diversification of BC income streams through a wider bouquet of services. It will also examine establishing commission-sharing arrangements between corporate BCs and agents and introducing graded commission structures based on geographic areas, such as rural, semi-urban, urban, and metro regions. Another focus will be on addressing liquidity challenges faced by BCs.
To ensure the long-term sustainability of BC services, the government must address systemic challenges and create an equitable operational model. Enhanced training and capacity building are essential, with a focus on providing BCs with training in value-added services, such as selling financial products like insurance or mutual funds, to diversify their income streams. Soft skills training, particularly in customer-centric approaches, is equally crucial.
Additionally, increased investments in infrastructure are necessary to enable better service delivery and operational efficiency. Revisiting pricing structures for transactions, including cash withdrawals, deposits, money transfers, and Aadhaar-Enabled Payment System (AePS) transactions, is also vital to ensure fair compensation for agents. Eliminating punitive penalties and creating incentives for banks to support BC networks can foster a more collaborative ecosystem.
Financial inclusion: The way ahead
A report by BCFI-GFI, titled Reimagining the Next-Generation BC Model, underscores the importance of value-added services and enhanced capacity building. By creating robust governance standards and sustainable business models, the government can ensure the BC model’s viability. Moreover, the lack of in-depth research and policy interventions in the BC sector remains a significant oversight.
Unlike sectors like insurance and mutual funds, which have benefitted from extensive studies and model development, the BC channel lacks such support. Conducting thorough research and implementing evidence-based policies will be critical for strengthening financial inclusion initiatives.
Financial inclusion must make commercial sense for service providers to ensure its long-term sustainability. By addressing existing challenges and creating a more equitable operational framework, the government can enhance the BC model’s effectiveness. This will not only sustain the financial viability of the channel but also empower rural communities, ensuring broader access to essential financial services.