It has happened! In May 2012, MicroSave’s study of the potential for MFIs to acts as business correspondents (BCs) concluded, “MFIs are potentially and excellent channel and product development partner for banks, as long as they have the capacity and resources to dedicate to it. MFIs can help all stakeholders to leverage their existing engagement with the customers. In this way, MFIs’ core competence of customer engagement and management can be more fully exploited.”
MicroSave has advocated MFIs as BCs for a long time now – even since June 2010 in MicroSave India Focus Note 48 “Who Says You Can’t Do MicroSavings in India? Part 4: Practical Next Steps”, where we concluded “The key for BC agencies and their partner banks to succeed simply is to begin to listen to the clients and to the agents on the ground first. The agents are essentially clients too!” We will return to this in the blog “NBFC-MFIs As Business Correspondents – What Will It Take?”.
We expanded this thinking in MicroSave India Focus Note 75 “Microfinance in India – Is Business Correspondent the Way Forward?” highlighting that “A tiered model with local merchants at the front end, MFI acting as ‘super-agents’ and banks at the back-end should evolve into a lower delivery cost model. Under the new regulatory guidelines, with interest and margin caps, the outreach of typical group microfinance, and outreach in far-off areas, will be constrained.”
By March 2014, the 46 MFIs that reported to Microfinance Institutions Network (MFIN) reached out to a total of 28 million clients through a network of 9,780 branches (See MFIN Micrometer). Basis its detailed research on the savings habits of low income households, MicroSave estimates that these 28 million clients could each save around Rs.7,677, (a total of Rs.215 billion), per annum, much of it in recurring deposits, thus creating a stable deposit base for the banks, and an excellent source of commission revenue for the BCs that service them. Thus with NBFCs-ND included in the BC space, the model would not only broaden but also deepen the provision of financial services in the under-served areas. Since we know that one of the repeated and central demand of MFIs’ clients is for savings services, this broadening of services will give MFI-BCs a significant competitive advantage over those that try to stick to the traditional microcredit model.
After the recommendations of the Mor Committee, to which MicroSave was invited to present, the RBI has now accepted the logic of NBFCs acting as BCs. This is an extremely positive development for financial inclusion in India; as well as for banks (which have been struggling to build effective agent networks – see India Focus Note 105 “The Curious Case of Missing Agents in Rural India”); and for MFIs most of which already recognise that the current model of microcredit in India has a very limited future.
We have also seen how BC/BF hybrids, which would likely be the most effective model for both banks and NBFC-MFIs, yields significantly enhanced income for all stakeholders … and build high value business for the banks. In “Great Business for Banks – So Why Are They Slow To Build Agency Banking?” we highlighted the activities that could be undertaken by the BC agents of a state owned bank were currently taking 51% of bank branch staff time as shown in the diagram below.
This means that if BC agents are deployed efficiently, a large part of the bank staff time could be freed up to focus on conducting high value-low volume transactions, as well as marketing to and servicing high net worth individuals. This, of course assumes that there is scope in the market for growth in services to high value customers. In the relatively remote area of rural India where we conducted the analysis, these customers were indeed present and a combination of the efforts of both branch staff and their BC agents yielded spectacular increases in business at both the branches and through the BC agents.
All well and good – what about MFIs?
It is MicroSave’s belief that MFIs would benefit significantly from acting as BCs for banks. Firstly, it will allow MFIs to respond to their customers’ clamour for savings services (which is an oft-repeated theme in all MicroSave’s research into customer needs and preferences in India). But in addition it will allow MFIs to finance much, and in some cases, all of their loan portfolio off-balance sheet, thus reducing the need for equity capital for on-going expansion, and significantly reducing the political risk associated with lending to the poor in India. Finally, MFIs stand to gain significantly in terms of operational efficiencies and reduced cash management costs through an agent-based model.
The core question is whether banks and MFIs can reach mutually beneficial agreements on the division of revenues from the BC model – something that has not always been easy for third party BC network managers to date. But with the new government’s continuing emphasis on direct benefit transfers and financial inclusion, there may be more opportunities in the current climate than before the election.
In the next blog, NBFC-MFIs As Business Correspondents – Who Benefits (Part-II)? we will examine the advantages and disadvantages of the BC model for NBFC-MFIs in detail.