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.

Also, please download our Agent Network Management for MFIs brochure.

  1. Not sure about this “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.”

    This is exactly where the deposit taking Saradha type scams can happen & MFIs may not have the capacity to deal with it. Besides, if they were able to recycle deposits from savings then how are they different from a licensed bank? Perhaps a starting point may be portfolio buy-outs to reduce cost of capital – like Cashpor Indus-Ind & credit history build up from savings transactions to de-risk?

    Also – a contrary study / data / opinion – to encourage BCs to become NBFC / MFIs might complete the circle.

    Reply
  2. Dear Anand,
    Thanks for your comments.
    Our experience with MFIs indicates that business correspondent model has proven to be a boon for the MFIs that latched on to the BC related business. It helped the MFIs to fuel their growth, which was stalled in the wake of the microfinance crisis (on account of trust deficit of banks to fund microfinance sector and MFIs’ portfolio growth). Also, the additional benefit is that as a BC of a public sector bank, the MFI gains from the credibility that the bank brings in (due to their brand recognition and general public’s trust). This in turn helps MFIs to mitigate a part of the high intensity political risks associated with microfinance sector. Also, BC opens multiple opportunities for the clients to utilise products (hitherto underserved) such as savings and deposit services.

    Clients do not face similar kinds of risks that they faced with Saradha, a chit fund company. In business correspondent model, a bank manages the operations in the background. Cutting-edge technology and customer education play a critical role in managing risks. For example, security features embedded within the equipment for branchless banking ensure that customer cash transactions are offset against the agent’s bank account. All customer transactions are done against an account that the agent has with the bank. This account may be funded with the agent’s own money or from a pre-agreed (finite) credit line or overdraft facility granted by the bank. In the case of a cash deposit by a customer, the bank automatically withdraws the equivalent amount from the agent’s bank account to fund the deposit, and the agent keeps the cash in compensation for the amount taken out of its bank account. In the case of a cash withdrawal, the opposite happens: the agent provides cash and is compensated by an equivalent increase in its bank account. In this way, the customer always bears the bank’s—not the agent’s—credit risk. So overall, comparing the BC-focussed MFIs/NBFCs to that of Saradha and other bogus financial institutions is not meaningful.

    Portfolio buy-outs have its own merits as the underlying principle is that the bank assesses the inherent risks of the portfolio. However, its applicability and relevance for smaller/mid-size and new NBFCs/MFIs is limited.

    While your idea of assessing the counter-side view of the BC model sounds practical, our experience of the model so far is that the benefits significantly override the pains associated. Also, the fact remains that in the current context, the better focus on implementation leads to a win-win solution for all parties (banks, MFIs and clients).

    Reply

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