The Banking Correspondent Model was launched in 2006 to provide banking services at reasonable costs to the poor people. After over a decade, to what extent this model has been able to achieve its stated objectives? Critically discuss its success and failures.
What are BCs?
Business Correspondents are retail agents engaged by banks for providing banking services at locations other than a bank branch/ATM. BCs enable a bank to provide its limited range of banking services at low cost. They hence are instrumental in promoting financial inclusion.
What are the functions of BCs?
BCs have to do a variety of functions viz, identification of borrowers, collection of small value deposit, disbursal of small value credit, recovery of principal / collection of interest, sale of micro insurance/ mutual fund products/ pensionproducts/ other third party products and receipt and delivery of small value remittances/ other payment instruments, creating awareness about savings and other products, education and advice on managing money and debt counselling etc..,
The BC model is akin to the agency model followed by insurance companies and pension funds. Out-sourcing of financial services through agents for a commission has been somewhat successful in case of other financial services, as the agents get a constant flow of income.
Why BC model failed
1)In order to provide banking services at reasonable costs to the poor people, the business correspondents model was introduced in 2006. Being technology driven, the BC model played a critical role in opening large number of Jan-Dhan accounts during the recent period, but was unable to provide basic banking services to them for several reason
2)The compensation in the case of the BC model is awfully inadequate compared to the services expected from them
3)Banks’ lending activities through BCs are negligible. The activities of BCs are typically limited to opening new deposit accounts for a commission. The opportunity of opening new deposit accounts is quickly exhausted, particularly after the success of Jan-Dhan Account scheme.
BCs are expected to provide small withdrawal and deposit facilities besides remittance service to all deposit holders. He is all in one — a clerk, cashier, branch manager, financial adviser and agent for rural digitization. He goes to the base branch and settles all deposit and withdrawals. BCs either neglect these activities, or are not in a position to do justice to them due to the sheer workload.
5)Some BCs do agency functions for mutual funds, LIC, or sell small savings instruments as they get a fair amount of commission. Hence, it is natural for them to ignore basic banking activities that are less lucrative. Handling cash is also risky, particularly where the base branch is far away. BCs have limited overdraft facility that may not be sufficient for daily requirement of the account holders.
For a BC to provide basic banking services effectively, deposit accounts should not exceed 500. Even ultra-small branches, where an officer from a base branch occasionally visits the rural area, are not working well where deposit accounts are more than 800.