ASOMI (An Institution for promotion of Secure Sustainable Livelihood) Subhra Jyoti Bharali CEO, ASOMI, Guwahati, Assam Making the Business Correspondent Model Work: Challenges and Opportunities National Microfinance Conference, March 2011, Ashok Hotel, New Delhi

BC MODEL Bank & Back Office Banking at doorstep through BC

a) India has largest baking network in the world but only about 46% of its adult population have bank accounts. b) Since nationalization of Bank in 1969, the number of bank branches have increased ten fold. However, only less than 40% of them are in rural areas. c) The average population per bank branch in India is 13,900, which looks dismal as compared to Germany (1,480 people/branch) and Japan (1,960 people/branch) and even Brazil (9,300 people/branch). d) A IFMR study (2010) on remittances found that recipients spent an average of 40 minutes in travelling and 50 minutes in waiting for their transactions at local bank branches.

a) In 2006, RBI had allowed BC to do transactions on behalf of Bank. b) By 2009, only 26 out of 50 Banks started work through BC. c) RBI/Govt is hopeful for BC.

 Financial ‘Swabhiman’ – a program to ensure banking facilities in 73,000 habitations with a population of > 2000, by March  At least 50 million new bank accounts are likely to be opened by using various models and technologies, including branchless banking through a network of Business Correspondents.

 Technology  Revenue and Expenditure  Institutional Arrangement for Service Delivery

Presently two type of technologies are in use:  Mobile Phone Based Technology – using GPRS or through SMS  Point of Sale (POS) Device using dedicated smart card for each client with biometric authentication.

Advantages:  Mobile Phone Based Technology is relatively inexpensive, as compared to POS Device.  The transactions are recorded on-line, hence less risky as compared to off-line transaction. Disadvantages:  GPRS connectivity not available in remote areas  Client also need to have mobile set and SIM  SMS based service needs separate server at Banks  Non-compatibility with Bank’s software

Advantages:  It can used even in remote areas where connectivity becomes handicap.  Biometric authentication reduces risk of misuse.  Easily compatible with Bank’s software.  Lot of options to upload data on Bank’s server Disadvantages:  POS device technology is relatively expensive, as compared to Mobile.  The transactions are recorded off-line, hence risky as compared to on- line transaction.  Limited battery back-up limits no. of transactions.

 BCs mainly handle ‘No-Frills Savings Account’  Fee from Banks is major revenue source for BC  Fee is usually based on two bases:  A fixed percentage of transaction amt. (0.5%-0.75%)  A fixed percentage of outstanding bal. (2% - 2.5%)  Other supplementary source of revenue are:  Client Enrollment fee  On Active Accounts  No. of Transaction

 Major cost drivers are:  Salary/Commission to Field Staff  Technology /Equipments cost  Liquidity cost  Supervision cost – both staff performance and client satisfaction/grievances.  Other supplementary cost drivers are:  Promotional/Advertising expense  Recruitment and Training  Overhead expenses

 Two common methods of service delivery are:  Mobile Staff/Delivery Agent (door-step service)  Kiosks/Branch office of BC (in a given service area)  The Kiosk model is relatively cheaper but outreach of service gets limited as inherent limitations of a Bank branch is also applicable here.  BC should have existing distribution network of service in a given area. Starting a dedicated network from scratch is not viable.

 The model should viable for all three parties:  Banking Correspondents  Banks  Technology Service Providers  All three parties are interdependent, hence, the model will not work if it is unviable for any of them.  In the present model, viability of one party adversely affect the margin of other party. The win-win situation can emerge only if substantial scale is attained.

 Keeping the viability of BCs in mind, cell phone based technology is most cost-effective at present  However, GPRS connectivity in remote areas remain a big challenge.  Banks need to upgrade their IT system to enable cell phone based transaction that requires large investment  Such investment may not be cost effective for Banks with limited outreach, like RRBs.

 The market segment is characterized by ‘Small Sum’ and ‘Frequent Transactions’.  In the present cost structure, transactions of less than Rs is not viable for BCs.  But discouraging small transactions will keep the poorest away from formal financial service.  Each centre/agent of a BC has to achieve two stages of break-even, (a) minimum number of enrollment, (b) to keep these accounts operational.  Experience shows that a large number of No-frill A/Cs became non-operational when they were not followed-up subsequently.

 Assumptions (based on ASOMI’s experience):  No. of Customers 2,500  Annual Fixed Cost Rs84,000 (Remuneration, overhead, eqp.)  Annual Variable Cost Rs 1,75,000 (Rs. 70, fee of each card)  Total Cost Rs 2,59,000  Fee earned 0.75% on per Rs 100 of transaction  Break-Even Vol. Rs3,45,33,333 (Total transaction amount)  To reach break-even, average amount a client should transact in a year is Rs 13,813,  This seems difficult to achieve under present revenue and expenditure structure.  It was found that for 1% increase in no. of customers, there is only 0.25% reduction in annual transaction amt per client

 Banks should open their doors for BCs to also deliver following services:  Time deposit  Recurring deposit  Advances up to Rs 10,000 against credit limit to client  Recovery of loan installments and NPAs  Remittance  Cheque collection  It will expand the scope of revenue for BCs that will help them to become viable business units.

 BCs should also push products with large volumes with minimal transactions (like time deposit) so that it can compensate cost of small transactions.  Banks should also work towards integration of their core banking system with technology platform of BCs.  BCs and Technology Service Providers should also get easy access to the ‘Technology Fund’ to reduce their cost of operations.  BCs should be supported with viability gap funding to absorb losses during the initial years of operations.

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