Manoj Nambiar and Shraddha Srimal

From Vision to Reality: RBI ruling brings India one step closer to true financial inclusion

In a recent landmark ruling, the Reserve Bank of India (RBI) has allowed non-banking financial companies (NBFCs) to become business correspondents (BCs) for banks in India. What this means is that NBFCs can now act as agents of banks to provide basic services such as bank accounts and transaction services, paving the way for microfinance institutions (MFIs) in India (at least those that have an NBFC license) to jump into the fray.

This move is poised to serve as a huge accelerator to drive true financial inclusion in a country where 720 million people still do not have a bank account.

The pre-ruling framework

Up until June 24 the BC regulatory framework allowed only private limited companies, NGOs and individuals – including small mom-and-pop shops – to appoint or become customer service points (CSPs) of scheduled banks to offer small-value banking services on behalf of the bank. With this constraint, the pre-ruling framework added over 200,000 CSPs, many even in rural areas, and 50-60 million bank accounts, but very few of these are being actively used by customers.

The Business Correspondent model was introduced by the RBI back in 2006 with a view to providing extended banking services to the 60 percent financially excluded population of the country, but failed to move the needle significantly. While many bank accounts were opened, 50 percent of the population still remains under-banked.

And so, the BC model has been stagnating. A bulk of the successful CSP outlets are located in urban India and rely heavily on volume-intensive remittance transactions. The rest, lying mostly in rural areas, are struggling. These have been a strain for banks, and are a loss-making proposition for institutional and local CSPs alike. A key reason is the need for investment in technology to enable transactions at remote points – which include authentication, customer database and response-generating technologies. The cost of these could even be up to USD $1000 – 2000 upfront, with recurring monthly costs. If there isn’t a “cash cow” service which generates volumes and incomes, this kind of investment can become unsustainable. In addition, financial literacy and awareness among the under-banked segment is also required for boosting uptake of financial products. Neither of these sits comfortably within the ambit of traditional BCs, where CSPs are often run by people who are not fully financially literate themselves.

Hence, while the pre-ruling BC framework was envisaged as a scalable extended banking services platform, in practice it turned out to be a source of financial loss for banks and BCs. There was a need for innovation in the business model itself – to create a model that balances customer convenience and service, with volumes and stable revenue lines.

What the new ruling means

The biggest significance of this ruling is that the regulated microfinance institutions of the country, classified as NBFC-MFIs, now have the opportunity to offer the full range of services that the RBI defines as the holy grail of financial inclusion: savings, remittance, insurance and credit. It is noteworthy that MFIs in India currently have access to 30 million customers (almost all women) with over 10,000 outlets spread mostly across the economically disadvantaged segments of country – i.e.: households earning USD $100-200 a month. Arguably, the MFI infrastructure has been far more successful than traditional bank branches in driving financial inclusion on the credit side by creating access to small ticket-size working capital loans. The business model has been established and delinquency levels are less than 1 percent. With the credit business model firmly in place, the MFIs’ doorstep service to the target customer segment and their experience and ready infrastructure to deliver financial services can now be leveraged to offer bank accounts and related services to close to 30 million women. Women in India have traditionally been more financially excluded than men. While credit empowered these women, MFIs can now leverage their customer connect to provide financial literacy, and support it with fulfilling services on the liability side to make them fully financially included and empowered. NBFC MFIs are currently growing at a stable 35-40 percent rate, and will cover almost 50 percent of financially excluded women in the country in about five years. Some MFIs, such as Arohan (where the authors serve as managing director and head of strategy), are growing even faster at over 100 percent, and could prove to be more nimble agencies of financial inclusion.

MFIs need to view this as an opportunity to transform into financial services providers for their customers, rather than just being lending players. They can also realize process efficiencies on cash management and build diversified sources of earnings by offering various financial products. In order to make the vision of being a financial services provider a reality, individual MFIs will need to be proactive and embrace the opportunity to partner with banks and plug in the gaps on any fronts – be it governance, IT or operating models.

Arohan, for example, has a stated vision to provide financial inclusion to its customers in its area of operations – the low-income states of the country in east, northeast and central India. This regulation will enable us to offer not only liability products, but also to utilize the bank account for its existing third party product offerings such as micropensions and insurance. This is possible with real-time systems in place in all of Arohan’s branches, and active partnerships with banks.

Connectivity to the last mile and bringing the bank to the customer used to seem like lofty goals. With the RBI’s ruling, they can now be a reality for millions of Indians.

Manoj Nambiar is the managing director at Arohan, an Intellecap enterprise. He is part of the senior management team at Intellecap, and is also on the board of Micro Finance Institutions Network (MFIN).

Shraddha Srimal heads strategy and new initiatives at Arohan, an Intellecap enterprise. Prior to this, she was a strategy consultant focused on financial services at a global audit and advisory firm, and has worked with business models at the base of the pyramid.

financial inclusion, governance, microfinance