Disclaimer: “This study was commissioned by the Bill & Melinda Gates Foundation. The views expressed in the study are the authors’ only”.

iii

ACKNOWLEDGEMENTS ...................... ............................................................................................ v

ABBREVIATIONS ............................... .............................................................................................. vii

EXECUTIVE SUMMARY ................... .............................................................................................. ix

Chapter 1 - Background, Approach and Design ............................................................................. 1 1.1 Background : ....................................................................................................... 1 1.2 Approach to the study : ....................................................................................... 2 1.3 Scope of the Study : ............................................................................................. 4

Chapter 2 - Agent Network Management Study- Literature Review ........................................... 5 2.1 Financial Inclusion and Business Correspondent Model : .................................. 5 2.2 Technology and BC - Review and Issues : ......................................................... 8 2.3 Regulatory issues and concerns : ....................................................................... 10 2.4 Risks and mitigation measures : ....................................................................... 11 2.5 Summary : ..................................................................................................... 11

Chapter 3 - Business Correspondent (BC) Model – Bankers’ Expectations and Concerns ...... 13 3.1 Customer relationship and bank’s reputation : .................................................. 13 3.2 Staff quality and training needs : ....................................................................... 13 3.3 Business continuity : ......................................................................................... 14 3.4 Regulatory Concerns .......................................................................................... 14 3.5 Operational Concerns : ...................................................................................... 14 3.6 Viability issues : ................................................................................................. 14

Chapter 4 - Business Correspondent (BC) Model - Corporates and their Agents - Expectations and Concerns ........................................................................................ 17 4.1 Coordinatedeffortsofcorporatesandnotforprofitagencies: ......................... 17 4.2 Agents with multiple Corporate Principals : ...................................................... 18 4.3 Mobile companies have technological advantage : ........................................... 18 4.4 Information and Communication Technology (ICT) : ....................................... 18 4.5 Regulatory authority and legal basis : ................................................................ 18 4.6 Use of Existing Infrastructure and Financial Exposure : ................................... 19 4.7 Risk management – combining strengths of corporates

andnot-for-profitagencies: ............................................................................... 19 4.8 Selection,stratificationandcontrolofagents: .................................................. 19 4.9 Training and skill development : ....................................................................... 20 4.10 Remuneration for agents : .................................................................................. 20 4.11 Positive Public opinion : .................................................................................... 20

Chapter 5 - Profiles of Retailers and Comparison of Different Retail Networks ....................... 23 5.1 FMCGs’ and Agri-input Companies’ Retail Outlets : ........................................ 23 5.2 Airtime (Telecom) retail outlets : ....................................................................... 24 5.3 Oil companies supported outlets (petrol pumps) : ............................................. 25 5.4 Pharmaceutical retailers : ................................................................................... 25 5.5 Expectations of BC agents : ............................................................................... 25 5.6 Comparison of strengths and weaknesses

of different categories of retail outlets : ............................................................. 26 5.7 Comparative rating of suitability of different categories

of retail agents to set up and run BC operations : .............................................. 28

Contents

iv

Chapter 6 - Feasibility of use of corporate retail networks as BCs - different models and their rationale ................................................................ 29 6.1 BC Models : ..................................................................................................... 30 6.1.1 Corporate as BCs and retailer as Sub Agents : ........................................ 30 6.1.2 Banks select some Corporate Agents as

BCs and Corporate as Network Manager : ............................................. 30 6.1.3 Retailer as BC with an Employee of Bank to Manage the Network : ..... 30 6.1.4 Retailer as BC with Network Management Outsourced by the Bank : ... 31 6.2 Pilot Designs : ................................................................................................... 31 6.2.1.1 Model 1 - ITC as BC : ............................................................................ 32 6.2.1.2 Model 2 - Sahayojaks and Sanchalaks of ITC as BCs : ......................... 33 6.2.1.3 Model 3 - Agro-input retail outlets as BCs : .......................................... 34 6.2.2.1 Model 4 - Petrol Pumps as BCs : ........................................................... 35 6.2.3.1 Model 5 - Telecom Company as BC : ................................................... 37 6.2.3.2Model6-DedicatedMobileShopsofidentifiedTelecomCo

as BC : .................................................................................................... 38 6.2.4.1 Model 7 - NBFC- MFIs as BC :............................................................. 39

Chapter 7 - Cost and Revenue Analysis and Sustainability ......................................................... 43 7.1 Steps in assessment of sustainability : ............................................................... 43 7.2 Revenue model of a typical BC : ....................................................................... 45 7.3 Cost to Banks : ................................................................................................... 48 7.4 Costs not considered and other issues : .............................................................. 48

Chapter 8 - Risks in use of corporate retail networks as Business Correspondents .................. 49 8.1 Risks perceived by Corporates : ....................................................................... 49 8.2 Risks perceived by banks : ................................................................................. 49 8.3 Addressing Risks : ............................................................................................. 50 8.3.1 Need for Training and Capacity Building : ............................................. 50 8.3.2 Role of IIBF in training and capacity building of BCs : ......................... 51

Chapter 9 - Concerns of the Regulator in using Corporate Networks as BCs ........................... 53

Chapter 10 - Way Forward ............. ....................................................................................... 57ANNEXURE 1 (A) Observations of the experts in the First Consultation Meet (08 June, 2010) ............ ........................................................................................... 59ANNEXURE 1 (B) Observations of the experts in the Second Consultation Meet (04 Sept, 2010) .......... ............................................................................................. 62ANNEXURE 2 Important Circulars of RBI regarding BC/BF ...................................................... 64ANNEXURE 3(A) Field Experiences of IT-enabled Financial Inclusion using the BC Model ... 65ANNEXURE 3(B) Technology providers and technology used ....................................................... 67ANNEXURE 3(C) Connectivity- Pros and Cons ............................................................................... 68ANNEXURE 4 Risks in agent banking and mitigation .................................................................... 69ANNEXURE 5 Strengths of Telecom companies in operating as BC – Views of Bharti Airtel ..... 71ANNEXURE 6 PNB’s BC model in Udaipur District...................................................................... 73ANNEXURE 7 Training Module for Potential Business Correspondents (BCs) ............................. 74Exhibit–1a Profileofcollaboratingbanksinthestudy-UnionBankofIndia(UBI) .............. 75Exhibit–1b Profileofcollaboratingbanksinthestudy-ICICIBankLtd ................................. 77Exhibit-2a Profileofstudydistrict-SURAT ............................................................................. 79Exhibit–2b Profileofstudydistrict-UDAIPUR ....................................................................... 81Exhibit - 3 List of Persons contacted by the Study Team .......................................................... 84

v

DuringthelastfivemonthssincecommencementoftheAgentNetworkManagementStudyinApril2010, the team had occasions tomeet and discusswith officials of banks, corporates, NGOs, theRBI, the two DDMs of NABARD (Udaipur and Surat districts) and above all, representatives of 130 corporate retail networks.

The study was the combined efforts and support at the management level of two banks, viz., Union Bank of India and the ICICI Bank Ltd and the corporate management of companies like Bayer CropScience, BhartiAirtel, ITCLtd, IOC etc.The teamenjoyed the comfort ofmeeting the concernedofficialswheneveritneededwithoutwaitingforanypriorappointment.Thisreflectedtheircommitmenttothetask the team was trying to put together by bringing the corporates and the banks in reaching out those unreached and underserved by the banking system using the Business Correspondent (BC) model.

Thereportgreatlybenefitedfromtheinputsprovidedbyexpertsinthefieldofbankingandfinancelike Dr S.L. Shetty, Prof M.S.Sriram, Mr R Bhaskaran, Mr Vipin Sharma, Mr Justin Oliver, Mr Alok Prasad, Mr Manohara Raj, Mr Greg Chen, and Mr S. Thyagarajan through their participation in the Consultation Meets organized by the team both at the beginning of the study and after completion of thefieldvisits.Immediatelyafterthecompletionofthefieldstudy,theteamcouldmakeapresentationtoMrsUshaThorat,DeputyGovernor,RBIonthequickfindingsofthestudy.Thediscussionsenrichedtheoverallpresentationofthereportandparticularly,ithelpedtheteamtofinetunetheelementsrelatingtotheconcerns of the Regulator in making the entry of Corporates as BCs.

The team would like to acknowledge the contribution of two agencies viz., HEADS in Udaipur and Bapalal Charitable Trust in Surat which helped in getting the survey of 120 corporate retail networks completed within the time frame and to the satisfaction of the team. The team would also like to place on record its appreciation to the owners/ managers / respondents of the corporate retail networks who responded to the questions posed by the team in eliciting information during the survey.

Late Prof Prahalad in one of his interviews mentioned that ‘For me, the test of a good, powerful piece is when people say, “But it’s so obvious.” You agonize and agonize and then somebody says, “But it’s obvious.” When I was younger, I used to get so irritated by that. Now I think it’s the highest compliment you can get’. It may not be surprising if a similar feeling comes to those who happen to read the study report - as the RBI has just decided to allow the corporates to function as BCs. But, theteamfeelsthatthereportwouldhelpbothbanksandcorporatesininitiatingspecificpilotsinduecourse. In that respect, the team records its grateful thanks to the Bill and Melinda Gates Foundation forhavingcommissionedtheabovestudy,afirstofitskindinIndia.

Dr Y S P ThoratTechnical Expert and Advisor

Acknowledgements

vii

ANMA Agency Network Management Study

BC Business Correspondent

BF Business Facilitator

BFEP Bhamashah Financial Empowerment Scheme

BPCL Bharat Petroleum Company Ltd

CGAP Consultative Group to Assist the Poor

DoT Department of Telecommunication

FI Financial Inclusion

FMCG Fast Moving Consumer Goods

GoR Government of Rajasthan

GoG Government of Gujarat

ICT Information and Communication Technology

IGS Indian Grameen Services

IOC Indian Oil Corporation Ltd

IIBF Indian Institute of Banking and Finance

KBS LAB Krishna Bhima Samruddhi Local Area Bank

KYC Know Your Customer

MG-NREGS Mahatma Gandhi National Rural Employment Guarantee Scheme

mn Million

NCAER National Council of Applied Economic Research

NSSO National Sample Survey Organisation

POS Point of Sale / Service

RFAS Rural Finance Access Survey

RBI Reserve Bank of India

UBI Union Bank of India

VAS Value Added Services

WB World Bank

WG Working Group

Abbreviations

ix

Financial Inclusion (FI) isfirmlyestablishedasapolicyobjectiveofGovernmentof Indiaand theReserve Bank of India (RBI) and numerous policy initiatives to achieve FI have been taken in the recent past including introduction of concept of Business Correspondents(BCs). The existing norms forselectionofBCspreferindividualsandentitieswithanot-for-profitmotivetotheexclusionoffor-profitorganisations.TheuseofsuchretailnetworksasBCsisnoteasyandwholesome.Intheabovecontext, the study commissioned by Bill and Melinda Gates Foundation, seeks to understand the nature ofcorporatenetworksthatexistandtheirsuitabilitytocarryoutfinancialservicetransactionsonbehalfof banks. It attempts to design scalable pilots that use corporate retail networks as BCs. The objectives of the study were to :

(i) identify the assets/skills and activities needed to set up and manage a national cash-in/cash-out network;

(ii) identify which corporate distribution networks are equipped with estimates of cost required to build and manage such a network; and

(iii) highlight the regulatory implications associated with these different corporate agency networks.

Thescopeofthestudyisnationalintermsofapplicationoffindings,thoughfieldworkwaslimitedtotwo districts viz., Surat and Udaipur. The report focuses on the strengths and weaknesses of existing retail networks and proposing models through which they could be brought in as BCs. The concerns of different stakeholders and aspiring participants had been recognized and ways of addressing these concerns have been explored. The risks of different types as also regulatory issues have also been discussed. The entire approach to the study was exploratory and therefore participatory.

WithfinancialinclusionplansofmostbanksacrossthecountryconvergingonuseofBCs,thequestionin everyone’s mind was where are the BCs? While preparing the hypothesis for this study, the study team after a review of developments predicted that the Central Bank might review the guidelines on eligible entities for selection as BCs and provide for Corporate Networks to become agents of banks. To a large extent the prediction seems to have come true with RBI announcing guidelines for appointing corporate networks as BCs following its discussion paper on use of corporates as BCs recently.

This study was done in collaboration with corporates and banks. Bayer, Airtel, ITC and Indian Oil among corporates and Union Bank and ICICI Bank participated and provided information as well as access to their retail networks. The study found that corporates are well suited to operate a BC network on behalf of any bank. Their ability, willingness and readiness to become banking agents were absolute. Concerns and apprehensions do linger in the minds of regulator, corporates, retail agents and banks. The study has tried to capture these concerns and examined the same. The concerns can be addressed effectively.

A survey of typical retail agents in the hinterland was carried out (sample of 130, spread over two districts and four broad categories). A comparative assessment of suitability of different types of retailers has been made. Pharma retailers and FMCG retailers that do not have a direct link with the principal corporate do not seem well suited to be BCs. Agri input dealers, Petrol pumps, ITC’s e-choupal network and airtime retailers linked to a single telecom company seem better placed to act as BCs. Networks controlled by a single corporate would lend for more disciplined operations. But, it wouldbedifficulttogetmanyretailnetworksthataremanagedbyasinglecorporate.Evenretailersthatdeal with several corporates can be used in a network; with one corporate acting as BC. Alternatively, corporates can become network managers that manage the retailers who become direct BCs of Bank. A third possibility is for banks to appoint network managers and link homogenous retailers in any major corporate network directly as BCs; with the Corporate providing technical support in selection and due diligence exercise of the retailer. There is also a possibility of outsourcing the network management to

Executive Summary

x

externalentitieswithretailersfunctioningasBCs.Butineverycasethenetworkshouldbedefinedandconfinedtomanageablylargegeography;operatewithanetworkmanagerprovidedbytheCorporateorbankorexternalentitycontractedbyBank.AsforMicro-financeInstitutions(MFIs),withincertainconditions, they might be able to operate as BCs from their physical branches.

The costs and economics have also been examined. The exercise, is however is not comprehensive asitdoesnottakeintoaccountanyspecificretailnetworkorlocation. It isagenericmodelbasedon pieces of information gathered from several sources. The business model shows that a breakeven periodoffiveyearsshouldbeassumedbythoseenteringthisservice.Banksshouldofferarangeofservices through the BCs (and not just savings) to ensure that they recover their investment costs and BCs recover costs within a reasonable period of time. Some reasonable charges could be levied on the customers by banks so as to partly recover the additional costs of engaging BCs.

Theregulatoryconcernsinthemodelhavebeenidentified.Conflictofinterest,bundlingofservices,emergenceoflocalmonopolies,missellingofproducts,breachofcustomerinformationconfidentialityand erosion of customer protection are some of the larger concerns of the regulator. The different risks inthemodelhavebeenexamined.Mostrisksaregenericandmightbefacedinanymodeloffinancialservices intermediation, even within banks. Business continuity risk, compliance risk, concentration riskandconflictofinterestseemtobesomewhatspecifictoBCsthatmightaffecttheprincipalbanksand the customer.

Basedonthefindings,thesuggestionsarethatspecificpilotsshouldbedesignedforidentifiedlocationsand partners (bank and corporate). The pilots should be large format (covering a district or a number of blocks) and should seek to create impact. The emphasis should be to make a success of the pilot so that the learning could be used in replicating the pilots with necessary adjustments across the underbanked regions.

Feasibility of use of corporate retail networks as BCs – Different Models and Rationale

Thefor-profitcompanieshavedifferenttypesofretailnetworksanddifferentmodesoflinkageswiththeir retailers. These are Dedicated Agents, Wholesalers Appointed by Company, Non-Exclusive Retailers Linked to Principal and Non-Exclusive Retailers with no link to the Principal. The BC networks to be created should take in to account the differences in the linkage between the companies and their retail networks.

The dedicated agents and wholesalers have clear network management arrangement in place. An employee of the company acts as the network manager – mostly in a geographic cluster. The staff member is typically responsible for generating orders from the retailers, supply of goods and services, securingpaymentforsuppliedgoodsandmaintaininginformationflowbetweenthehigherlevelsofthe company and the retailers. In some companies, the network manager will also be responsible for marketing campaigns and market development in the area of operation. Where the company staff do not have this responsibility, the company has an external agency/person for managing the network. Normally this is the distributor/wholesaler that renders the services of managing the retailers, processing their orders, supplies and payments. The wholesaler/distributor is responsible to the company for the retail network’s transactions.

Theforegoingisasimplifiedversionofvarietyandcomplexityofcorporateretailnetworksthatexist.From this understanding, four generic models of BC networks are proposed in the partnership between Banksandfor-profitcompanies.

1. Bank– Corporate as BC – retail agents as BC sub-agents2. Bank– Retail agents as BCs in a network – Corporate as network manager3. Bank– Retail agents as BCs in a network – Bank staff as network manager4. Bank– Retail agents as BCs in a network – outsourced network manager supervised by the bank.

This could be the distributor/wholesaler or a special purpose network manager.

xi

Given the number of people without banking services, retail network agents seemed to eye the opportunities in acting as agents of banks rather than on providing cash in/ cash out services only.

Reserve Bank of India has held the view that BCs enable a bank to expand its outreach and offer a limited range of banking services at a low, affordable additional cost. BCs are more integral to the financialinclusionstrategythantothebanks’businessstrategy.TheintroductoryphaseofBCrolloutby RBI was marked by caution. The gradual easing of norms to include a variety of BCs, expanding theareaofoperationbyincreasingthedistancefrombankbranchtoBC,permittingindividualforprofitentities to become BCs and permitting banks to charge service charges from clients serviced through BCs signalled a positive, expansionist stance. However, concerns of the regulator, understandably, remain.Therequirementsofensuringsystemicintegrityoffinancialsectorinstitutionsandmaintainingcustomerprotectionhavetobebalancedwithaccelerationoffinancialinclusion.RBIisacutelyawareoftheneedtoprovideforsustainabilityoffinancialinclusioninitiativesforallstakeholders.Itisinthiscontext RBI has now permitted corporates with a commercial orientation to function as BCs of banks.

InthecaseofNBFC-MFIstheconcernsidentifiedaretheconflictsofinterestinsellingcreditproductsonownaccountaswellasonbank’saccount,lackofretailpointsofpresence(asfieldofficersvisitthe villages once in a week or fortnight for about 30 minutes) and the image of MFIs as high-cost institutions.Oneoftheimportantmeansofaddressingtheconcernswouldbetointroducesignificantlylargesizepilots with close monitoring under controlled conditions. Selection of a suitable corporate with its retailnetworkanddrawingofacontractwiththeprincipalbankreflectingtheconcernsofRBIandthe manner of addressing the same will go a long way in ensuring RBI comfort. Over the long run, institutionswithabilitytoinvestandpatiencetowaitwillreapthebenefitsofexpandedbusinessandnew clientele. Such institutions are not likely to be very small entities such as Kirana Shops, etc. They are more likely to be larger corporates having the resources and the managerial skills.

Overall,contractingfor-profitcorporateretailagentnetworksisboundtoofferawin-winpropositionformanystakeholdersthatareinvolved.Therisksofconcentrationandconflictsofinterestarecapableofbeing mitigated through appropriate supervision mechanisms and suitable contractual arrangements. The business side of the BC arrangement seems reasonably well placed, especially in the context of larger villages with more than 2000 households. The revenue models indicate that BC will breakeven infiveyearsandcandosoearlieriftheyenrolcustomersfasteranddeepentheservicesearlyintherelationship.Bankswouldalsobeabletorecovertheirinvestmentcostswithinfiveyears.OfferingarangeofservicesthroughtheBCbecomescriticalfortheprofitabilityoftheBCaswellasthebank.

Based on the initial experience over a period of 6-12 months, similar arrangements in different parts of the country could be designed and implemented. Corporates and banks are quite keen to run significantly largepilotswith footprintas largeasadistrict. BayerCropScience, ITCLtd,UnionBankofIndiaandICICIBankhadexpressedthedesirefordesigningareaspecificpilotsinEasternUP, Jharkhand, Madhya Pradesh and Orissa. There might be other banks and corporates who might be willing to do so. In the next stage we should identify such institutions and based on the choice of locations, design pilots that are suitable and relevant both to the partners as well as the excluded in those geographies.

1

1.1 Background :

Financial Inclusion is firmly established as a policy objective of Government of India1 and the ReserveBankofIndia(RBI).Policyinstrumentssuchassimplifiedsavingsaccounts,relaxedKYCnorms, dedicated funds to support inclusion etc., have been used to accelerate the pace of inclusion in underbanked rural areas2. RBI had launched the concept of Business Correspondents (BCs) more than four years back to enable banks to extend their network beyond their branches and provide a point of presence to prospective customers nearer to their residence or workplace. Driven by policy intent, banks have undertaken several measures to include the hitherto excluded. A large number of new No-Frill-Accountswereopenedandmanydistrictsweredeclaredastotalfinancialinclusiondistricts.Butseveralproblemsstillremain.Asignificantnumberofnewcustomersandaccountsacquiredbybanksunder the inclusion effort have remained dormant. The customers’ ability to transact on the newly opened accounts is severely limited on account of physical and psychological distance between the customer and branches.

The BC arrangement, as proposed by RBI, was expected to provide a customer a convenient point of transaction in his/her vicinity. RBI has issued guidelines regarding selection of BCs, the transaction processes and risk mitigation in agent banking. The existing norms for selection of BCs prefer individualsandentitieswithanot-for-profitmotivetotheexclusionoffor-profitorganisations.Whilevery valid reasons underlie this decision of RBI, it keeps away a large number of potential partners thatcouldenablebankstooffereffectiveservicestocustomersinasustainablemanner.Afor-profitorganisation could bring the organisational skills and capacity to upscale that is rarely present in non-profitentitiesandindividuals.Thefinancialandoperationaldisciplinesandaccountabilitylevelsinfor-profitorganisationshavematuredovertheyearsunderdifferentgovernanceandregulatorysystems.

Corporates operate through retail networks that reach deep in to the rural hinterland. The customers transact with the retail agents of corporates. The familiarity and ease of transacting on such points improve the prospect of banking transactions being put through if the retail agents are appointed as business correspondents. Cash handling becomes part of the normal routine of the agents who are familiar with the same in their day-to-day business. The disciplines of reporting and accounting exist in such agents (with varying quality and complexity) as part of the requirements of the principal corporates.

The use of such retail networks as BCs is not easy and wholesome. Several problems exist and new ones are bound to arise. The positive aspects of their presence also need to be better understood. It is in this context that this study has been designed. The study seeks to understand the nature of corporate networksthatexistandtheirsuitabilitytocarryoutfinancialservicetransactionsonbehalfofbanks.Thewillingness, readiness, competencies, remuneration expectations of corporate networks and regulatory comfort with this model are some of the important aspects that is part of the study conclusions. The study attempts to result in a scalable pilots that use corporate retail networks as BCs.

Chapter - 1BACKGROUND, APPROACH AND DESIGN

1CGAP Consumer Protection Policy Diagnostic Report, India 20102RBINotificationofDecember1,2009–Listofunderbankeddistricts

2

1.2 Approach to the study :

1.2.1 Objectives of the study The objectives of the study are to:

(i) identify the assets/skills and activities needed to set up and manage a national cash-in/cash-out network;

(ii) identify which corporate distribution networks are equipped with estimates of cost required to build and manage such a network; and

(iii) highlight the regulatory implications associated with these different corporate agency networks.

1.2.2 Methodology :The study adopted following methodology

1) Literature Review: A literature review was carried out to take stock of existing knowledge, issues, concerns and regulations on the agent banking, covering both domestic and international initiatives3onfinancialinclusionthroughagentbanking4. The information on known remittance corridors of migrants was also examined.

2) Selection of Banks for Study: Two banks one each from public sector and private sector viz., Union Bank of India and ICICI Bank Ltd., (Banks’ Profiles given in Exhibits 1-a and 1-b) were selected for studying their initiatives and concerns of BC networks for the purpose of the study. Detailed discussions with the management and concerned departments of these banks were undertaken.

3) Selection of districts: Surat district in Gujarat and Udaipur district in Rajasthan (District Profiles given in Exhibits 2-a and 2-b) were selected based on the discussion with the banks. These districts are one of the important remittance corridors where people migrate from Rajasthan to Gujarat in search of employment and do remittance to families back home in Rajasthan. These districtsrepresentnotonlyuniqueprofileofbankingnetworksbutalsodiversityintermsofeconomic and social conditions. While Udaipur is a tribal district with low banking networks, Surat is an economic hub for textile and diamond trade.

4) Identification of Corporates and their networks in Surat and Udaipur: A preliminary visit was undertaken in the selected districts to identify major corporate networks and their outreach in the following categories :

CATEGORY CORPORATES IDENTIFIEDFMCGs Bayer CropScience Ltd and ITC LtdMobile Companies Bharti AirtelOil Companies IOC Ltd and BPCL Ltd

•1 CGAP Consumer Protection Policy Diagnostic Report, India 2010•CGAP–RealizingthePotentialforBranchlessBanking•CGAP–OngoingCashlessatPointofSale–HitsandMissesinDevelopedCountries•CGAP–BankingwithPoorviaG2PPayments;2010• IgnacioMas-EconomicsofBranchlessBankingpublishedinInnovations-ResilienceinTurbulentWorldVol4,Issue2,Spring2009•FrederikEijkman,JakeKendall,andIgnacioMas-BridgestoCash:theretailendofM-PESAThechallengeofmaintainingliquidityforM-

PESA Agent Networks; 2009• IgnacioMasandOlgaMorawczynski,DesigningMobileMoneyServices•LessonsfromM-PESApublishedinInnovations-ResilienceinTurbulentWorldVol4,Issue2,Spring2009• IgnacioMasandDanRadcliffe,MobilePaymentsgoViral:M-PESAinKenya;Bill&MelindaGatesFoundation1March2010

4Report of the RBI Working Group to Review the Business Correspondent Model, RBI Circulars on BC, Deshingkar, Khandelwal, Farrington on migration, Report of the Committee on Financial Inclusion.

3

Preliminary visit to the district was followed by detailed presentation and discussions with the management of select corporates to explain to them the objectives, scope and expected outcomes of the study and to elicit views and concerns on possibility of using their networks as BCs to achieve financialinclusioninruralIndia.

5) Filed Study Framework:

a. Sampling of the retail agents. For the purpose of the study a comprehensive list of retail agents was collected from the principal and from other different sources. The agents were stratifiedaccordingto:

i. Location : a. Under-banked and overbanked areas, b. Rural and urban population, and c. Ease of physical access ii. Nature of agents : a. Number of clients serviced, b. Volume of transactions with the corporate, c. Currentexperienceinfinancialservices(creditsalesonbehalfofcorporate,

clientverificationforcreditworthiness,etc.),and d. Use of technology in the interface with customers and corporate principal. iii. Selection of respondents: 60 respondents from each district were selected for the study. iv. Structured questionnaire: Structured questionnaires were developed and field tested

during the preliminary visit of the districts. The questionnaires broadly covered • Basicinformation • Financerelatedinformation • BusinessCorrespondentrelatedInformation

b. Selection norms for BC agents;

c. Skill sets required in agents;

d. Training, if any, provided to agents;

e. Security deposits, if any, demanded from agents;

f. Compensation structure; and

g. Investment costs of setting up an agent network management system.

The survey outputs were collated and used for answering several questions relating to suitability of different types of retailers, selection norms, training requirements, remuneration expectations, assumptions relating to customer acquisition and revenue estimates. Open ended interviews were conducted with the NGOs, existing BCs, Banks, NABARD representatives etc., in Surat and Udaipur districts.

6) Consultation Meet : Immediatelyafterthepreliminaryfieldstudy,anExpertConsultationMeetwasorganisedto

discusstherationale,methodology,preliminaryfindingsandotheraspectsofthestudy.TheMeet was organised on 8 June 2010 at the Indian Institute of Banking and Finance, Mumbai.

The discussion in the consultative meet attempted to answer following questions (Discussion

highlights given in Annexure 1- a) :a. Arecorporatenetworksapracticaloptionforextendingfinancialservicesandaccelerating

inclusion? What are the pros and cons of using the same?b. Use of corporate retail networksmight encounter opposition on account of the profit

motive and business objectives. To what extent this might delay if not derail the model?

4

c. What could be the key regulatory concerns in use of corporates as BCs? How to mitigate the regulator’s concerns? What are the conditions that might be necessary to ensure that corporatenetworksplayafunctionalroleinfinancialinclusion?

d. What critical selection criteria should be considered in choice of corporates as well retail agents?

e. How to improve the revenue model of BCs while retaining bank’s breakeven in mind? What other revenue based services could be offered through the BC?

f. IsthereneedforafloorandceilingonBCremuneration?(Volumebasedremunerationmight take time to provide a realistic income to BC; purely transaction and customer based remuneration could split up transactions and bring in non-serious customers)

g. How ‘long term’ should be the investment in these model before breakeven is expected? Is it suitable for support from Financial Inclusion Fund?

h. Banks and corporates indicated a preference for area allocation for BC operations (similar to service area) for securing a viable volume of customers and business. Is this a realistic proposition?

i. Will it be reasonable to propose a service charge payable by the government for making paymentsunderNREGSandsimilarprogrammestotheaccountsofbeneficiaries?Whatincentives might be needed to make these accounts more functional for the customer?

j. What kind of agent risks can we foresee? How to deal with the same ? What type of technologies will be most suitable for use by BCs? What are the banks’experiences in this?

k. Are banks in a position to make use of the ‘service charge levy’ introduced by RBI in respect of BC customers? Are there any impediments to introducing this?

The consultation meet brought some insights and opened new issues for further study. The second Expert Consultation Meet was held on 4 Sept 2010 at Delhi. The meet while agreeing with thefindingsandthesuggestionsfromthestudy,opinedthat thecostsandrevenuesprovidedinthestudyaremoreindicationsandthelocationspecificfactorswillbetakenintoaccountwhenmodelsare designed for a given place for given partners. Further, the consultation meet concurred with the suggestionthatspecificmodelsshouldbedesignedinthreeorfourlocationsafteridentifyingabankand corporate that are willing to partner so as to push the agenda forward. Minutes of the meeting are given in Annexure 1 (b).

A list of those people met and discussed by the Study Team during the course of the study is given in Exhibit-3.

1.3 Scope of the Study :Thescopeofthestudyisnationalintermsofapplicationoffindings,thoughfieldworkislimitedtotwo districts viz., Surat and Udaipur.

Basedonthediscussionswithbanks,corporates,informaldiscussionswithsomeregulators,fieldvisits,survey of retail outlets of corporate, consultation with experts and literature review of past studies a report is drawn up. The report focuses on the strengths and weaknesses of existing retail networks and proposing models through which they could be brought in as BCs. The concerns of different stakeholders and aspiring participants had been recognized and ways of addressing these concerns have been explored. The risks of different types as also regulatory issues have also been discussed with a solution focus. The entire approach to the study was exploratory and therefore participatory. Recognising the evolving nature of the BC mechanism and the novelty of introducing corporates in to banking, the study is not in a position to propose final solutions of any kind. Therefore, the recommendations are at best proposals that have a high probability of being successful.

5

Policy makers, bankers and service providers hold divergent views regarding the importance of financial inclusion and related developments such as introduction of Business Facilitators (BFs),Business Correspondents (BCs), technology solution providers etc. Similarly, the awareness among users, prospective clients of banks and other users of various services available to them, though increased over time, has still not reached the desired level to demand such services from banks and other service providers. Taking into account various developments that have taken place in the area offinancialservices,thischapterreviewstherelevantliteratureandstudiesintherelatedareaanddelineate a plan so that we would have a basic understanding of issues from the perspective of service providers(BanksandBCs)andtheusers.Thechapterisgiveninfiveparts,(i)FinancialInclusionandBCs, (ii) Technology and BC - Review and Issues, (iii) Regulatory Issues and Concerns, (iv) Risks and Mitigation Measures and (v) Summary.

2.1 Financial Inclusion and Business Correspondent Model :

During 2003, the ‘Rural Finance Access Survey’ (RFAS)5 was undertaken by the World Bank and the National Council of Applied Economic Research (NCAER). The study covered two Indian States, viz., Andhra Pradesh and Uttar Pradesh. Though the results of RFAS 2003 are not comparable with the NSSO surveys, they provided certain important pointers on the state of access to institutional finance forthe rural areas. According to the RFAS 2003, ‘the majority of rural population still does not appeartohaveaccesstofinancefromaformalsource. About 59% of rural households do not have a deposit account and 79 per cent of rural households have no access to credit from a formal source.’

The year 2005-06 can be considered a watershed in the annals of Indian Banking as it marked the beginningofnew approaches to ruralbanking.Two significant announcementsweremadeby theFinanceMinisterinhisBudgetSpeech2005-06.ThefirstonewasrequestingtheReserveBankofIndia (RBI) to examine the issue of allowing banks to adopt ‘agency model’ by using the infrastructure of civil society organizations, rural kiosks and village knowledge centres. The second one was advising banks to consider appointing Micro-Finance Institutions (MFIs) as ‘Business Correspondents’ to provide transaction services on their behalf. The RBI then constituted an Internal Group6 to examine the issues addressed by the Hon’ble Finance Minister. Among various recommendations made by the Group, it set forth guidelines for two types of support systems for banks to make use of viz., Business Facilitator Model (BF) and Business Correspondent Model (BC).

AGENT NETWORK MANAGEMENT STUDY- LITERATURE REVIEW

Waiting at UBI Branch, Surat

5Financial Inclusion- An Overview, Occasional Paper No.48, NABARD, 20096Set up under the Chairmanship of Shri H.R.Khan, Executive Director, RBI; then Chief General Manager and Principal, College of Agricultural Banking (CAB), RBI, Pune.7Finance for All? Policies and Pitfalls in Expanding Access, World Bank Report, 2008. It provides a survey of measurement problems and issues infinancialinclusioninacrosscountryframework.

Chapter - 2

6

A World Bank Report7definesFinancialInclusionorbroadaccesstofinancialservicesas“anabsenceof price andnon-price barriers in the use offinancial services.” The report clearly brings out thedistinction between the key words used such as ‘access to’ and ‘use of’’. ‘Access’ essentially refers to thesupplyofservices,whereas‘use’isdeterminedbythedemandaswellassupplyofvariousfinancialservices. It also recognizes the distinction between voluntary and involuntary exclusion and stresses thattheproblemoffinancialinclusionaddressesthe‘involuntarilyexcluded’astheyaretheoneswho,despitedemandingfinancialservices,donothaveaccesstothem.

IntheIndiancontext,theissueoffinancialinclusionwasanalysedingreaterdetailbytheCommitteeon Financial Inclusion.8 The Committee among other things, examined the term ‘Financial Inclusion’ andprovidedaworkingdefinition.AccordingtotheCommittee,theFinancialInclusionwasdefinedastheprocessofensuringaccesstofinancialservicesandtimelyandadequatecreditwhereneededbyvulnerablegroupssuchasweakersectionsandlowincomegroupsatanaffordablecost.Thisdefinitionwas more comprehensive than the one provided in the World Bank Report as it expanded the coverage of the term ‘involuntarily excluded’ by including those weaker sections and low income groups. It also covered the main aspect of providing timeliness and adequacy of credit to this segment of people at an affordable cost. In other words, it also addressed the issue of demand and supply side perspectives of Financial Inclusion. The RBI followed up the recommendations of the Khan Working Group and the Rangarajan Committee on Financial Inclusion by issue of series of Circulars9 beginning from January2006.AsthefocusofthedefinitionofFinancialInclusionwasprovidingcreditsupporttothevulnerable groups at an affordable cost, the RBI instructions to banks too were aimed at introducing simplifiedproductssuchasnofrillsaccountsandcreatingexpandedoutreachinthehinterlandthroughthe agency of BFs and BCs. The banking system responded with opening a number of ‘no-frills accounts’10 without further effort to provide deeper savings services or credit related services to the clients.

The Working Group to review the Business Correspondent Model by the RBI11 looked at Financial Inclusioninaholisticmanner.TheGroupobservedthat‘thefinancialinclusioninvolvedthethreecriticalaspectsof(a)accesstobankingmarkets,(b)accesstocreditmarketsand(c)financialeducation’.It also emphasized that there should be a proper understanding and appreciation of the BC model by all stakeholders, in particular, by the banks.

Remittance of money is important for migrant workers. A few studies have been conducted to look at the pattern of remittances from migrants to their families. The money is typically sent through friends and relatives and in some cases through the contractor. The formal banking system has hardly been used. Although many migrant families had bank accounts with a local cooperative bank/society, they onlyavailedcroploans.Otherfinancialserviceswerenotknowninthevillages.

Business Correspondents (BCs)

The starting point for speeding Financial Inclusion through BC and BF models was the Khan Committee recommendationsin2005andrefinedlateronthebasisofRangarajanCommitteerecommendationsin 2008.

As per extant instructions of the RBI on Financial Inclusion12, in addition to activities listed under the BFmodel(facilitation/non-financialservicesonly),thescopeofactivitiesthatcouldbeundertakenby the Business Correspondents (BCs) included (i) disbursal of small value credit, (ii) recovery of loan principal / collection of interest, (iii) collection of small value deposits, (iv) sale of micro insurance/

8Set up in 2008 by the GoI under the chairmanship of Dr. C.Rangarajan, 9A summary of circulars issued by RBI in this regard is given in Annexure-2. 10No-frills accounts are savings bank accounts that are basic-without minimum balance requirements and without cheque drawing facilities- introduced by RBI to reduce barriers for poor in accessing banks. Data revealed that as on March 31, 2009, out of 50 public sector and private sector banks, only 26 banks had reported having opened 88.60 lakh no-frills accounts. The number of accounts opened formed only 26.82 per cent of the no-frills accounts reported to be opened by banks so far.11Set up in August 2009 by the RBI under the Chairmanship of Shri P.Vijaya Bhaskar, CGM, DBOD, RBI12RBI circular DBOD.No.BL.BC.58/22.01.001/2005-06 dated January 25, 2006

7

mutual fund products/ pension products/ other third party products, and (v) receipt and delivery of small value remittances/ other payment instruments. The activities to be undertaken by the BCs were to be within the normal course of the bank’s banking business, but conducted through the permitted entities at places other than the bank premises.

The Working Group on BC model also observed that most of the banks that have employed BCs have appointed the Section 25CompaniesorTrusts/SocietiesasBCs.Anothersignificantobservation made by the WG was almost all the Section 25 Companies appointed as BCs were set up by the technology service providers who had provided the smart card or biometric solutions for account opening, etc13. The WG while discussing the enlarging the category of entities permitted as BCs deliberated at length the desirability of including entities like telecom companies, oil companies and other corporates as BCs. It however, decided not to consider any of these entities as BCs. The WG, therefore, recommended the following as BCs in addition to those already covered by extant guidelines of RBI :

(i) Individual kirana14/medical/Fair Price shop owners (ii) IndividualPublicCallOffice(PCO)operators(iii) Agents of Small Savings schemes of Government of India/Insurance Companies (iv) Individuals who own Petrol Pumps(v) Retired teachers, and (vi) Authorised functionaries of well run Self Help Groups (SHGs) linked to banks.

Further, the WG recommended that non-deposit taking NBFCs in the nature of loan companies whose microfinance portfolio is not less than 80%of their loan outstandingmay be permitted asBCs inthefinanciallyexcludeddistrictsas identifiedby theCommitteeonFinancial Inclusion (Chairman:Dr.C.Rangarajan), only for liability products.

The RBI, after careful consideration of the above recommendation of the WG, permitted the banks to appoint the following as BCs15:

(i) Individual kirana/medical /Fair Price shop owners (ii) IndividualPublicCallOffice(PCO)operators(iii) Agents of Small Savings schemes of Government of India/Insurance Companies(iv) Individuals who own Petrol Pumps (v) Retired teachers (vi) Authorised functionaries of well run Self Help Groups (SHGs) linked to banks.

Again, based on the Credit Policy announcement of the RBI, it issued a Circular in April 2010 and further relaxed the entry norms for BCs by allowing any individuals including those running Common serviceCentres(CSCs)toworkasBCssubjecttobankssatisfiedabouttheirbonafides.

However,theRBIdidnotacceptthespecificrecommendationoftheWGforinclusionofnon-deposittakingNBFCsinthenatureofloancompanieswhosemicrofinanceportfolioisnotlessthan80%oftheirloanoutstandingasBCsinthefinanciallyexcludeddistrictsasidentifiedbytheCommitteeonFinancial Inclusion(Chairman: Dr.C.Rangarajan), only for liability products. In other words, its extant instructions to banks to defer selection of NBFCs (other than Section 25 Companies) as BCs were reiterated.16

UBI, Surat- people waiting for their turn

13RBI WG report on BC Model –Section III-Experience gained so far and inferences drawn14Small grocery store in the neighbourhood.15RBI Circular 2009-10/238 dated November 30, 2009.16RBI Circular 2005-06/331 dated March 22, 2006

8

The Financial Inclusion Committee also recognised the fact that for small ticket remittances, the fees could constitute up to 25% of the money transferred17. Even the average cost of sending money home isalmost10percentofthetotalsent,duetomarketinefficienciessuchaslackofcompetition,useofcostly transfer methods and inadequate means of transferring money.

2.2 Technology and BC - Review and Issues :

2.2.1 Review

In the light of branchless banking spreading across India, CGAP in a detailed report18 has covered two major segments, viz., (i) trends in branchless banking in India and (ii) Customer protection in Indian Banking. It has also made various suggestions for accelerating the pace of implementation of Financial Inclusion models by banks. The report focuses on branchless banking models that can serve poor andmarginalizedpeoplerather thanonhigh-endbranchlessbankingtechnologiesaimedataffluentcustomers. It has concluded that agent-based models—where business correspondents and business facilitators deliver banking services fully or partially—are the most effective in serving poor clients. It has examined some of the technologies and processes in the context of customer protection and comfort.

While discussing the role of BCs and initiatives taken by governments, it has observed that in the not-so good experience of Bhamashah Financial Empowerment Scheme—Government of Rajasthan wherein with the support of BASIX, though two million clients could be enrolled with KYC compliance, only 8,000 smartcards were issued. No service centres or kiosks could be set up so far. A change of government has placed the project implementation on hold pending a review.

On the same count, it has complimented the work of Andhra Pradesh Government in using BCs and technology for accelerating the pace of NREGS in the State. However, it has observed that the model has posed some challenges. The biggest challenge was lack of viable business volumes because there were many existing banks and many correspondents in a given area. The Government of Andhra Pradesh felt that the process was slow and, even after one year of implementation of the pilot, the up-scaling of the model was still not complete.

For implementing the BC model, there are three types of technology interventions under use. These are (i)Pointofsalemachines,kiosks—fixed,(ii)Handhelddevices—portable,and(iii)Mobilephones—portable. Banks prefer to use technologies that involve either mobile telephony-based solutions or a handheld electronic device that connects to the bank’s server through the Internet, mobile services, or physical docking.

Some of the hardware devices being used across the country include • handhelddeviceswithtransactionprocessingcapabilitiesandinternalmemory;handhelddevices

with single/multiple card reading capabilities and internal memory-based transaction processing ability;

• mobilephoneswithfingerprintidentificationcapabilityandattachedprinters;• POSmachineswithavarietyofattachments,suchascardreaders,biometricinformationreaders

and printers; and • MobilephoneswithSMS-basedtransactionprocessingcapabilities.Mostofthesecanworkboth

offlineandonline.

While some POS machines are desktop computing devices stationed in kiosks, others are portable devices carried by itinerant banking correspondents.

17Report of the Committee for “Financial Inclusion” – Government of India 200718CGAP Consumer Protection Policy- Diagnostic Report- India 2010

9

2.2.2 Banks associated with BC model :

Anumberofbankshavetakenuppilotsandinitiativestoachieveobjectivesoffinancialinclusion.TheWG on BC Model has observed that out of 50 public sector and private sector banks, only 26 banks have so far reported appointing BCs. Among the Public Sector Banks, State Bank of India, Indian Bank, Union Bank of India, Corporation Bank, Punjab National Bank, Andhra Bank, Bank of India, Bank of Baroda, Bank of Maharashtra and among private sector banks, ICICI Bank, HDFC Bank, Axis Bank have taken steps for new customer acquisition.

2.2.3 Technology Providers as BCs :COrganisations such as BASIX, and a few technology providers such as A Little World (www.alittleworld.com), EKO (www.eko.co.in), Atom Technologies (www.atomtech.in) and Financial Information NetworkandOperationsLimited(www.fino.co.in)aredoublingupasBCsusingsimpletechnologyplatforms (for example, FINO’s SARAL or ALW’s ZERO) to manage their own business operations. It has been observed that while there are certain advantages in using a particular technology, there are also disadvantages in each one of them. The challenge is in implementing a uniform and adaptable and scalable technology so that smooth movement from one system to another and one level to another can be achieved without any loss of further investment19.ThefieldexperiencesofITenabledFinancialInclusion through BC model, Technology providers and technology used and the pros and cons relating to connectivity have been presented in Annexures 3(a), 3(b) and 3(c).

2.2.4 Transaction costs and viability :

Not much data are available with regard to the transaction costs incurred in functioning as BCs. In a study of 5 BCs, the cost and revenue analysis showed the following pattern (Table-2.1):20

Table 2.1 Revenue and Cost of BC operations

Total Revenue(per client)

From Credit From Savings From Payments

Rs.154.65 Rs.128.61 Rs.22.45 Rs.3.02Total Costs(per client)

Paid to staff For Operations For Capex For Others

Rs.346.09 Rs.191.49 Rs.147.96 Rs.13.69 Rs.10.96

Out of the total revenue per client of Rs.154.65 generated, credit related revenue with Rs.128.61 per client formed the maximum proportion followed by Savings and other payments.

While discussing various aspects on the viability of a BC model, the IFMR Finance Foundation has observed that21 a BC should have a good mix of three products viz., Savings, Loans and Remittances, as given in Table 2.2 below:

Table 2.2 Optimum Product mix per customer per month

Product Transactions per Customer per monthSavings 5Loans 4Remittance 2

19SeeAnnexure-2forafewsuccessfulfieldexperiencesofIT-enabledfinancialinclusionservicesprovidedusingtheBCmodel,Annexure-3(a)Technology provider and technology used and 3 (b) Connectivity- Pros and Cons20Business Correspondents and Facilitators: The Story so far, Yeshu Bansal and N.Srinivasan - Article in CAB Calling, April-June 200921IFMR Finance Foundation- Deepening Financial Access in India - A Blue Print for Commercial Banks-Using Business Correspondents and Business Facilitators, February, 2010

10

The focus of BC would be in mobilizing more savings accounts. The remittances would form 20% of the savings customers. Remittance, Life Insurance and Personal Accident Insurance would form major sources of revenue for the BC. The BC should also aim to increase its business by 10 per cent per annum.

According to EKO, each physical banking transaction costs a bank more than Rs.100 per customer; each ATM transaction more than Rs.15. But the mobile banking model costs very little to the bank, except for the commission paid to EKO as correspondent.

A clear position with regard to the viability of the BC model is yet to emerge, except that a BC would need to focus on all the three streams of products to make its operation viable. The available costs and viability estimates are based on small samples and limited business volumes; not always based on justifiableassumptions.Initialinvestmentcostshavebeentakenascurrentexpenditureandbreakevenperiods assumed as low as one year in some of these exercises. A rigorous costing of services with a view to examine viability has yet to take place.

2.3 Regulatory issues and concerns :

Though it is not clear if RBI had kept in view the problems of migrants in sending remittances to their families, when it rolled out a new set of guidelines for adoption of mobile banking services in October 2008 it opened new opportunities for banks to provide remittance services to the migrants fromdifferentpartsofthecountry. Basedoninitialresults, itrefinedtheguidelinesthroughthreespecificamendmentsissuedinDecember200922. These three amendments related to Transaction limit, Technology and security standard and remittance of funds for disbursement in cash. Among the three, the third one actually facilitated the use of mobile phones for remittance of funds by migrants and similarly placed people. Under this facility, banks are permitted to provide fund transfer services that facilitate transfer of funds from the accounts of their customers for delivery in cash to the recipients. The disbursal of funds to recipients of such services can be facilitated at ATMs or through an agent approvedbythebankasBC.Thisisaverysignificantstepforwardandaddressestherealproblemfaced by migrants. Though, in some places where migrants stay, most of them may lack identity cards and residence proof to satisfy bank’s Know Your Client (KYC) norms.

Whilediscussingtheissuesemergingfromtheregulator’sguidelines,theMicro-finance-StateoftheSector Report, 200923 has expressed its concern that a bank using BC model, as per RBI’s instructions, has to carry in their books all transactions that have been put through on its behalf by the BC at the end of each day or next working day. The distance criterion in the area of operation of the BC though seen as a customer-protection measure, it has the unintended consequence of limiting the inclusion potential that a BC could achieve through better mobility and high-end technologies. Given that the banks remain responsible for the acts of omission and commission of their BCs, the monitoring arrangements are best left to the discretion of the banks.

Similar concern has been expressed in the Diagnostic report of the CGAP. It observes that the present regulatory basis of branchless banking that banks are primarily responsible for the acts of their banking agents is well held. This has to be reinforced by avoiding micro-regulation that tends to direct banks in business decisions. Micro-regulation would shift responsibility from banks to regulators and offer an avenue for explaining away problems by attributing them to regulations. For example the guidance on distance restriction between branches and location of correspondents24, cash limits on transactions, form of institutions or businesses that could be chosen as business correspondents, agent remuneration, finalrateofinteresttotheclientespeciallyonloans,etc.shouldbelefttobanksthatcontractbusinesscorrespondents. The regulator should focus on expectations relating to quality of service and customer

22RBI/2009-10/273 DPSS.CO.No.1357/02.23.02/ 2009-10 December 24, 200923MicrofinanceIndia-StateoftheSectorReport-2009,ChapteronFinancialInclusion-N.Srinivasan24RBI has since relaxed the distance restriction in rural areas to 30 km from the previous 15 km between the bank branch and location of the banking correspondent. (RBI circular /2008-2009/455 DBOD.No.BL.BC.129 /22.01.009/2008-2009 dated 24 April 2009)

11

protection, which should be made known clearly to banks, and banks should be asked to ensure that they meet those expectations. Micro-regulation tends to dilute the large responsibility for customer protection that is cast on banks. Regulation of branchless banking should be based on norms, focusing onoutputsratherthanonspecificguidanceandinputs.

The number of technology service providers involved in branchless banking has increased exponentially. However,onlyafewhaveimplementedtheirsolutionsonasignificantscalebecausebankstendtoinitiatepilotsfirstbeforescalingup.Thesamebankssometimesworkwithdifferentserviceprovidersin different locations because of the decentralized nature of hiring business correspondents and the lack of a pan-Indian footprint of most service providers. The regulator has emphasized technology standards that would enable seamless movement of information across different technology platforms. Interoperability has been the key regulatory criterion in the choice of technology by banks and service providers for financial services25.

Pricing opacity is another area of concern of the Regulator in using BC model by banks. Of course, it isnotnecessarilyuniquetobranchlessbanking.Inagent-ledmodels,customersmayfinditdifficultto obtain pricing information—the elements of price, comparison with other products and institutions, andjustificationfortheprice26.

2.4 Risks and mitigation measures :

Using business correspondents exposes customers and banks to a variety of agent risks, which include business correspondents conducting their own account transactions that are not authorized by the bank, rendering poor service that alienates customers, cutting corners and ignoring prudential requirements, lacking capacity to deliver services provided for in the contract, not providing timely information to the bank, and becoming so big and critical that the bank is unable to monitor and control their activities. The WG to review the BC Model has observed that given the problems relating to cash handling, generally,onlythoseentitieswhichhavecashinflow/outflowaspartoftheirnormalactivitieswouldbe better equipped to take the role of BCs. It has also suggested for streamlining the system by adopting ‘Cash routes’ (linking various BCs which are in close proximity to each other to a base branch) whenever warranted with suitable cash transit insurance.

In 2007, RBI issued guidelines on risks arising from outsourcing of services. In the agent model, some types of risk and possible mitigation strategies have been tabulated and given in Annexure-4.

2.5 Summary :

The review has brought out a number of aspects which inhibit expected growth in outreach of banks tounbankedareasusingBCmodel.Thoughmorethan4yearshavepassedsincethefirstguidelineofRBI was issued, the development of BC model is more idiosyncratic than system driven. The existing choiceavailableforcontractingBCsis limitedtoindividualsandnon-profit institutionsthatdonothave the organising ability and investment capacity to make a success of the large task ahead. The potential of corporate sector with considerable reach in the rural areas to play a role in inclusion by becoming BC either directly and indirectly needs to be harnessed. At present, most of the BCs are used by banks with focus on savings services and to a limited extent on credit. This may be due to the fact that RBI has been advocating ‘no-frill’ accounts as a mandate for the public sector banks under the Financial Inclusion programme. Being the easiest to achieve and least risky, banks have concentrated on no frills accounts to the near exclusion of credit and remittance services. The migrants continue to depend upon the informal system to send their remittances to their families. With the amendment to the operating guidelines relating to the mobile banking transactions by the RBI allowing remittances from a customer’s account as cash to another recipient, a new opportunity has been created to the banks

25Diagnostic Report India-2010, CGAP26Diagnostic Report India-2010, CGAP

12

in the country, It is a challenge for the banks to seize this opportunity and expand business through mobile banking services.

The Information, Communication and Technology (ICT) enabled service providers have found a great opportunityinfunctioningasBCs.But,againthereisnoevidencetoconfirmthattheywereabletogeneratesurplusintheirBCoperations.ALW,reportedly,isfindingitdifficulttoscaleupitsoperationson account of funds constraints. IT companies that have offered to act as BCs (through dedicated non-profitentities)havedonesotofindamarketfortheirtechnologysolutionsandhardware.Thisrenderstheir continued interest in customer service over sustained periods (when there is no further scope for selling technology) doubtful.

Though the regulatory concerns (KYC and others) and choice of BCs by banks would need to be addressed, micro-management may become counter-productive to the efforts of BCs and banks using technology in a creative way. Infotech and Biotech sectors have grown exponentially in the country without a strong regulatory system, in a flexible environment. Similar flexible environment mayaccelerate thepaceoffinancial inclusion.Whilebasicbanking isacommercialactivitycarriedoutin an organised manner, entities that help banks in expanding their foot print across the country could ill-afford to be unorganised and unfocused on outcomes of their effort. The need to bring in larger, organised players in to the BC fold has never been greater.

13

Ever since the business correspondents model was introduced in 2006 by the Reserve Bank of India, banks have been examining the opportunities offered by the model. The progress till the recent past has been slow as not many business correspondents have been engaged. However, the progress in the last year was exciting. State Bank of India, Punjab National Bank, and many others have enrolled quite a few business correspondents and are continuing to experiment with different possibilities in this respect.

The issues and concerns facing the banks in utilizing the business correspondents model are varied and complex.

3.1 Customer relationship and bank’s reputation :

BC model entails outsourcing of core business activities27 of banks to non-banking entities. In the process, the banks hand over to their agents, the interface with the customer which is a very critical part of the banker-customer relationship. The banks, barring sporadic monitoring over BC agents’ work, do not really have control over how the relationship with the customer is maintained and how the transactions are put through by BC agents. There is no precedence of outsourcing of this relationship which is causing a sense of uncertainty in banks. The uncertainty of how the BC agents would interact withthecustomerinthefieldandtheconsequentfalloutonthereputationofthebankareaspectswhichrequire serious consideration.

To ensure that the business correspondents protect and sustain the image of the bank among its clientele, they would like to be sure that the selection of agencies to act as BCs is done carefully. The challengeliesnotonlyinidentificationofentitiesthatcouldeffectivelyintermediatebetweenthebankand the customer but also in the ability of the intermediary to provide high quality service at affordable price. There are no readymade business correspondents for the banks. Whichever entity is chosen to function as a BC has to be made familiar with the importance of bank-customer relationship from the perspective of the banks. How this would be done in the initial stages at least cost is a matter that is engaging the attention of banks.

3.2 Staff quality and training needs :

Banks apart from engaging a BC, would like to have a say in identifying proper staff within the BC entity that would undertake banking related activities. Training the staff of BCs on basic banking and good quality customer service therefore becomes the responsibility of the principal bank. Eventually, the customer comfort is derived from the banking backbone and not from the strength of BC or of the BC’s staff. Making the BC staff aware of issues relating to bank’s image and reputation and the need to protect the same has to be built in to training programmes by banks. The cost of training and raising awareness on part of BC agents has to be met by the bank or otherwise the BC may not invest in human capacity required for carrying out what might be regarded as an agency work.

BUSINESS CORRESPONDENT (BC) MODEL – BANKERS’ EXPECTATIONS AND CONCERNS

27Banks use direct Marketing Agents for credit card and personal marketing. Banks also use recovery agents to deal with chronic defaulters. But, banks have not used agents for putting through transactions on deposit accounts or loan accounts; agents had not been used for making pay-ments out of accounts to the customers till the introduction of BC arrangements.

Chapter - 3

14

3.3 Business continuity :

Banks are concerned over the fact that a BC could shut down operations and move away. In such a situation, banks have to take care of their customers who had been serviced by the BC agents hitherto. If the number of clients that were serviced by the BC agent were large (which is likely in the case of corporate BCs) maintaining business continuity in respect of the clients becomes a primary concern. On account of low volumes and non-viability of operations some BCs in the past have suo moto terminatedtheirservices.Bankshavebeenputtoconsiderablehardshiptofindsuitablereplacements.Maintaining continuity of services to customers in the interregnum has been a challenge. Banks will have to create fall back arrangements to deal with drop out of BCs especially in the remote areas.

3.4 Regulatory Concerns

• 24 hour Cash settlement- Current regulations require BCs to complete accounting and settle cash with bank branches within 24 hours of transaction. Given the area of operation of BCs - ruralareaswithdifficultaccess-settlementsinvolvingcashpaymentstothebankbytheBCwithin 24 hours present a big challenge.

• Distance criteria – The existing criteria for location of BCs are that they should be no further than 5 km in respect of urban and metropolitan areas and 30 km in respect of other areas. Banks which do not have an extensive branch network in some districts are unable to expand their businessthroughBCnetworkonaccountofthedistancerestriction.Banksdonotalwaysfindit easy to get distance waiver from District Level Consultative Committees which is necessary to operate in certain areas. The private sector banks seem to have greater problems on this score.BanksfeelthatamoreflexibleenvironmentshouldbecreatedforlocationofBCswiththe removal of distance restrictions.

3.5 Operational Concerns :

• Cash handling - Allowing BCs to handle cash is the biggest challenge. An overwhelmingly highproportionof thefinancial transactionsare incash,warrantinghigh-costcash-handlingoperations and added operational risks. Moreover, clients tend to perceive that the BCs are the principals of the transactions (especially when they pay out cash to the customer) and not agents of the banks.

• Irregular accounting - Irregularities (both by accident and design) have been observed in accounting of clients’ withdrawals and deposits by BCs and as a result there are delays in accounting for the banking transactions with the Bank.

• Gullible client profile - Recipients of BC services are mostly illiterate and unfamiliar with banking. Technology might render the less literate customers susceptible to misguidance by the BCs. The unfamiliarity with banking renders the customers easy prey to frauds and scams.

• Fraud and Misappropriation - Since the BCs’ staff operate individually without any line supervision, the risk of fraud and misappropriation are higher. Commercial entities would seek to cut costs and reduce the monitoring required to keep the operations sound. There have been instancesofmiscommunicationbyBCs.Failuretoaccountforcashandfalsificationofrecordshave been noticed and dealt with by banks.

3.6 Viability issues :

• Use of BCs for offering limited facilities – Banks have been using the BCs for new client acquisition and transactions on the savings accounts. Banks are reluctant to offer loans and remittance products through BCs in the initial period. This limits the business opportunities and makes attainment of viability harder. During this period, dropout rates of BCs could be higher.

• Inactive ‘No Frills Accounts’ – Large numbers of ‘No Frill Accounts’ opened by BCs are not

15

operational.Insomelocationsthathaveachieved100%financialinclusion,theliveaccountsare less than 25%. In other cases, the accounts have been used just for receiving payments from government schemes such as MG NREGS. The average balances in savings accounts have been very low at uneconomic levels for banks.

• Model Viability - There’s a shortage of funds for meeting the initial investments in infrastructure and cash settlement arrangements of BCs. BCs are unable to bear the initial costs of technology devicesandsecuritydeposits.TherearefinancialconstraintsonthepartoftheBCsforcapacity-building initiatives, such as investing in training for their staff.

In summary, Banks look forward to partnering with better organised entities that could facilitate financial inclusiononefficient lineswithsoundcommercialsense. Corporate linkagesisseenasapractical way of extending inclusion within a short period, but there are concerns of general nature abouttheBCmodelandspecificconcernsrelatingtoworkingwithfor-corporates.Buttheconcernsare not of a nature that would come in the way of experimentation with corporate retail networks as BCs. Certainly, external support and handholding in the initial stages might be required to deal with concerns of both the banks and the corporates.

17

The BC model was thought to be one of the ways of marketing traditional banking products differently. The banking system in India is still coming to terms with the issues of modes, methodologies and viabilityofdeliveringBankingproductsthroughBCswhoweretillnowsupposedtobenot-for-profitagencies as per the policy guidelines of the RBI. However, the study rightly hypothesized that space for commercial entities such as corporates and NBFCs to function as BCs would be created and gradually scaled up. This hypothesis has come true with RBI signalling its stance through the discussion paper recentlyplacedforpublicconsultationonthedesirabilityofhavingfor-profitcorporatesandNBFCsas BCs.

Whileregulatoryregimemightallowfor-profitstoentertheBCspace,thecorporateshavetheirownstrategizingtodobeforeentry.Somecorporatehouseshavecarriedoutpreliminarystudiesoffinancialservices for the poor and rural markets to understand the ground realities. There is cautious optimism amongcorporatesinpartneringwithbankstodrivefinancialinclusionandbringinexcludedpeople.Corporates see advantages in proactively supporting inclusion initiatives. Vulnerable sections of peoplecanbecomestrongercustomersforthecorporates,whenprovidedaccesstofinancialservices.Afinanciallyincludedlocaleconomyconstitutesabettermarketforallkindsofgoodsandservices.Corporatesseekingtoexpandmarketshaveanaturallikingforthosemeasuresthatimprovefinancialaccess for excluded people and increase their propensity to consume. Corporates are also wary of difficulties thatarise inworking in ruralmarketsespecially in retailingfinancialproducts inwhichrelationship of trust precedes the inherent product quality. The concerns of the corporate sector detailed in the following section have been collated from discussions with the corporate representative and also during the consultation meet.

4.1 Coordinated efforts of corporates and not for profit agencies :

Financialinclusionisaherculeantask.Not-for-profitagenciesworkinginisolationcannotachievethedesiredobjective.Not-for-profitagencieshavelimitationsinscalingupandreachingeconomiesof scale, executing integrated delivery systems of multiple products and services, covering vast geographies,harnessinglargefinancial,technologicalandhumanresources.Thecorporates,guidedby their business strategies, have been developing extensive networks in different parts of the country and deploying new technologies, modern risk management systems and other resources for delivering their products and services.

ThereareotherareaswhereCorporateshaveanupperhandovernot-for-profitorganizationssuchas:• financialsoundnessandabilitytoservicecommitmentsunderadverseconditions;• businessreputationandabilitytodevelopsoundcomplianceculture;• abilitytohandlecustomergrievancesandrespondtocomplaints;• abilitytousetechnologybaseandcontrolovertechnology;• abilitytoinvestinsecurityandinternalcontrolsystems(auditcoverage,reportingandmonitoring

environment); • abilitytomanagebusinesscontinuitydespiteproblemsattheretailend;• abilitytoadoptandmonitorperformancestandards;and• abilitytoidentify,isolateandprotecttheconfidentialityofcustomerinformation. Inclusionoffor-profitsBCsisnotonlydesirablebutalsoanecessityinsomeways.

Chapter - 4BUSINESS CORRESPONDENT (BC) MODEL -

CORPORATES AND THEIR AGENTS - EXPECTATIONS AND CONCERNS

18

4.2 Agents with multiple Corporate Principals :

Most of the agents and sub-agents, especially of FMCG and Mobile companies, represent and conduct business for multiple principals. Although, many corporates conduct due diligence of the agents before appointing them, they do not have total control over the business behavior of these agents. The agent loyaltyforprovidingfinancialservicesunderBCmodelisdifficulttoestablishwhichincreasestheriskfor the corporates. Corporates have expressed the need for having a well-structured selection policy to identify retail agents for functioning as BCs. Some corporate suggest that only those agents that represent only one principal should be selected to function as BCs.

4.3 Mobile companies have technological advantage :

Two technologies viz. mobile phones and POS equipments are used for pay-in and pay-out and for virtual storage of value. Mobile networks are being extensively used in countries like Kenya28 . Corporate with mobile networks have technological advantage over FMCG, oil companies and even theothernot-for-profitagenciescurrentlyusingPOSinstrumentsforextendingBCservicesinruralIndia. The BC business is expected to cater to the low value and high volume markets which makes it financially difficult for the companieswith limited technology to access thesemarket segments.Technology ensures that every transaction is updated real time on the central server. As per the information provided by Airtel, all retailers are issued 128k SIM on appointment to carry the easy recharge and Value Added Services (VAS). This makes the sale of airtime easy and the transaction highly secure.

Unless many mobile companies compete for the limited BC business this technological advantage may induce monopolistic tendencies among the mobile companies. Similar sentiments have also been expressed in other countries where mobile networks are being used as BCs.29

4.4 Information and Communication Technology (ICT) :

AvailabilityanduseofICTisanecessaryconditiontoachievetheobjectiveoffinancialinclusionandbranchless banking in a cost effective manner. Different ICT platforms used by different may corporates suit their respective current business needs these ICT platforms but may not meet the challenges of interoperability and convergence. Sincefinancialservicesresultintransferandsettlementacrossbanks and accounts, the technologies in use should permit convergence and interoperability across platforms. Itmay be difficult to achieve convergence and interoperability between oil companies,FMCGs and telecom operators. Moreover, many of the corporates have limited use of ICT to meet theirinternalbusinessrequirement.Theymaynotfinditconvenienttosharetheirnetworkswithothercorporates (to avoid possible loss of sensitive information specially if the platform is to be operated by their ‘non-exclusive’ agents). There is a perceived threat of telecom companies passing the data of customer base and agent networks of one corporate to its rivals.

ICT faces fastest rate of obsolescence. Only corporates that are technology intensive and which continuously invest in up-gradation of their technology can remain in fray in the long run. Corporates expect that the cost of development and deployment of ICT tools and systems should be shared by the banks.

4.5 Regulatory authority and legal basis :

It is important to provide legal protection to corporates whose networks provide BC services on behalf of the banks. RBI has made it clear that the ultimate responsibility for the acts of omission

28Alliance for Financial Inclusion , Enabling mobile money transfer The Central Bank of Kenya’s treatment of M-Pesa – A Case Study; 2010Amrik Heyer and Ignacio Mas, Seeking Fertile Grounds for Mobile Money, Bill and Melinda Gates Foundations, 200929CGAP - Regulating Transformational Branchless Banking: Mobile Phones and Other Technology to Increase Access to Finance; 2008CGAP – Realizing the Potential for Branchless Banking

19

and commission of the BC rests with the concerned principal banks. However, it would be useful to develop and adopt a standard set of terms and conditions to govern the relationship between the corporates and the concerned banks.

Corporates are governed by various regulatory bodies such as Tax Authority, Registrar of Companies, SEBI,FERAetc.Possibleareasofconflictbetweentheregulatorybodiesneedtobeassessedforanypotential corporate who undertakes BC activities.

Corporates and their agents need to be authorized to conduct BC business under a legally acceptable format. It may even require the corporate agents to get license to conduct BC business through some regulatory authority. Under the extant RBI guidelines, the BCs are expected to be appointed and monitored by the banks. The process of enrolment of BCs (which may be uniform through out the country) with their jobs, responsibilities, expectations and terms of reference vis-a-vis other stakeholders should be clearly spelt out. Whether corporates in their existing form can offer to function as BC with their retail network becoming customer service points (CSP) or offer the retail agents as individual BCs with corporates acting as a network manager of the retailers are questions in the minds of both corporates and banks.

4.6 Use of Existing Infrastructure and Financial Exposure :

Corporates such as agricultural input marketers and pharmaceutical companies have extensive networks to reach the remotest of rural areas. It is expected that they would leverage on the existing infrastructure. However, these corporates take extensive financial exposure by providing creditalongtheirdistributionnetwork.Thefinancialexposuretothesenetworksislimitedtotheextentofphysical quantity of products of the company in stock at different locations. This is particularly true forcorporates thathaveseasonaloperations (e.g.agriculture). Whenfinancial servicesareofferedthroughtheretailnetworks,additionalsafeguardsandfinancialarrangementsbecomenecessary.Thismight entail a reappraisal of credit worthiness of the retailer network.

4.7 Risk management – combining strengths of corporates and not-for-profit agencies :

RBIhasidentifiedvariouskindsofrisksintheBCbusinesses.Corporatesareexpectedtobeabletomanage strategic risks, operational risks, compliance risks and reputation risks. But, they are not as effective in dealing with concentration and systemic risk, contractual risk and counterparty risks. Not-forprofitentitieshavetraditionallybeenabletodealwiththelatertypesofrisksbetter.Hence,intheinitialstagesofrolloutofcorporateBCs,partnershipwithnot-for-profitstounderstandlocalmarket(of excluded, vulnerable people), and achieving familiarity with their livelihoods and transaction requirements might be useful.

4.8 Selection, stratification and control of agents :

Conduct of BC functions entail high responsibility on the part of agents and therefore require proper selection. Each corporate will have to decide on the eligibility criteria for selection of agents. Although corporates have their own criteria for selection of distributors, agents and sub-agents, they may not be sufficient tomeet the challenges involved infinancialdealing in theBC framework. Someof thecriteria as suggested by the corporates are:• Highnetworth• Historyoffinancialintegrity• Permanentresidenceandhighbusinessinterestintheareaofoperation• Goodreputationinthelocalarea• AbilitytohandlefinancialtransactionsandabilitytoworkonICTtools,computersetc.and• Knowledgeofbankingoperationandbankingproducts

20

Selection of agents may also vary with the different type of BC functions they are expected to operate. Pure payments in the form of cash-in and cash-out may be relatively simpler as compared to operating stored-value-accounts and deposit accounts. Stored-value-accounts deal in repayable funds stored in virtualaccounts.Abilityandrequirementofvirtualaccountstolinkwithotherfinancialservicessuchasinsurance,credit,remittancesandprovisionofoverdraftaddtothecomplexityandriskprofileoftransactions.

4.9 Training and skill development :

Skills required for operating a BC network can be no less demanding than the skills required to operate a brick and mortar bank branch. BC agents are the face of the bank which they represent. Failure of the agent to meet its BC obligation and expectation of the customer can be seen as the failure of the bank itself. Corporates and their retail agents have expressed a deep desire to acquire required skills forconductingBCbusiness.Someofthetrainingneedsidentifiedbythemare:• BCprocessesresponsibilitiesandcontractualobligations,• operationalskills,• troubleshootingoftechnology,• customerrelationmanagement,• basicbanking–functions,lawsandregulations,• fraudidentificationandmanagement,• accountingandmaintenanceofrecords,• cashmanagement,• telecommunicationlawsandtheirimpactonBCfunctions,• dealingwithremittances,• E-commerceande-security,and• applicableconsumerprotectionprocedures,lawsandregulations

The corporates expect the banks to share the costs of development of training modules and training expenses.

4.10 Remuneration for agents :

Agents can perform diverse BC functions based on their resources, ability and customer reach. The remuneration may vary with the complexity and riskiness of BC products handled by them. In the survey conducted by the team it was observed that most of the agents work for their principal for margin of 1-3%. But, in the initial period when the customer numbers and business volumes are low, corporate have to maintain minimum remuneration levels of retail agents. In this they would require support of banks.

4.11 Positive Public opinion :

Corporates are concerned that if they can contribute to both economic and social development of the countrythenwhytheyhavebeensofarexcludedfromtheprocessoffinancialinclusion.Corporatesfeel that theyhavevariouspositive factorswhichcanhelp them tobecomeefficientBC toensurefinancialinclusionviz.,• CorporatescarryoutdevelopmentactivitiesaspartofCorporateSocialResponsibility(CSR);• theyhavebusinessinterestsandexposuresinruralareas;• theyhaveextensiveandefficientnetworksthatnotonlydeliverintegratedsolutions,products

and services but also provide after sales services towin and retain consumer confidence andloyalty;

• theyhaveresourcestoinvestinResearchandDevelopment;• theyextensivelyuseinformationtechnologytobuildrelationshipsandcutcosts;• theycanaffordbestofthehumancapital;• theyuseSHGs,JLGs,farmersclubsandotherinformalruralinstitutionstobuildmarkets;and• theyimplementstrategiestomanagebothdemandandsupplysideoftheirofferings.

21

Ontheonehandtheyprovideextensiveandefficientnetworkstomanagesupplysideontheotherhandthey engage in product literacy efforts through locally appropriate forms of dissemination such as street plays, video shows, wall paintings, training programs, etc., to build and manage their demand side.

Mobilenetworkshavedonecommendableworkinensuringfinancialinclusioninothercountriessuchas Kenya, Phillipines, South Africa, Brazil etc. They can achieve similar success in India. Corporates appearreadyandkeentoplayanactivepartinfinancialinclusion.TheRBI’srecentdiscussionpaperis timely and early action on the same would bring in organized players as network agents of banks paving the way for faster and qualitative inclusion.

23

The Agency Network Management (ANMA) study covered four categories of corporate networks viz., (a) FMCG retailers and Agri-input retailers, (b) Airtime (telecom) retail outlets, (c) Oil pumps and (d) Pharmaceutical retailers. 120 retailers were covered through a survey and 10 more were visited by the study team for observation/extensive discussions.

The study came across three types of enterprises viz., private limited company (only one), partnership firms and proprietorship firms. The financial and organisational strength of the retailers variedsignificantlywithinandacrosscategories.TheselectionofanyspecificoutlettofunctionasBCoragentof BC has to be done with inputs from the principal Corporate entity. The strength of the relationship of the retailer with the corporate entity would be a decisive factor in selection.

A comparative analysis of all the four categories of retails networks has been done. Each of the categories of retailers has certain unique strengths. A description of the different categories of retailers follows.

5.1 FMCGs’ and Agri-input Companies’ Retail Outlets :

Among FMCGs and agri-input retail outlets, three broad sub-categories emerged. These are, i. FMCG retail outlets with consumer goods like snacks, confectionary etc.ii. Agriculture inputs retail outletsiii. ITC’s e-choupal model

5.1.1 FMCG retail outlets with consumer goods like snacks, confectionary etc. Underthefirstsub-category,onewholesaledealerand5retailoutletsinSuratdistrictwerecovered.The wholesaler has a large number of retailers. It was observed that the wholesalers have no control over the business behaviour of dealer and retailers. Retailers moved in and out of the network. Some of the retailers are committed to wholesalers and they operate mainly in Surat town only. The retailers in Udaipur district, were dealing with the wholesale dealers but had no connection with the corporates whose products they were selling through their outlets. There was no homogeneity among the type of customers coming to their outlets.

Thoughwilling,thiscategoryofretailagentsgenerallymaynotfitinwellwiththerequirementsofoperating a cash in/cash out network on behalf of banks. Selected, large retailers might be able to successfully run BC operations, but would need to be integrated in to some networks of other retailers for management and monitoring.

5.1.2 Agricultural inputs retail outlets :Under the second sub-category, those dealing with the agricultural inputs such as seeds, pesticides etc., it was observed that they were all serving the rural segment with a strong focus on farming community. Their contact and relationship with the corporate (such as Bayer CropScience, Advanta, Rasi, Rallis etc.,) was strong. The ambience of shops/ outlets was reasonably good. The outlets had made an effort to create visibility for the products. A number of these outlets not only sold agri-inputs products but also provided services such as advice to farmers on nature of chemicals, pesticides to be used in crop cultivation. Some shops also provided extension services by going to the villages for organising publicity camps etc. They enjoyed loyalty of the customers (it was noticeable in the interactions between customers and retailer’s staff) which helped the outlets to plan their inventories

PROFILES OF RETAILERS AND COMPARISON OF DIFFERENT RETAIL NETWORKS

Chapter - 5

24

well in advance. From the corporates’ side, some of the companies like Bayer CropScience, have developed a very strong database of all their retailers through out the country. Their district level officialsprovidefieldlevelsupportthroughproductawarenesscampaignsandinformationaboutthecompany to every retailer who markets their products. In that respect, there is a strong link from the corporate to the retailer and retailer to the clients. Some smaller retailers in this category, especially in Udaipur district do not operate round the year. Their seasonal nature of operation precludes them from being BCs.

This category of retailers is well suited to set up and run cash-in/cash-out networks. They are well connected to farming customers and the principal corporates. The willingness to set up and run a BC operation was high on account of increased business potential that might result from customers being enabled to access loans from the banks.

5.1.3 ITC’s e-choupal30 model :ITC’s e-choupals are operating in Udaipur district and not in Surat district. ITC has around 650 e-choupals covering major commodity districts in Rajasthan. This included Udaipur district where they have more than 30 e-choupals in operation. Unlike other FMCG companies, ITC has a two way supply chain (procurement of agri products from the farmers and marketing of their and other branded products to the rural community) and has a larger outreach of clients. Their retail service outlets use computers (including internet based services) in their business premises and are more technology savvy than retail outlets of many other corporates. They are already marketing Kisan Credit Cards through their Sanchalaks and are familiar with banking operations. At corporate level also they are willing to add BC model to their Sahayojaks and Sanchalaks. So, they have a clear advantage over other types of FMCGs operating in the rural segment. A distributor (Sahayojak) manages a network of sanchalaks and operates the logistics chain (distribution vans with a salesman) for supply of products to the rural shops andthesanchalaksinspecifiedvillageshelpthesalesmantodeliverproductsandcollectpayments.Thedistributionshaveafixedweeklyscheduleofsuppliestothedifferentvillagesandthesanchalaksare available in the shops in concerned villages to help out in the supplies and payments.

Presently, the sanchalaks do not handle cash. But, with a physical technology enabled infrastructure, close contacts with local area and ongoing business links with local shops, sanchalaks have the capacity to set up and run cash-in/cash-out networks. The advantage of this category is that only one corporate (ITC) is involved making management of the network easier.

5.2 Airtime (Telecom) retail outlets :

A number of telecom retail outlets (both exclusive ones and combined with other products) exist in the rural segment. This is a fast growing industry with new services and new customer base added every day. The retail outlets are having small space but reasonably well done up. The companies using the retail outlets have displayed their boards indicating that their products and services are available with the particular retail outlet. So, greater visibility of the shop helps any potential customer in locating the outlet easily. However, the retail outlets of telecom companies were not selling products of only one or two telecom companies. They were adding products of any telecom company which offer them business. The airtime resellers are connected to airtime wholesalers. The transactions were more on cash and carry lines with minimum credit facilities. The revenue stream of the outlets consisted of sale of telecom company products, repair services, selling of other non-telecom products etc. Of the 35 retail outlets surveyed, a few had exclusive focus on telecom products while most of them were selling a variety of products (including groceries, cigarettes). So, while selecting a retail outlet of a telecom company, care may be taken to select such outlets which are selling telecom products, located nearer to the market place with high footfalls.

Corporate networks of a telecom operator and retailer network are engaged in recharging and activating customers through an electronic easy-recharge medium with pan India presence. The entire model

30E-Choupal is a hub and spoke business model developed by ITC Ltd which works as a part of their supply chain management

25

has now scaled to Rs. 85.0 billion of prepaid recharges is pre-funded and is being managed without fraud and risk for more than a decade. A similar model can be replicated for providing BC services. The retailers are managed by a huge distributor network with controls, even in remote areas with no roads. Telecom operators provide stable, scalable and secure technology to provide - transactions without any service denials. A telecom operator is adept at making money from millions of small transactions, each with a small margin. It has a model of low cost, accessible distribution in addition, a miniature combination of hardware and software as mobile phone with SIM to enable a variety of financialtransactions.Annexure-5 has the views of Bharti Airtel, a telecom company on suitability of telecom retail networks for operating as BCs.

5.3 Oil companies supported outlets (petrol pumps) :

Oil companies supported outlets (Petrol pumps) score over all others as they have very close association on a very regular basis with the parent oil company. Moreover, a rigorous selection process is in place forselectinganappropriateperson(orpersonsinthecaseofpartnershipfirms).Theirbusinessmodelis well structured and the pay back period on investment for any new outlet is estimated to be less thanfiveyears.Theoilcompanyconcernedprovidescertaininfrastructureandtechnicalsupporttothe retail outlets. Besides, oversight arrangements are in place by the parent company for monitoring of the functioning of the retail outlets. Of late, it is also observed that the parent oil companies have arrangements with other corporates to market pesticide, seeds, FMCG products, etc., through oil outlets. There are tie-ups with banks to locate ATMs. The oil companies help the outlets to have add-onproductsandservicessothattheycanruntheirenterprisesprofitably.TheKisanServiceKendraof IOC is a pioneering effort in bringing oil companies closer to the rural areas. Addition of the BC function to the retail outlets would be facilitated by the parent oil companies themselves. Their location, earlier experience etc., would be critical factors while considering an outlet of an oil company for undertaking BC functions.

Oilretailoutletsrelatewiththeirbankscloselyandhandlesignificantamountsofcash.Theoilretailoutlets are best equipped in terms of willingness and capability to set up and run BC operations. Since these outlets have to deal with one oil company exclusively, monitoring and managing the network shouldnotposeanydifficulty.

5.4 Pharmaceutical retailers :

Among all the four categories of corporate retail networks surveyed, Medical shops were found to be having certain features unique to their own. A number of medical shops were functioning in a small area providing similar products to any customer who needed them. Their locations were easily accessible. However, though most of them sold mainly medical products, some of them were selling other non-medical products and a few of them providing services like Xeroxing. As far medical products are concerned, they were selling only branded products, like Ranbaxy, Biocon, FDC etc. However, their contacts with the corporates were found to be indirect and they procured all their requirements from the dealers who were the interface for the outlets. All the outlets were run on individual basis without any control from any corporates whose medical products were sold by these outlets.

From customer loyalty point of view as also the ability to network with the principal corporate, the pharma retailers are not a natural choice for BC tasks. Though footfalls are high, converting the footfalls in to banking customers would call for a huge effort as the transaction focus has to shift significantly.Ofthecategoriesofretailnetworksstudied,thiscategoryisleastequippedtooperateasBC.

5.5 Expectations of BC agents :

During the study, a number of potential BC agents who worked as part of dedicated corporate network or as the last point of retail distribution of corporate network were visited. There is considerable interest among these retail agents in functioning as business correspondent of banks. While they were

26

prepared to handle banking business, they had some expectations from banks. a) Training and Capacity Building: The entities required that their awareness should be raised and

their skills should be developed to meet the banking services needs of clients. b) Marketing expenses: The corporate retail outlets also expected that banks should undertake

marketing activities so that the foot falls of customers into their premises increase. They did realize that to become sustainable they would have to acquire and service a large number of clients and offer a wider range of services. While they were prepared to do this, they require the banks to undertake joint marketing with the retailer in the neighbourhood of BC operations.

c) Initial investment: In terms of investment the retail outlets were prepared to make the infrastructural and staff investments as may be needed. But they required the support of bank for making these investments in the form of loans and where feasible in the form of grants. A heartening point to note is that the agents saw business prospects in the arrangement and hence were willing to make the investment necessary in infrastructure.

d) Independence of operations: The corporate retail outlets also wanted a measure of freedom tolinkupwithanybankoftheirchoiceratherthanbeingforcedtobecomeagentsofspecificbanks.

e) Remuneration: In the matter of remuneration, they were quite willing that just their costs are covered in the initial stages. They were willing to wait for a return on any investment that they might be required to make.

f) Branding and image building: They desired that they should be allowed to prominently display their partnership with the bank. In fact, in their reckoning, the BC agency would boost their image and standing in the local area. This in itself was seen as a pay-off which compensated for low incomes that the BC work might generate initially.

g) Business continuity: The apprehension of the potential BCs was that of arbitrary behaviour on the part of banks in selection and termination of BCs. They wanted adequate safeguards in the contracts to ensure that they are not at a disadvantage while dealing with the large banking entities.

h) Competition: They were also concerned with competition that might emerge if different banks in a small location appointed different entities as BCs. With a limited customer base there might not be adequate space for many BCs to operate. Therefore, they desired that the area of operation of a BC would be earmarked and delineated rather than being opened to competition which could make the operations of many BCs and banks unviable. The expectation is more on the lines of a service area approach which was effectively in place till a few years back for rural branches of banks.

5.6 Comparison of strengths and weaknesses of different categories of retail outlets31 :

Basedonthefieldsurvey,ananalysisofstrengthsandweaknessofdifferentcategoriesofcorporateretail networks has been done and given under each category.

5.6.1. Agricultural input RetailersSTRENGTHS WEAKNESSESHigh number of foot falls Notconfinedtoonecorporateproducts(>8-10)In the market place or near market Foot falls – Seasonal

Smaller retailers do not operate round the yearPersonal touch with clients-going beyond selling of products

Not using technology in business though familiar

Creates repeat visits -loyalty to shopRepresenting good corporates increases business

31FMCG retailers category has not been included in this analysis on account of its very limited potential to act as BC

27

Financially strong and have good relationships with banks. Majority of the retailers in this category were willing to set up and manage cash in/cash out arrangements on behalf of a bank. But only larger outlets that function round the year have the capacity to carry out cash-in and cash-out transactions. These are rated as having high potential as BCs. Smaller outlets that work only during the season do not have capacity for round the year operations and are best avoided.

5.6.2 ITC e-choupal model :STRENGTHS WEAKNESSESHigh number of foot falls No cash handling as part of existing business –

will require support for cash management In the village Foot falls not year round – Seasonal during

cropping and post-harvestPersonal touch with clients – credibility arising from crop and market advisory

Not good ambience in all places – located inside -Sanchalak’s habitat in some places

Skilled through training by ITC and backed by information supportComputer and technology savvy – ability to transact through web based processes likely to be high

Sanchalaks / Sahayojaks fall within a single corporate network of ITC. Through its FMCG marketing channel which is paired with the sanchalaks/ Sahayojaks, ITC would be able to provide more support. Sanchalaks/ Sahayojaks under e-Choupal have the willingness and capacity to operate as agents of BC.

5.6.3 Petrol pumps :STRENGTHS WEAKNESSESDeal with only one Corporate Distance- Away from villagesHave largest number of foot falls No need to market Oil products. So, not good in

marketing of other productsUse of technology (facility for payment through debit/ credit cards

Footfallsfromallplacesandnotconfinedfromthe area of operation

Familiar with banking practices (RTGS, CBS) No personal touch with users of servicesCorporate support high

Theoiloutletsarefinanciallystrong.Mostly,theyworkonthebasisofadvancepaymentsforpurchaseof oil. They handle cash continuously with safe banking arrangements. They are willing to set up cash in/cash out arrangements as agent of banks. The best among the types of retail agents studied in terms of cash-in/cash out capacity.

5.6.4 Mobile airtime retailers :STRENGTHS WEAKNESSESModerate number of foot falls across all outlets – Category A outlets have average footfall of 500 and more with high frequency

Notconfinedtoonecorporateproducts

In the market place or near market – Prime areas in every zone/district even villages.

Moderate support from Corporates

Technology understanding level high - a big chunk of our retailers are technology savvy as compared to other possible BC

Low per customer transaction volume

28

RepresentgoodandfinanciallystableCorporates Outlets ambience is good – Visibility and branding spend is taken care of; Product understanding is very good; Educate customers on various plans and packages

Comfort level high in dealing with banks and an established process for KYC quite similar to banks

Financial strength of mobile retailer and dealers are uneven. Some large players that combine other lines of business (such as sales of electronic hardware and distribution of satellite television connections) are stronger. Financial relationship is closer to airtime wholesaler than with the banks. While most retailers are willing to set up cash-in/cash-out arrangements, only the larger ones might have the capacity to operate the same.

5.6.5 Chemists – pharma retailersSTRENGTHS WEAKNESSESReasonably high number of foot falls No loyalty to any corporateIn the market place or near market NosupportfromanyspecificcorporateOutlets ambience good Low loyalty level with any corporate Credibility among customers high on account of advice on cure for minor illnesses.

Though repeat visits of customers are there, no personal touch with any customer

Whilecapacityforcash-inandcashoutexists, theymightfinditdifficult tofocusonthecustomerwhileputtingthroughfinancial/bankingtransactions.So,theyarenotanaturalchoiceasBC.

5.7 Comparative rating of suitability of different categories of retail agents to set up and run BC operations :

Basedon thefield survey and analysingof their strengths andweaknesses, suitabilityof variouscategories of corporate retail networks has been assessed and a comparative position is given in the Table 5.1 below:

Table 5.1 Categorywise comparative rating of corporate retail networksCATEGORY/SUB CATEGORY RATING OF SUITABILITY(a-i) FMCGs retail outlets with consumer goods like snacks,

confectionary etc., Low

(a-ii) Agricultural inputs retail outlets Moderate to high(a-iii) ITC’s e-choupal model High(b) Airtime (Telecom) retail outlets Moderate to High(c) Oil companies supported outlets (Oil pumps) High(d) Pharmaceutical retailers Low

29

Thefor-profitcompanieshavedifferenttypesofretailnetworksanddifferentmodesoflinkageswiththeir retailers. The BC networks to be created should take in to account the differences in the linkage between the companies and their retail networks.

Dedicated Agents :Thefirsttypeofretailnetworkisthatofdedicatedretailagentsthatdealintheproducts and services of the principal company to the exclusion of all others. The linkage between the retail agent and the corporate is direct, with order taking and processing being carried by company staff.

Wholesalers Appointed by Company :Thesecondtypeisaminorvariantofthefirsttype,wherethe wholesaler appointed by the company does the order processing and servicing of the retailer. The company staff is involved in monitoring and development activities, but not in transacting with the retailers.

Non-Exclusive Retailers Linked to Principal : The third type is of retailers stocking and selling of products of the company along with other (competing/different) products of other companies. While these retailers are selected by the principal company to retail its products, these are not exclusive agents of any one corporate network. Here too, servicing of the retailer could be directly by the staff of companies or the wholesalers appointed by the principal corporate. The principal company keeps track of the retailers, maintains a database and relates to them through periodic meetings and marketing campaigns regardless of how the order processing takes place.

Non-Exclusive Retailers with no link to the Principal : A fourth type is of retailers that do not deal with the principal corporate at all. They procure their requirement of goods and services from wholesalers/stockists at different levels. They have no relationship with the corporate entity that produces the goods or services. Nor does the principal company have more than rudimentary information on such retailers.

The first two types have clear network management arrangement in place. An employee of thecompany acts as the network manager – mostly in a geographic cluster. The staff member is typically responsible for generating orders from the retailers, supply of goods and services, securing payment for supplied goods and maintaining information flow between the higher levels of the companyand the retailers. In some companies, the network manager will also be responsible for marketing campaigns and market development in the area of operation. Where the company staff do not have this responsibility, the company has an external agency/person for managing the network. Normally this is the distributor/wholesaler that renders the services of managing the retailers, processing their orders, supplies and payments. The wholesaler/distributor is responsible to the company for the retail network’s transactions.

Theforegoingisasimplifiedversionofvarietyandcomplexityofcorporateretailnetworksthatexist.From this understanding, four generic models of BC networks are proposed in the partnership between Banksandfor-profitcompanies.

FEASIBILITY OF USE OF CORPORATE RETAIL NETWORKS AS BCs –

DIFFERENT MODELS AND THEIR RATIONALE

Chapter - 6

30

1. Bank– Corporate as BC – retail agents as BC sub-agents2. Bank– Retail agents as BCs in a network – Corporate as network manager3. Bank– Retail agents as BCs in a network – Bank staff as network manager4. Bank– Retail agents as BCs in a network – outsourced network manager supervised by the bank.

This could be the distributor/wholesaler or a special purpose network manager.

The possible linkages between Bank and the retailers fall in to four major models.

6.1 BC Models :

6.1.1 Corporate as BCs and retailer as Sub Agents :ThefirstisoneinwhichthecorporateentitybecomestheBCofthebankandofferstheretailersassub agents. This is most likely in business where the retailers handle the products of the corporate entityexclusivelyordependonthecorporatesignificantlyfortheirbusiness.Wherethecorporatehasa strong marketing and distribution network supervised by its own employees, such a linkage would be feasible.

6.1.2 Banks select some Corporate Agents as BCs and Corporate as Network Manager :The second model envisages the banks taking selected retail agents of a corporate entity as BCs – but in a clusterised network. The corporate acts as the network manager and ensures performance and compliance of BCs in accordance with the expectations of the bank. This would be feasible only where thecorporateentityhassignificantbusinessdonethroughtheretailersandtheretailershaveconfidencein the corporate.

6.1.3 Retailer as BC with an Employee of Bank to Manage the Network :The third model also envisages engagement of retailers as BC agents, but with an employee of bank managingthenetwork.HeretheCorporateentityisusedforidentificationofretailerstobeengagedas BCs. This model would be useful where the retailers market products of several principals and not closely related to any corporate entity to give the necessary comfort to any corporate to act as network manager. Banks might make use of the retailer network, but manage it with their own staff.

31

6.1.4 Retailer as BC with Network Management Outsourced by the Bank :The fourth model is similar to the third one described above, but the network management is outsourced toathirdpartymanagerbythebank.Wherebanksareunabletofindstafffromwithinforperformingthis function, it might be advantageous to consider outsourcing network management. There are alreadysimilararrangementsinthefieldthatusetechnologyfirmsasnetworkmanagersandnot-forprofitentitiesasBCswhoworkthroughsub-agents.

In case of NBFC-MFIs, the arrangement is likely to be simpler. The NBFC is directly hired as BC and uses its staff to put through transactions with the clients. This is closer to model 1, but the difference is that there is no third tier in the form of retailers.

Within these models, the mode of services delivery will differ. The key differences will depend upon whethertherewillbeafixedpointofpresenceandwhattechnologyisadopted.Wheretheretaileristhefocalpointofdeliveringservices,afixedpointofpresenceisestablishedandservicesareofferedfrom the retailer’s premises. The BC agent could also be itinerant and provide the service near the location of customers for which a schedule of visits is established as a daily (or weekly) routine. The technology will play a role in determining depth and volume of services and also speed of settlement of transactions between the BC and the bank.

Normally,inthecaseofIndividualsidentifiedasBCs,aBankhastotakeallthestepsfromidentificationtomonitoringrunningofBCworkbytheconcernedBC.Inaslightlymodifiedversion,servicesofaTechnology Service Provider (TSP) are used for undertaking all the work with oversight arrangement of the TSP retained with the bank. The TSP does not have full knowledge of the potential clients and the experience in handling such operations. In a third version, observed in Udaipur district, the PNB hasidentifiedanNGO(HEADS)asaBC32 and simultaneously contracted with ILFS Ltd as TSP to provideall technical support andoversight arrangements through it. TheTSPagainhas identifiedReliance Communication as the connectivity provider. NGO in turn has appointed BC- Agents (mostly staff recruited on contracts) who will be performing the BC work. The BC work is yet to commence in the district. This model has been used by HDFC bank to provide loans to SHGs with the facilitating NGOs contracted as BCs in different parts of the country.

The study of four categories of corporate retail networks has brought out that by using the services of corporates and their networks banks could access a large number of ready to use retail outlets as BCs,reduceriskinidentificationofpotentialBCsandminimizethecostsandeffortinvolvedinsettingupoversight/monitoringarrangements.Basedonthestudyfindings,followingpilotdesignshavebeen developed. Detailed comparative analysis of all the four categories of corporate retail networks including profiling of each of them have been done in the earlier chapter. From the comparativeanalysis, it may be observed that the feasibility of using medical shops as BC is very remote and hence not considered for the time being.

6.2 Pilot Designs :

6.2.1 FMCG and Agri-Input Networks :The analysis of FMCG and agri-input networks has thrown up three feasible models:i. ITC taking up the role of BC and implementing it through its Sahayojak and Sanchalaks located

in various districts in a State (e-Choupals). ii. ITC and Bank would identify locations where BC work has to be rolled out. Based on the

recommendation of ITC, select Sahayojaks and Sanchalaks can be entrusted with the responsibility of functioning as BCs. ITC could function as network manager. In a variant, the Sahayojak could be made the BC and the Sanchalaks made sub-agents of the BC.

iii. Companies engaged in Agro inputs [Example: Bayer CropScience] and the bank would identify locations where BC work has to be rolled out. Based on the recommendation of the Company, its

32Model given in Annexure - 6.

32

select Retail Outlets can be contracted as BCs. The Company will function as Agency Network Manager. A variant could be where the company does not have a close relationship with the retailers (on account of multiple dealerships of different companies), the bank could appoint one of its own staff as network manager. The bank can also outsource the task of network management.

6.2.1.1 Model 1 - ITC as BC :ITC can take up the role of BC and implement it through its Sahayojaks and Sanchalaks located in various districts in a State. The diagrammatic representation of the BC model is given below. Under this model, ITC can work as BC for more than one bank with a condition that in one area itwillwork asBC for one selected / identifiedbank only. The concerned bank would enter into an agreement with ITC at corporate level for the latter performing BC work. The area(s) of operation can be identified through mutualdiscussion and factors comfortable to both the bank and the ITC.

Model - l

Services that can be performed :Under this model, ITC can be allowed to provide the following categories of services:a. Savings related - A/c opening, allowing depositing and withdrawal of funds from SB A/c.b. Loan related - Release of loan instalments based on approval by the bank branch, Recovery of

loansc. Remittance related - Allowing transfer of funds between savings accounts of individuals across

banks/branchesd. Marketingofotherfinancialproducts-Popularisingmutualfundproductsandinsuranceproducts

among customers and potential customers.

ITC Sahayojak, Fatepur, Udaipur

33

Responsibilities of ITC as BC :The responsibilities of ITC would include a) Identifying Sahayojaks and Sanchalaks through a careful process to perform BC functions on

behalf of the Principal viz., ITC. Here, the role of Sahayojaks will be that of Super Agent of BC and that of Sanchalaks would be Agents of BC. Sahayojaks can provide BC services directly to a customer, though the customer concerned has been brought in by any of the Sanchalaks under theareaofcontroloftheidentifiedSahayojaks.ThoughfortheBank,ITCwillbetheBC,itwillsupervise the banking operations performed by Sahayojaks and Sanchalaks.

6.2.1.2 Model 2- Sahayojaks and Sanchalaks of ITC as BCs :While all other conditions remaining same, under this model, the Sahayojaks and Sanchalaks of ITC would take the role of BCs with ITC providing moral support from behind. It will not take any responsibility for the BC related work of their Sahayojaks and Sanchalaks. ITC can help the concerned bank in referring / recommending select names of Sahayojaks and Sanchalaks to a bank who can function as BCs. The bank concerned will do due diligence with regard to the particular Sahayojak oraSanchalakappointedasBC.ItwillalsoenterintoanagreementwiththeidentifiedSahayojaksand Sanchalaks for performing BC related work. The concerned bank may sign an MoU with ITC for providing comfort in selection of Sahayojaks and Sanchalaks to function as BC. The area(s) of operationcanbeidentifiedthroughmutualdiscussionandfactorscomfortabletoboththebankandthe ITC.

Model - 2

ITC and Bank would identify locations where BC work has to be rolled out. Based on the recommendation of ITC, select Sahayojaks and Sanchalaks can be entrusted with the responsibility of functioning as BCs.

Responsibilities of ITC with Sahayojaks and Sanchalaks as BCs :The responsibilities of ITC would include identifying Sahayojaks and Sanchalaks through a careful process to perform BC functions. Here, the role of ITC is provide increased comfort level to the concerned bank in selection of Sahayojaks and Sanchalaks as BCs. Sahayojaks can provide BC services

34

directly to a customer, though the customer concerned has been brought in by any of the Sanchalaks under the areaof controlof the identifiedSahayojaks.SanchalakswillworkunderSahayojaksasAgents of BC and not directly as BCs.

ThoughfortheBank,SahayojaksandSanchalakswillbetheBC,itwillhavesuperficialcontrolonITC by making it to do some oversight / monitoring of BC work being performed by their Sahayojaks and Sanchalaks. Such mechanism would help the bank concerned to get the maximum support from the Sahayojaks and Sanchalaks for the smooth growth of BC network.

Services that can be performed :Under this model, Sahayojaks and Sanchalaks can be allowed to provide the following categories services:a. Savings related-A/c opening, allowing depositing and withdrawal of funds from SB A/c.b. Loan related - Release of loan instalments based on approval by the bank branch, Recovery of

loansc. Marketingofotherfinancialproducts-Popularisingmutualfundproductsandinsuranceproducts

among customers and potential customers.d. Remittance, especially payment of remittances received by the

customers.

6.2.1.3 Model 3 - Agro-input retail outlets as BCs :AsthestudyfindingsobservedthatCompaniesengagedinAgro-inputproducts have stronger potential to be partners in BC model than others. One such example is Bayer CropScience which has very large presence through retail outlets even in the interior villages of across the country. The diagrammatic representation of the proposed BC retail outlet model is given below.

Model - 3 Bayer Gayathri,Fatenagar,Udaipur

35

Similar to the role of ITC under the model allowing their Sahayojaks and Sanchalaks to function as BCs,underthismodelalso,theidentifiedretailoutletswouldtaketheroleofBCswiththeAgro-inputcompany acting as network manager. It will take responsibility for the tasks performed by retail outlets. It will supervise and monitor the functioning of the retail units as BCs and ensure that they comply with the requirements of the bank while providing quality service to the customers. The agri-input company and the Bank would identify locations where BC work has to be rolled out. Based on the recommendation of company, select Retail outlets can be entrusted with the responsibility of functioning as BCs.

Responsibilities of Agri-input Company as Network ManagerThe responsibilities of the Company as network manager would be to i) identify the Retail Outlets based on norms, ii) support the bank in training of personnel of the retail outlets, iii) monitor ongoing settlement of accounts and cash balances by the BCs, iv) monitor performance of the BC periodically and v) provide feedback to the bank

Responsibilities of Agri-input companies with its Retail Outlets of as BCThe select Retail Outlets can provide BC services directly to customers. The Company as the network managerwillhelptheBCsintheirinitialoperations,trainingandmarketingofthefinancialservicesin collaboration with the bank. The retail outlets will be responsible to the bank for accounts and cash settlements and also ensure compliance with the norms of the bank.

Under this model, Retail outlets can be allowed to provide the following categories of services:a. Savings related - A/c opening, accepting deposits in to accounts and withdrawal of funds from

SB A/c.b. Loan related - Release of loan instalments based on approval by the bank branch, Recovery of

loansc. Marketingofotherfinancialproducts-Popularisingmutualfundproductsandinsuranceproducts

among customers and potential customers.d. Remittance and payment services- transfer of funds to a Savings A/c of a customer of the bank

and receive funds in accounts of customers.

6.2.2 Oil Companies :The analysis of Oil Companies retail network has highlighted the singular control exercised by the Oil company over the Petrol Pumps. Indian Oil Corporation, an oil major indicated that it will not take the role of BC. But, it is willing to share the information and help the Bank concerned in identifying suitable Petrol Pumps which can function as BCs. In these cases, it might be necessary to use services of a bank staff to function as the Network Manager or outsource this function to a suitable entity/ agency.

6.2.2.1 Model 4 - Petrol Pumps as BCs :AsdiscussedinthesurveyfindingsofPetrolPumpsand the discussions with the Oil company (IOC), it is observed that the Oil companies have strong organic link with each and every petrol pump being operated in the country. In every petrol pump, the Oil companies have made investments for smooth operations of petrol pumps. Moreover, the petrol pumps are providing such services to the public which are considered virtually essential service. Petrol pumps cannot be directly engaged as BCs by banks without prior consent from the concerned principal Oil company.

Indian Oil Corporation indicated that it can help the concerned bank in selection of suitable Petrol Pumps to function as BC. But it will neither directly undertake to be a BC nor it will function as a

IOC outlet,Sion, Surat dist

36

network manager. It will not also take any responsibility for the BC related work of their retail outlets but will require the Bank to enter into an agreement with it to allow the latter to use the selected Petrol Pumps to function as BC. The concerned Bank would have to pay a fee (royalty) to the oil company. Thearea(s)ofoperationcanbeidentifiedthroughmutualdiscussionandfactorscomfortabletoboththebankandtheidentifiedOilCompany.

Model - 4

Responsibilities of Petrol Pumps of identified Oil Company as BC :TheidentifiedPetrolPumpswouldbecomedirectBCsofbanksandprovideservicesfromthelocationof the petrol pump.

Under this model, Petrol Pumps can be allowed to provide the following categories of services:a. Savings related - A/c opening, receiving deposits and withdrawal of funds from SB A/c.b. Loan related - Release of loan instalments based on approval by the bank branch, Recovery of

loansc. Marketingofotherfinancialproducts-Popularisingmutualfundproductsandinsuranceproducts

among customers and potential customers.d. Remittance and payment services.

Though, all the four services can be allowed to be provided by a BC, a judicial combination of services that can be provided by a Petrol Pump has to be worked out on a case by case basis. This is because of the locations of Petrol Pumps in the rural areas as some of them are located near the market places and some of them are on the highways.

Banks’ additional responsibilities :As the Oil Companies are not likely to play the role of network manager, the banks will have to appoint network managers from among its staff or outsource network management to external entities. The other normal responsibilities such as training, skill building, marketing of services and supervision over the BCs operations and performance would be taken up by the bank as in the case of other BC arrangements.

37

6.2.3 Telecom Companies :The analysis of Telecom companies has brought out the higher level use of ICT (mobile phones) for cash in / cash out by the Mobile shops located across the length and breath of most of the districts in the country.

Similar to the ITC model, two models are feasible under this category also, viz.,i. theidentifiedTelecomCoundertakingtheroleofBCinselectedgeographicalareasii. theidentifiedTelecomCocanalsoassociatewithabankformakingitsdedicatedMobileShops

tofunctionasBC.Thismightbealesspreferredoptiononaccountofdifficultiesinsettlementof transactions of a number of outlets with the bank.

6.2.3.1 Model 5- Telecom Company as BC :As the studyfindingsobserved thatTelecomCosengagedin providing mobile phone services have stronger potential to be partners in BC model. One such example is Bharti Airtel which has very large presence through their product selling retail outlets even in the interior villages across the country. Under thismodel, the identifiedTelecomCo canwork asBC for more than one bank with a condition that in one area itwillwork asBC for one selected / identified bankonly. The concerned bank would enter into an agreement with the identified Telecom Co at corporate level for thelatter performing BC work. The area(s) of operation can be identifiedthroughmutualdiscussionandfactorscomfortableto both the bank and the Telecom Co.

Model - 5 A Telecom outlet, Sion,Surat dist

38

Services that can be performed :TelecomCosareveryfamiliarwiththecashin/cashoutoperations.TheirfinaloutpostistheMobileShop located in the villages. These companies have unique advantage of using communication systems with suitable technology for transfer of funds from one mobile phone to another without any difficulty.So,theTelecomCosarebestsuitedforprovidingremittancerelatedservices.However,astheywillhavetooperatethroughtheirMobileShops,underthismodel,theidentifiedTelecomCocanbe allowed to provide the following services on a mobile banking platform in the order of preference:a. Remittance and payments servicesb. Savings related - A/c opening, receiving deposits and withdrawal of funds from SB A/c.c. Marketingofotherfinancialproducts-Popularisingmutualfundproductsandinsuranceproducts

among customers and potential customers.d. Loan related - Release of loan instalments based on approval by the bank branch, accepting

repayment of loans.

A variant of this is use of mobile retailer as a normal BC. The BC service in such a case need not necessarily run on mobile enabled platform. The retailer can function as a conventional BC operating through whatever technology that the bank has in the given location. If the agreement between the telecom co and the bank envisages working on a mobile enabled banking platform then the BC could offer the same to the customers.

Responsibilities of Telecom Company as BC :TheresponsibilitiesoftheidentifiedTelecomCowouldinclude(i)selectingMobileShops(retailers)through a careful process to perform BC functions as sub-agent of the Telecom Co., (ii) train the sub-agents on banking transactions and other relevant aspects of BC tasks, (iii Maintain a robust mobile basedbankingplatform that is subject tomonitoringandverificationby thebank, (iv)monitor theoperations and performance of the sub-agent mobile shops, and (v) ensure compliance with regulatory norms of RBI and other authorities. The Mobile shops can provide BC services directly to a customer but in the capacity of an agent of the Telecom Co.

ThoughfortheBank,theidentifiedTelecomCowillbetheBC,itwillhavesupervisorycontrolonBC work being performed by the select Mobile Shops. The bank would also have the additional responsibility of ensuring that customer information carried on mobile company networks remains confidential.

6.2.3.2 Model 6 - Dedicated Mobile Shops of identified Telecom Co as BC :Underthismodel,theRetailoutletsoftheidentifiedTelecomCos-thededicatedMobileshopswouldtaketheroleofBCswiththeidentifiedTelecomCocontractedasnetworkmanager.TheTelecomCo will help in identificationof suitable retailers tobehired asBC,monitor theiroperations andperformance, train the personnel of the retailers, ensure settlement of accounts and cash transactions.The Telecom Co and the Bank would identify locations where BC work has to be rolled out. Based ontherecommendationoftheidentifiedTelecomCo,selectMobileShopscanbeentrustedwiththeresponsibility of functioning as BCs.

39

Model - 6

Responsibilities of Mobile Shops of identified Telecom Co as BC :The select Mobile Shops can provide BC services directly to a customer without appointing any agent for the purpose. For the Bank, Mobile shops will be the BC and it will have the support of Telecom Co as network manager. Such a mechanism would help the bank concerned to get the maximum support from the Retail Outlets for the smooth growth of business from the network.

Services that can be performed :Under this model, Retail outlets can be allowed to provide the following categories of services in the order of preference and suitability:a. Savings related - A/c opening, allowing depositing and withdrawal of funds from SB A/c.b. Remittance and payment services c. Marketingofotherfinancialproducts–marketingmutualfundproductsandinsuranceproducts

among customers and potential customers.d. Loan related - Release of loan instalments based on approval by the bank branch, accepting

repayment of loans.

6.2.4.1 Model-7 NBFC- MFIs as BC :The discussion paper released by RBI examines the pros and cons of using NBFC-MFIs as BCs. Though there are a number of NBFC-MFIs working in various areas in the country, only one was reportedly working in Udaipur district and none in Surat district. In general, each MFI has certain unique characteristic features covering organizational design, delivery mechanism, oversight arrangements etc. They have ready to use infrastructure and familiarity with the work relating to BCs. A feasible model of BC using NBFC-MFI is given below:

Basic requirements : TheNBFC-MFIshouldsatisfycriteriafixedforselectionofBCbythebankconcerned.DeposittakingNBFCswillbeexcludedforfunctioningasBCastheirbusinesswillhavedirectconflictofinterestwith that of the Bank. Besides,

40

• it should be in operation for at least 3 years in the areawhereBCwork is proposed to beundertaken / entrusted with it by the bank;

• itshouldhavehighstandardsofgovernance;• itshouldusededicatedequipments/systemsincludingmaintainingaseparateaccountingsystem

for all BC related operations;• itshouldidentifyfieldstaffamongitsexistingstaffafterathoroughscreeningastotheircharacter,

ethics, knowledge of work etc, to work as BC agent in addition to their MFI related work. Model - 7

MFIs have hundreds (thousands in some cases) offield staff. Thefield staff are verymobile andallowing all of them to offer banking services is likely to increase operational risk and make settlement ofaccountsdifficult.Hence,theMFIsshouldbeallowedtoofferBCservicesonlyfromtheirbranches.Here too, dedicated POS terminals that exclusively put through banking transactions only should be placedsothatMFI’sandbank’stransactionsdonotmingle.Toavoidconflictofinterestespeciallyin loan marketing, the banks and MFI could agree on a cut-off limit of loans above which MFI will invariablyrefercasestobank.Belowthecut-offlimit,theMFIcanfinancecustomersfromitsbookordecidetorefertheproposalstothebankforfinancing.

Some of the requirements for considering an NBFC-MFI as a BC are, Bank and NBFC-MFI should enter into an agreement covering inter-alia all the legal and operational aspects governing the performance of BC work by the latter. Bank would provide the necessary equipments to the NBFC-MFI for use of the latter for performing the BC work with ownership retained by the bank.

Bank would provide or arrange training to the staff of NBFC-MFI on their roles and responsibilities relating to performing BC work. Bank and NBFC-MFI would do joint marketing of BC services. Bank will monitor the operations and performance of the MFI in branches that offer banking services on behalf of the bank.

41

Services that can be performed :NBFC-MFIsareveryfamiliarwiththeallthefourcategoriesoffinancialservicesidentifiedforaBCto perform. These companies have unique advantage of using communication systems with suitable technologyfortransferoffundsfromaremotehandsettoadedicatednetworkwithoutanydifficulty.TheidentifiedNBFC-MFIscanbeallowedtoprovidethefollowingcategoriesservicesintheorderofpreference:a. Remittance and paymentsb. Marketingofotherfinancialproducts-Popularisingmutualfundproductsandinsuranceproducts

among customers and potential customers.c. Savings related - A/c opening, allowing depositing and withdrawal of funds from SB A/c.d. Loan related - Release of loan instalments based on approval by the bank branch, Recovery of

loans.

Though all the four services can be allowed to be provided by an NBFC-MFI, a judicial combination of services that can be provided by an MFI has to be worked out on a case by case basis. This is becauseoftheapparentconflictofinterestoftheconcernedNBFC-MFIandtheservicesrequiredtobe performed. Responsibilities of NBFC-MFI as BC :TheresponsibilitiesoftheidentifiedNBFC-MFIwouldincludemaintainingdistincttransactioncapturesystems and accounting procedures for conducting BC related work. MFI should ensure that its own transactions and banking transactions do not mingle and the systems to ensure clear segregation and accounting are in place. MFI should also ensure that marketing of services is done ethically and the staff do not hold out implied warranties of a bank when the MFI’s products are marketed.

Advantages for bank and the NBFC-MFI :EconomyofscaleinoperationfortheBankconcernedastheidentifiedNBFC-MFIwouldbemakingavailable its branch network. MFIs already have customers in thousands and many of them would be ready candidates for inclusion effort on the savings side. The MFI would be able to carry out both sides offinancialintermediationwhichwillbringdownitscosts.ThelargereadynetworkofMFIscouldcutdown the time taken for expanding banking services to the underserved.

Theabovemodelshavebeendesignedkeeping inview theactualfieldconditionsand theneed toprovide an initial framework for banks to adopt/adapt with minimum changes. Each of the models will beself-sustainingovertimebyprovidingacombinationoffinancialservicesasBCs.Thebreakevenperiod for both the bank and the BC will depend on banks’ readiness to offer a range of services through the BC. While it is understandable for a bank to gradually increase the range of services offered through the BC, the time taken to introduce incremental services would determine the length of gestation. On the part of BC, the level and strength of effort taken to bring in those who are not presently customers of the retailer as a banking customer would determine the commercial success. Marketing of the BC in the local area coupled with quality of service would play a key role in new customer acquisition.

43

In order to estimate the cost of operations, revenue earnings and then the sustainability of operations of aCorporateBC,thefollowingstepshavebeenadopted.Broadly,costs-boththefixedcostsandthevariable costs have been estimated for operating one corporate BC. Taking into account the revenue stream available for a BC under the existing remuneration models, the income from operations has been estimated. Based on these exercises, the time required for achieving the business sustainability has been estimated. The exercise has been done for a 5 year period. It is expected that during the firstyearofoperation,initially,moretimeandenergywillbespentinpromotioneffortswhichwouldinclude marketing campaigns by the bank concerned and the BC to popularize the BC model among potential users of BC services. This would also include time for training, completing various formalities betweentheconcernedbankandtheidentifiedBC.Businessvolumesmaybuildupfromthesecondhalfofthefirstyearonwards.

7.1 Steps in assessment of sustainability : Theanalysisisbasedontheinformationcollectedduringfieldvisitandliteraturereview33.

7.1.1 Step 1: Estimation of number of footfalls per outletAs mentioned earlier, retailers of different types were covered under a survey (130 from Udaipur district and Surat districts). The survey revealed that on an average under each of the four categories of retailers (FMCG, Oil companies, Telecom and Medical shops), foot falls registered were around 300 per day/outlet. It was highest in the case of Oil companies (maximum indicated was around 700 per day). So, this has been considered as the basis for determining the business potential for a corporate BC. Though the outlets of all the four categories generally keep open their outlets on all the days, it is expected that a BC would be able to offer services for about 250 days in a year. This has been done as operations of a BC are linked with the bank working days (52 Sundays + 52 Saturdays +15 days of holidays = 119 days). So, in a year about 75,000 foot falls are considered per outlet. However, 75,000 footfalls do not translate to 75,000 customers. In rural and semi urban areas, typically same customer visits the retailer several times during the month34. Their frequency of visits could range from daily (petrol in case of small transport operator for example) to once in a year (seeds purchase or medicine for example). It might be useful to assume that the average frequency is monthly which brings down the number of customers to about 6,000. The marketing campaigns would bring others who are not presentlycustomersof retailer (andwhodonothaveaccess tofinancial services) toavailbankingservices.Whileitisdifficulttoestimatethenumbersofsuchcustomersonthebasisofthesurvey,itisassumed that this could be 25% of the existing footfalls. This number would vary according to the type of retailer (agri-input retailers would have no landless in their current customer base, mobile retailers do not serve a larger number of persons than that they serve in rural areas, a medical shop might have most of local population as customers but very infrequently and petrol pumps might have a limited customerslocally,buthavepotentialcustomersfromsurroundingvillagesandpassthroughtraffic).

7.1.2 Step -2 : Estimation of unbanked :The survey also elicited information with regard to the number of persons who already had bank accounts. The proportion of customers of retail outlets who already had bank accounts ranged from 25% to as much as 80%. For the purpose of estimating the potential business that can be captured by

COST AND REVENUE ANALYSIS AND SUSTAINABILITY

33Bindu Ananth and Asha Krishnakumar - “A Blue Print for Commercial Banks -Using Business Correspondents and Business Facilitators” IFMR Finance Foundation, February 2010 34Only those who visit a retailer several times in a month/quarter are likely to be customers for the BC service.

Chapter - 7

44

a corporate BC, it has been assumed that 50% of those who take / come to avail the services at any of these outlets may not have any bank accounts. These unbanked users of services of outlets will be the firsttargetsegmentforthepotentialBCtocapturebusiness.Thoughsubstantialproportionofthosewho avail / take services from the outlets do not have bank accounts, a conservative estimate of those who would avail the BC services has been made.

7.1.3 Step - 3: Services wise estimation of potential business :As mentioned before, a BC is expected to provide the following four types of services, viz., Savings Bank, Loans, Insurance, mutual funds and remittances.

Though discussions were held with two BCs (FINO of SBI and HEADs of PNB), due to sensitive nature of information relating to cost and revenue under the BC model, exact and complete information was not made available. Discussions with FINO revealed that they are providing only one type of service - Savings account opening and transactions on those accounts.Discussions with both BCs operating in Surat and Udaipur districts also revealed that the entire process of starting a BC network took them more than a year from the time of initial dialogue with the bank concerned. Even after eighteen months of operation, FINO has been able to provide services to over 31,000 new clients (smart cards issued by end May 2010) as against a target of 150,000 planned. A BC securing new business would take time initially and accordingly estimates of client acquisition by BCs need to be conservative.

The basis of analysis made in the Steps 1 to 3 above has been covered in Table 7.1 - Assumptions and Table 7.2 - Year wise and category wise projections of feasible coverage (% of potential customers) given below.

Table 7.1 AssumptionsAspect Assumption parameter NumbersFootfalls Average 300 per day and 250

days in a year75000 footfalls

Foot falls discounted for frequency to estimate customers

Average 12 visits in a year 6000 customers

Customers without bank accounts 50% 3000 customersNon-customers who might avail services of BC

25% of total customers 1500

Total potential customers for BC service 4500Maximum proportion of customers that might avail savings service

75% 3375

Maximum proportion of customers that might avail loans

35% 1575

Maximum proportion of customers that might avail insurance, mutual funds and remittance services

20% each 900

Location of BC outlet In or near market placeMode of operations Established non-mobile outlet with BC equipment Human resource IT savvy human resource with knowledge of

banking operation availableUse of Technology Use of Point of Sale Terminal (POST) which is

most prevalent has been assumed. Use of mobile phones is not assumed for banking operations. If mobile phones are used the cost of technology will come down substantially.

Training and capacity building cost Not included

45

Table: 7.2 Year wise and category wise projections of feasible coverage (% of potential customers)Products and coverage (in terms of % of people not having bank a/c)

Yr 1 Yr 2 Yr 3 Yr 4 Yr 5

Savings Bank 10 30 60 70 75Loan A/cs 3 10 20 30 35Sale of Insurance & other products 3 7 10 14 17Remittances 3 7 10 14 17

Based on the estimated foot falls in an outlet, year wise segregated estimate under each of the categories ofservicestobeprovidedbyaCorporateBChasbeencalculated.Inthefirstyear,aBCisexpectedto provide SB related services to 450 people which will go up to 3300 in the third year and stabilise at thatlevel.Theloanscustomerswouldgrowslower.Evenattheendoffiveyears,therewouldbescopefor growth in loan customers as also volumes. In respect of other services it would range from 150 to 750 over the same period. The details are given in the Table 7.3 below:

Table: 7.3 Category wise, year wise expected coverage of number of people Products Yr 1 Yr 2 Yr3 Yr4 Yr5Savings Bank 450 1350 2700 3150 3300Loan A/cs 135 450 900 1350 1600Sale of Insurance products 150 300 450 600 750Saleofotherfinancialproducts 150 300 450 600 750Remittances 150 300 450 600 750

The location of BCs in market places in small towns or large villages that not only have local populations butalsofloating(butregularlyvisiting)populationfromneighbouringareaswouldmakethenumberspossible. A cluster of about 5 villages with about 4000 to 5000 households is seen as the location for the BC retailer. Alternatively, the location is a small market town to which people from neighbouring villagesfrequentlyvisit(aswasseenduringthefieldstudy)andwhichmighthaveabankbranch,butwithout the necessary staff and infrastructure to handle 3000 to 4000 more accounts.

7.1.4 Step - 4: Pricing of BCs’ services :A BC would be getting its income from providing the above services. From the survey and discussions with BCs and banks, it was observed that there was no standardization of compensation can be made for services proposed to be provided by a BC. This is due to the fact that the entire BC model is still evolving and each bank is experimenting with the processes and pricing.

During the survey, a number of potential corporate BCs indicated that they would be interested in undertaking the BC related work if their costs are fully covered. Some of them found good business opportunityinworkingforabank,asortofindirectbenefitbywayofincreasedrecognition,betterterms of banking facilities etc. They were agreeable to work for a bank as BC on the approved rules/ norms of the concerned bank. In other words, they were prepared to work without stipulating any pre-condition for taking up the BC related work. To construct a revenue model, the inputs from the BCs already operating (with PNB, UBI, SBI) and theIFMRcasestudyontheuseofSmartcardstodeliverGovernmentbenefitsinAP(October,2008)have been used.

7.2 Revenue model of a typical BC :

The number of transactions in the SB account has been taken at 6 per year, though typically it could be 12 transactions in a year and in cases of NREGS workers , dairy farmers, etc., it could be weekly. For SB account related services a minimum of Rs.35 per SB account at the time of opening an account and

46

Rs.5 per account per transaction have been assumed. For other services such as repayment of loans, a fee of 0.5% of average loan (that increases from Rs.5,000 in year 1 to Rs.10,000 in year 5) has been assumed. For insurance/ mutual fund services and remittance services, a uniform amount of Rs.10 pertransactionhasbeenconsidered.ThishasbeenkepttakingintoaccounttheflatfeeofRs.25pertransaction being charged by the UBI to the migrants for effecting remittances. The income details in accordance with the assumptions are given in the Table 7.4 and the revenue model in Table 7.5 and the capital expenditure in Table 7.6 below:

Table 7.4 Service wise income details for a BCServices offered Yr 1 Yr 2 Yr3 Yr4 Yr5a. Business Facilitation fees / per new account 35 35 35 35 35b. Service Fees: per transaction 5 5 5 5 5c. Service fee for repayment collection: /per account/per year 25 25 35 45 50d. Other services fess/ per account/ per year 10 10 10 10 10e. Remittances/ transaction 10 10 10 10 10a & b are as per PNB-BC ratesc & d are assumede Assumed from Rs.25 per transaction being charged by UBI

Table -7.5 Revenue Model for a BCIncome Year 1 Year 2 Year 3 Year 4 Year 5Revenue from services Amount in INRa. Account opening fee – SB a/c (one time) 15,750 31,500 31,500 15,750 5,250b. Servicing fees 13,500 40,500 81,000 94,500 99,000c. Service fee for repayment collection 3,375 11,250 31,500 60,750 80,000d. Service fee for other services 1,500 3,000 4,500 6,000 7,500e. Remittance - Transaction Charge 1,500 3,000 4,500 6,000 7,500Total Income 35,625 89,250 153,000 183,000 199,250

Table 7.6 Capital expenditureCapital Expenditure Amount (INR) AssumptionsPOST with Biometric Card Reader

25,000 By bank. Some banks ask BC to invest this amount

Smart cards and customisation charges @ Rs.100 per card for 3300 accounts

330,000 Paid by bank over first fiveyears as per progress in opening of accounts

Furniture at BC outlet 15,000 By BCOther infrastructure (telephone, internet connection, etc)

10,000 By BC

Total 380,000

For performing various BC operations, certain basic infrastructure by way of capital expenditure would have to be incurred both by the bank and the potential BC. There are major costs such as Point of Sale Terminal (POST) machine with bio-metric card reader would cost around Rs.25,000. Each smart card with bio-metric capability would cost Rs.10035. These two costs are expected to be borne by the concerned bank as these would be considered as their infrastructure and the BC is only allowed the use of them subject to various terms and conditions of contract entered into by them with the concerned bank. In addition, the Corporate BC would be either holding certain basic related infrastructure such

35IFMR study of NREGS Andhra Pradesh

47

as a telephone connection, furniture etc., for providing BC services. These are estimated to cost Rs. 25,000/- to the potential BC.

Under the proposed corporate BC, the services of BC are expected to be provided by one of the staff already available or appoint one person to provide more focused attention to the demands of prospective clients. At the projected level of number of accounts and transactions, the per day transactions in year 5wouldbeabout100,whichrequiresanexclusivestafftohandle.Beyondthefifthyearifnumberof transactions increase, more staff may have to be hired by the BC; the estimates that the revenue would permit such additional staff. Based on the discussions and survey inputs received, at least Rs.6,000/- per month would be required by way of salary to a person assigned this job in the BC outlet. In addition, there would be other recurring costs such as electricity, telephone, stationery etc., which are required to be incurred by a potential corporate BC. These have been estimated to cost around Rs.25,000/- per year. Cost escalation of 5% per year on recurring operational cost of BC has been provided for the second and subsequent years.

Taking into accountvarious physical andfinancial inputs analysedabove, apotentialBC’sviablecosts and revenues per BC are determined by the average number of services under each category of services per year spread over 5 years. The results of the analysis of the minimum number of years per potential Corporate BC required to recover its initial investment and make the operations sustainable for the BC are given in Table 7.7 below :

Table 7.7 ProfitabilityRecurring Exp Amount in INRSalary for CSP 72,000 75,600 79,380 83,349 87,516Rent 9,000 9,450 9,922 10,418 10,939Electricity 6,000 6,300 6,615 6,945 7,293Stationery 3,000 3,150 3,307 3,472 3,646Travel 3,000 3,150 3,307 3,472 3,646Misc 3,000 3,150 3,307 3,472 3,646Total 96,000 100,800 105,838 11,1128 116,686Income received (refer earlier table) 35,625 89,250 153,000 183,000 199,250Net surplus (72,375) (11,550) 47,162 71,872 82,564Cumulative surplus (72,375) (83,925) (36,763) 35,109 117,673Minimum Investment costs 25,000 - - - -Net surplus after min investment costs

(97,375) (11,550) 47,162 71,872 82,564

Cumulative surplus (97,375) (108,925) (61,763) 10,109 92,673Investment with card reader 50,000Net surplus after total investment (122,375) (11,550) 47,162 71,872 82,564Cumulative investment (122,375) (133,925) (86,763) (14,891) 67,673

The BC agent, subject to assumptions being realised, would breakeven after recovering minimal investment costs in the fourth year. If however, the BC agent is required to invest in the POS Terminal, thenthecashflowoftheBCturnspositiveinthefifthyear.TheBCisinapositiontoearnaminimumincome of Rs.120,000 from the sixth year onwards.

48

7.3 Cost to Banks :

Making assessment of true costs of delivering various banking services through a BC via either a technology service provider or directly by the bank itself is beyond the scope of this study. Moreover, in order to increase its banking services through various means including BC model, they will be appointing a number of BCs under various categories in different geographic locations and as part of theiroverallcorporatestrategy.So,estimatingthecosttobanksforoneBCmaynotalsoreflectthetrue costs to a bank under BC model.

a. Investment CostCost of 3300 Smart cards @ Rs. 100/ card 330,000POS Terminal Rs. 25,000Total investment Rs. 355,000

b. Cost of transactionCard cost – allocated cost per year Rs.20 or Rs. 3.33 per transactionAllocated cost for HR and establishment cost per transaction Rs.5Technology cost (same as SMS cost) Rs.2Total Cost per transaction Rs.10.33

In addition to the cost of services to be recovered by the BC the bank may also have to recover Rs.10.33 per transaction in a SB account from the customer. The cost of network management by the bank and cost of essential infrastructure by the bank would normally be met through banking usual income flows.RBI’sdispensation36 for recovering separate charges from customers towards costs of BC agents should not include technology investments that go towards accounting and settlements.

7.4 Costs not considered and other issues :

The use of technology through BC model would reduce the cost of operations for a bank over time. Thiswouldindirectlyimprovetheefficiencyofoperationsandbusinessofbankbranches.Atthesametime, there are certain indirect costs of customer relationship maintenance, grievance redressal, frauds in using BCs, oversight and monitoring, loss / theft of Smartcards, etc., which have not been factored while making the above analysis. These are presently not quantifiable. But, when these becomesignificant,bankswouldhavethecapacitytopricetheirservicesappropriately.Thefundingavailablefrom Financial Inclusion fund, subsidy given by on cost of smart costs available for NREGS accounts and possible viability gap funding for working in disadvantaged areas have not been considered. If any such funding becomes available the same would strengthen the revenue model and improve viability. Given the demand for the BC services and the credibility established in choosing a right candidate as a corporate BC, most of these costs would be reduced that would actually improve the viability of BC operations.

36Circular issued in November 2009

49

37USAID -Mobile Financial Services Risk Matrix, 201038Financial Inclusion Fund and Financial Inclusion Technology Fund with NABARD

RISKS IN USE OF CORPORATE RETAIL NETWORKS AS BUSINESS CORRESPONDENTS

Banks would be outsourcing core banking tasks to retail agents who primarily are retailers of corporate entities. Such outsourcing carries two different types of risks. Business risks as also the domain risks of banking. Use of agents to do banking business has traditionally seen as a risky proposition. There areseveraltypesofrisksthathavebeenidentifiedsuchasstrategicrisk,reputationrisk,compliancerisk,contractualrisk,accessriskandconcentrationrisk.Sinceforthefirsttimecorporateretailagentswould be used as business correspondents of banks they would be entering an unfamiliar territory which engenders certain other risks associated with banking.

8.1 Risks perceived by Corporates :

The risks in corporate retailers taking up banking agencies are many37.ThefirstisthatoftheriskofbusinessfailingtogeneraterevenuesthreateningviabilityoftheBC.Inanon-profitnetwork,failuretorecovercostsmightnotbeaseriousconcern,butinafor-profitnetwork,failuretomakeaprofitcouldhave adverse consequences on how the business is run. The second is the business continuity risk that exposes a bank to the possibility that the BC might withdraw from the scene rendering the bank liable to make arrangements for servicing the customers who had already been acquired. This follows from theviabilityrisk–for-profitsquicklydecidetoshutdownunprofitableoperationsandshiftresourceselsewhere. A further risk that’s increasingly gaining attention is the technology risk. Most BCs would be technologically linked to the bank for both putting through transactions and settling accounts balances as well as cash. The suitability of technology, possibility of failure of technology and the accompanying issues raisedifficulties thatneed tobedealtwith. Thecompatibilityof technologyplatforms of the corporate retail agents and that of the banks could also be an issue. While such problems are remediable, they take time and money, increasing the costs and breakeven periods.

8.2 Risks perceived by banks :

The risk that banks face in dealing through business correspondents relate to (i) the interface with the customer, (ii) the interface of the BC with its own staff who would be putting through banking transactions, (iii) the interface between the bank and the BC, (iv) the technological interface between these3differenttiersintransactionand(v)thepossibilityoffraudandlossinherentinanyfinancebased business. A bank proposing to use a business correspondent should invest in risk mitigation - not only in-house risk detection and mitigation capacities but also attend to the risk management requirements of the BC, its staff and a relatively unfamiliar and ill-informed customer base. Hence, the approachtoidentificationofdifferentriskfactorsasalsothemitigationmeasuresshouldbeelaborateand comprehensive. Typically the business risks of BCs arise from the fact that the projected client base could not be acquired or revenues that were projected from the presumed level of transactions do not get generated. In either case, the viability of the BC is threatened and would need to be dealt with. This risk can be mitigated by banks making adequate arrangements to meet the viability gap of BCs. Further, in assigning different lines of business to BCs, bank should carefully quantify the costs and returns of the BC and ensure that the allocated business lines have the potential to provide a net positivereturntotheBC,sufficienttoensurecontinuityinbusiness. Thefunds38 that are available forsupportingfinancialinclusionmayalsobeselectivelyusedtoensurethattechnologyinvestmentswhich comprise a bulk of the initial investments in the BC are met. Having a reasonably long breakeven

Chapter - 8

50

period would ensure that banks are in a position to adequately compensate the BCs thereby rendering their viability feasible.

A BC might for very different reasons choose to discontinue functioning as a BC of a bank. This could be on account of basic business viability concerns or failure of technology or inability of a bank to provide the support necessary to make the customer feel happy about transacting with the bank. Any problem between the BC and the bank in their relationship could also adversely impact the inclination of the BCs to continue to do business. In case the business continuity is affected by the BC deciding not to continue as an agent of the bank, servicing the existing customers in that location becomes a major problem for the principal bank. A short term, quick response strategy is to have in-house staff tofillingapsinservicearisingfromBCsdiscontinuingtheirservices.Thismightnotbetoodifferentfrom handling of absences of staff (either planned or unplanned) within the branch network of banks. However, a parallel longer term strategy should ensure that corporates keep a panel of BCs in each geographical area, that are willing to take up servicing of clients at short notice. Maintenance of such a panel of trained BCs who could be mobilized at short notice is one of the ways in which the business discontinuity risks could be managed. While dealing with corporate retail networks, the fall back arrangements required to deal with drop out of individual retails agents should be left to the corporate network manager. One of the comforts available to the banks in taking on corporate BCs is their ability to meet such contingencies.

Oneofthecriticalissuesinusingretailagentsofcorporatesisthatofthepotentialforconflictofinterestbetween the basic products of the corporate that are marketed and the banking products of the bank. To some extent, it’s possible that the retail agents bundle banking and non-banking products in such a manner as to compel the customer to buy some products and services that may not be immediately neededbythem.Evenwithinfinancialservicesattimescustomershavebeensoldinappropriateandunnecessary products in order to avail a basic and necessary service. Several insurance policies and pension plans have been sold to customers who desired normal banking services. Such cases of cross selling and mis-selling could be disadvantageous to the customer and might be pursued by the BCs on accountoftheincentivepackages.SuchconflictofinterestsituationthatseektomaximizerevenuestotheBCsanddisregardthediscomfortandpotentiallosstothecustomershastobefirmlydealtwith.Mitigation of this could be through i) a code of conduct that separates marketing of banking and non-banking products, ii) an enforcement mechanism which will periodically review the marketing and sales effort of the BCs and iii) customer grievance handling mechanism which enables banks to get information periodically from customers. The corporates have to be made to realize the reputation risk that might result from bundling of unsuitable products as part of the banking services.

8.3 Addressing Risks :

8.3.1 Need for Training and Capacity Building :The BC agents being unfamiliar have to be made knowledgeable about all banking services and the modalities of putting through banking transactions. They should also be well trained in the technology chosen for recording of transactions and settling of accounts. The regulator would keenly watch BC’s compliance with regulatory requirements. The capacity and readiness of BC agents to comply with the prudential guidance and regulations should be built up. The need for training and skill development of BCs has been discussed in para 4.9. Training is an on-going process to build capacities of the persons engaged in BC related work. Initially, the BCs should be sensitised to understand the various requirements of the concerned bank and that of the RBI. In order to sensitise the potential BCs in various tasks to be performed by them, a training module has been developed and given in Annexure-7. It envisages a one day programme with half a day at the branch level of the bank concerned and another halfadayattheidentifiedBCcentre.ApartfromtrainingBCstaffintheissuesinvolved,orientingthem towards the importance of compliance and attention to be paid to the regulatory norms is a clear necessity. In the initial period banks may have to spend adequate time on training the BC and their staff on the regulatory norms and the need for diligent compliance in order to ensure the risks of failure of compliance do not impact either the bank or the customers.

51

8.3.2 Role of IIBF39 in training and capacity building of BCs :With the RBI permitting banks to use intermediaries such as BCs / BFs to reach out to ‘excluded’ rural poor, the demand for people / institutions to take up the role of BCs/ BFs is expected to increase over time. A large pool of competent persons is needed urgently, who could be employed as BCs/ BFs by the banks or the Customer Service Providers (CSPs) by the agencies which are appointed as BCs by the Banks.

In order to meet this demand for trained personnel to function as BCs/ BFs, the Indian Institute of Banking and Finance (IIBF) has launched aCertificateCourse with structured training and classroom support, followed by an off-line examination process. The Course carries an examination fee of Rs.4,000/-. The NABARD, from its Financial Inclusion Fund (FIF) is extending support to the Course by way of Full / Partial reimbursement of the Course Fee to the successful candidates. In addition,NABARDalsosupportscapacitybuildingofBCs/BFsthroughthisCertificationCourse.

The design of the course has two parts viz., internal assessment through a process of training of the candidates by accredited institutions in which candidate should get a minimum of 40%, and external assessment by way of testing candidate’s eligibility through an objective type of examination with multiple choice questions in which he / she will have to score a minimum of 50%. On successful completionof thetest/examination, thecandidateswillbegivenapassCertificatebytheInstitute.Details on the Course by IIBF are available in the following website - http://www.iibf.org.in/documents/rulessylabus_bcbf.pdf

A summarized view of the different risks and how they could be mitigated at bank and customer levels is given in Annexure -4. In using the corporate agents, banks may have to spend more of their energies in risk mitigation and monitoring of customer protection issues rather than in basic performance management for which corporate retail networks are better equipped.

39IndianInstituteofBankingandFinance(IIBF)isabodyofbanksandfinancialinstitutionsandprofessionalsinbankingandfinanceindustryinIndia.TheMissionoftheInstituteistodevelopprofessionallyqualifiedandcompetentbankersandfinanceprofessionalsprimarilythroughaprocess of education, training, examination, consultancy / counselling and continuing professional developmental programmes.

53

Reserve bank of India has held the view that BCs enable a bank to expand their outreach and offer a limited range of banking services at a low, affordable additional cost. BCs are more integral to the financialinclusionstrategythantothebanks’businessstrategy.TheintroductoryphaseofBCrolloutby RBI was marked by caution. The gradual easing of norms to include a variety of BCs, expanding the area of operation by increasing the distance from bank branch to BC, permitting individual for profitentities tobecomeBCsandpermittingbanks tochargeservicecharges fromclientsservicedthrough BCs signalled a positive, expansionist stance. Very recently, a discussion paper has been placedinthepublicdomainforinputsfrompubliconuseofforprofitentitiesincludingcorporateandNBFCs as BC in a bid to accelerate pace of inclusion40.

However, concerns of the regulator, understandably, remain. The requirements of ensuring systemic integrityoffinancialsectorinstitutionsandmaintainingcustomerprotectionhavetobebalancedwithaccelerationoffinancialinclusion.RBIisacutelyawareoftheneedtoprovideforsustainabilityoffinancialinclusioninitiativesforallstakeholders.ItisinthiscontextRBImightbewillingtopermitcorporates with a commercial orientation to function as BCs of banks.

While the positive aspects of using corporates such as superior organising and managing abilities, betterfinancialstrength,goalorientedfunctioning,reputationandlongtermfocusarewellunderstood,there are also concerns in using them as banking agents. The concerns relate to bundling of corporate’s productswithfinancialservices,mis-selling,highpressuremarketingoffinancialproductsandmisuseofconfidentialcustomerinformation.

InthecaseofNBFC-MFIstheconcernsidentifiedaretheconflictsofinterestinsellingcreditproductsonownaccountaswellasonbank’saccount,lackofretailpointsofpresence(asfieldofficersvisitthevillages once in a week or fortnight for about 30 minutes) and the image of MFIs as high-cost credit institutions.

RBI is also concerned about the customer protection issues while using BCs in general and corporate entities in particular. The unfamiliarity of customer with banking practices, lack of visible links between BC and bank (in the eyes of the customer) and limited monitoring capacity available with bank to supervise customer comfort provide room for disquiet.

Theregulatoryconcernsarelegitimateandreflecttheemphasisongettingfinancialinclusioninitiativeson track with adequate rigour and discipline. Mitigation of some of the concerns is possible through appropriate design of the operational norms and monitoring system.

Corporates, that strive for a market for their products have a reputation to sustain and protect. On the agencyfunctionofprovidingfinancialservices,theyareunlikelytoengageinbehaviourthatwillmartheir reputation and put at risk their basic business.

Since most retail agents of any corporates are also agents for other corporate entities and the incomes of the retailer are a function of selling a variety of products of all the corporates that they represent; thebundlingof productsof one corporate alongwith thefinancial products is unlikely.Since theretail agents have a presence in the local markets they would remain responsive to the customer needs. The risk faced by the retail agent is that if the customer gets a feeling that he/she has been mis-sold a

CONCERNS OF THE REGULATOR IN USING CORPORATE NETWORKS AS BCs

40Thestudyteamcontributedtothefinalizationofthedraftdiscussionpaper.

Chapter - 9

54

product or short-changed in any manner, then the customer might be lost forever and worse, friends of the customer as well. The dependence on the customers for their business viability and incomes makes responsible behaviour on the part of retail agent imperative. Unlike BCs who depend solely on marketingoffinancialservices,corporateretailagentsstandtolosemorebylosingcustomers.

InthecaseofMFIs,theconcernofaconflictofinterestbetweenretailingownloansandbanks’loansis valid. However, the MFIs do not offer large loans on account of resource limitations. Arrangements could be worked out between the banks and MFIs to introduce a cut-off loan size above which, bank loans would be offered; and at the choice of the MFI even loans below the cut-off could be offered by the bank. The MFI could be restrained through the contract from offering larger loans (above the cut-off) to customers on its own account.

The issue of lack of a physical presence especially for dealing with savings has to be dealt with. In addition, safeguards should be established to separate transactions on behalf of the bank from transactions of the MFI. One possibility is to allow MFIs to function as BCs from their physical branches; and provide exclusive POS terminals of the bank in the physical branches for enabling bank’s transactions. This would ensure the accounting of transactions on behalf of the bank would remain exclusive and enable settlement in accordance with the regulatory norms.

Whilethebanksthroughtheirownnetworkofferfinancialservices,investmentsmadeinsystemsofthebankasalsotheskillbuildingofstaffensurethatthebankingservicesmaintainhighfidelitytothe customers’ requirements and ensure the integrity of banking services. Issues relating to physical loss of cash, theft and the like in the bank’s premises, are dealt with through systems of mitigation including insurance. Similar arrangements would need to be made in the hands of BC agents and their staff so that the customers do not suffer. Another concern of the RBI is that large corporate becoming agents of banks might look for a backdoor entry into banking service. The RBI has for long, ensured that no corporate house is allowed to enter banking on account of problems faced in the initial stages of evolution of banking in India. This route of using BCs from among corporate retail network should not result in the corporates having a major say in the banking operations. Concentration risks mightarisewhencorporateagentsofferaverylargeandsignificantservicetoahighpercentageofpopulation in local areas. The RBI would like this to be addressed effectively by the banks through proper contracting for services. The RBI also would very much desire that the banks monitor the work of the BC agents and its staff. Continuing contact directly with customer (though acquired by BCs) is thought of as an important requirement. Banks and BCs should devise processes by which bank staff are in a position to meet a large number of bank customers periodically so that they can directly listen to the customers views as to the quality of service rendered by the BC.

Having a sound monitoring system in place, both with the BCs and banks to manage performance of BC agents is an imperative. Apart from this, a sound customer grievance redressal mechanism has to be put in place. The RBI has stipulated that the grievance redressal mechanism should be open, transparent and responsive to the needs of clients, especially the vulnerable clients who would for the firsttimebecomepartofthefinancialsystem.TheBCnetworkshouldfindfacilewaysofrecordingtheir complaints and getting the same redressed. RBI also is critical of the attempts made to do wide andshallowfinancialinclusionratherthandeepeningtheinclusionefforts.ThismeansthattheBCagents should, apart from marketing the no frills accounts must also market a broader range of services from the banks. Banks should be willing to allow the BCs to market loan products apart from the liability products.

AcontinuingconcernofRBIisthatofconfidentialityofcustomerinformation.Sincethecustomerrelated information would be travelling on third party systems and data networks, ensuring data privacy and security in the interest of the customers and also in the systemic interest of the banks, adequateinvestmentswouldneedtobemade.Theseinvestmentswouldgobeyondfirewallsandin-housemonitoringandshouldincludeexternalauditofthequalityofsystemsandtheirfidelity.ThemajorconcernofRBIhasbeenthatofachievingfinancialinclusionacrossthecountryinasshortatime as possible. On account of this concern, banks had been asked to prepare a plan for providing a point of presence in each under-banked village having a population of more than 2000 for providing

55

financialservices.Bankshavepreparedsuchplansandhaveundertakentoserviceagivennumberof villages in each state. In these villages either through opening of a new branch or to use of a businesscorrespondent,thebanksareexpectedtoprovideapointofpresenceforcarryingoutfinancialtransactions to newly included customers as well as the existing customers. This plan is envisaged to be completed before end of March 2011. Once the problems of villages with population exceeding 2000 are sorted out, the RBI intends to take the inclusion plan down to the smaller villages.

Theplanspresentlyreflectapreferenceforusingbusinesscorrespondentsasamaintoolofachievinginclusion. RBI is also acutely aware that having numerous very small entities acting as correspondents mightrenderitdifficultfor thebankstohaveaqualitativemonitoringandcontrolsysteminplace.While not entirely on-board with the idea of using corporate retail networks as business correspondents, the RBI is willing to experiment with select networks that have a better chance of succeeding in the rural hinterland.

Oneoftheimportantmeansofaddressingtheconcernswouldbetointroducesignificantlylargesizepilots with close monitoring under controlled conditions. Selection of a suitable corporate with its retailnetworkanddrawingofacontractwiththeprincipalbankreflectingtheconcernsofRBIandthe manner of addressing the same will go a long way in ensuring RBI comfort. Over the long run, institutionswithabilitytoinvestandpatiencetowaitwillreapthebenefitsofexpandedbusinessandnew clientele. Such institutions are not likely to be very small entities such as Kirana Shops, etc. They are more likely to be larger corporates having the resources and the managerial skills.

57

WAY FORWARD

Having regard to thedifferent initiatives taken in thesphereoffinancial inclusion, it seemshighlyunlikely that physical network structures of banks would be able to provide the extent and volume of services required to meet the needs of those that still remain excluded. The recent initiatives of RBI in getting banks to plan for providing coverage to the under-banked larger villages in the country have seen that majority of banks have thought of using business correspondents as the best manner of achievinginclusion.Thepresentregulatorynormsprovideforuseoffor-profitinstitutionsinalimitedwayasbusinesscorrespondents.Useofretailagentsofcorporatenetworksdonotovertlyfigureinthe norms but seems feasible. The recent discussion paper of RBI promises to make possible the contracting of corporate as BCs of banks.

Corporate networks because of the corporate backing are better suited to function as BCs than many other entities. First they have the capacity to make investments necessary in the initial stage in infrastructure, human resources and training. Second, being commercially oriented, they understand the need towait for a period before generating positive revenues. Third, being for profit entities,corporates would ensure to widen and deepen the services offered and retain the customer base intact so that their revenues are sustained. Fourth, these networks have been subjected to financial andoperational discipline by the principal corporates. Performance monitoring, control over operations and end results have helped these entities to function in a manner far better than that of the other not-for-profitentitiesanddisparatelydistributedsmallunitssuchasKiranaStoresandthelike.Fifth,itis feasible to use the corporates as managing entities of the retail networks that actually take up the tasks of a BC. The corporates also have a reputation to protect and sustain. On account of this, one expects that along with the bank, corporate would also ensure not only a good commercial outlook to operations but a customer focused ethic that would deal with most of the current and future concerns. If corporate networks are engaged as BCs, issues in business continuity that tend to crop up while using smaller entities would possibly vanish. Corporates would be able to replace any weaker links in their networks with stronger ones and ensure that customer service is maintained without hindrance astheydointheirbasicbusiness.Asforbanks,usingcorporatenetworkofferssignificantadvantagesin the sense that a strong partner with a capacity to invest is always preferable compared to weak partners who have to be continuously hand-held. Banks’ requirements of monitoring and performance management of BCs could be concentrated at key points of the network rather than monitoring every individual BC agent in the network. Customer contact on a periodic basis can be maintained by the bank by utilizing the services of dedicated customer relations manager who not only manages the retail agents in the network but also meets the people once in a quarter or so.

The concerns from the banks’ side might be that of bundling of different products along with banks’ financialproductsandcrosssellingandmis-sellingpractices.However,havingdedicatedcustomerrelationsmanagertomonitortheworkofBCs,shouldensurethatthepracticesinthefieldarefairandthat theBCagentsinfactprovidequalityfinancialservicestothecustomers. TheBCagentshavedistinct gains arising from this. The closer relationship with the bank would improve their image in the localareaandonaccountofthefinancialservicesofferedleadtoincreasedfootfalls.Therelationshipwiththebankwouldprovidethemaccesstobetterfinancialservicesandlargercreditlimits,whichwould be critical for their business expansion. They would also be able to offer their customers a much superior quality of service leading to higher sales on the basic product line for which they act as agents ofthecorporates.Overall,contractingfor-profitcorporateretailagentnetworksisboundtoofferawin-winpropositionformanystakeholdersthatareinvolved.Therisksofconcentrationandconflictsof interest are capable of being mitigated through appropriate supervision mechanisms and suitable contractual arrangements.

Chapter - 10

58

The business side of the BC arrangement seems reasonably well placed, especially in the context of larger villages with more than 200 households. The revenue models indicate that BC will breakeven infiveyearsandcandosoearlieriftheenrolcustomersfasteranddeepentheservicesearlyintherelationship.Bankswouldalsobeabletorecovertheirinvestmentcostswithinfiveyears.OfferingarangeofservicesthroughtheBCbecomescriticalfortheprofitabilityoftheBCaswellasthebank.Theimmediateneedisforsomelargepilotsindifferentpartsofthecountrywhereidentifiedcorporatescollaboratewithabanktodeliverfinancialservicesthroughtheirnetworkofretailers.Basedontheexperience over a period of 6-12 months, similar arrangements in different parts of the country could bedesignedandimplemented.Corporatesandbanksarequitekeentorunsignificantlylargepilotswith foot print as large as a district. Bayer CropScience, ITC, Union Bank of India and ICICI Bank had expressedthedesirefordesigningareaspecificpilotsinEasternUP,Jharkhand,MadhyaPradeshandOrissa. There might be other banks and corporates who might be willing to do so. In the next stage we should identify such institutions and based on the choice of locations, design pilots that are suitable and relevant both to the partners as well as the excluded in those geographies.

59

ANNEXURE 1 (A)Observations of the experts in the First Consultation Meet (08 June, 2010)

The following attended the Meet :i. Banks : Representatives from UBI and ICICI Bankii. Corporates : Representatives from Bayer CropScience, Airtel and ITC iii. Experts : Dr S.L.Shetty, EPW Research Foundation, MrJustinOliver,CEO,CentreforMicrofinance, Mr Vipin Sharma, CEO, Access Development Services, Mr R Bhaskaran, CEO, Indian Institute of Banking and Finance. Prof. M.S.Sriram, Consultant.iv. The study team led by Mr N Srinivasan, Consultant and Dr Y.S.P Thorat, Technical Expert

Afterdetailedpresentations,specificquestionswereflaggedbyDrThoratbasedonthevisitsoftheteam to Surat and Udaipur and also the discussions they had with corporates and others. These formed the basis for discussion in the Meet. Experts and representatives of corporates and banks commented / offered their suggestions for consideration of the Study team.

1 Are corporates a practical option for extending financial services ?

Dr Shetty expressed his concern on the declining interest of CBs in rural banking. He also expressed his concern in using the corporate networks as BCs. He observed that banking is a sensitive activity. World over non banking institutions are not allowed to meddle with banking and so if we mix up the two, complications would start. As a long term objective, existing banking network should be strengthened. So, he suggested use of Cooperative Banks and Societies as BCs by commercial banks. He emphasised that the BC staff should be residents of the local area. The BC should not charge a fee from the customer for BC work. In principle, corporate entities should not directlybeengagedasBCs.Theconflictofinterestinmarketingownproductsandbankingproductswill not be good for banking industry. Corporates can at best set up separate and dedicated entities to function as BCs.

Mr Bhaskaran, CEO, IIBF, highlighted the potential role of corporates in bringing a new dimension to the rural banking. He cited two case studies where pesticide suppliers issued co-branded credit cards. He welcomed the participation of corporates as they would be able to lend their expertise to expand banking operations as has been done by Bayer, ITC etc. But, he also cautioned that there is need for sensitising all concerned and underlined the need for training of BCs and their staff.

Mr Anjaneyulu of Bayer indicated that over Rs.7000 crore is credit provided in the pesticide industry which supports agriculturists. So, there is synergy possible if corporates are used by the banking system. Corporates could help their customers in the retail end access formal credit system. Since a large part of the credit available to the farmers is informal, the Corporate retail agents as BCs would know which customerscouldbebroughtintothefoldofbankingservices.Thiswouldbenefitfarmerstoincreaseincomesandachieveobjectivesoffinancialinclusion.

Mr. Justin Oliver expressed the view that the BC arrangement would be an intermediate arrangement. Once volumes build up and the range of services increase, the banks have to directly service their customers. The banks should be doing banking with the poor and vulnerable, but the experience has shown that the progress is slow and halting. So BC model using corporate should be explored as an interim arrangement.

Mr. Vipin Sharma said that there are no incentives for banks to reach out; instead they face a revenue loss in increasing outreach to the hinterland. So, they do the minimum that would help them pass ‘test of inclusion’ as mandated by the RBI. A commercially oriented BC is therefore a good intervention. These BC would work hard to extend services and expand the outreach in order to breakeven and

60

stabilise their revenue stream. The challenge according to him was how to optimise the existing infrastructure of corporate networks.

Prof Sriram observed that bank’s role as ultimate cash settlement points should be recognised. Changes in technology which facilitates / reduces the interface between banks and customers make it easier for branchless banking models including BC models. He pointed out that all types of corporates would not be able to do the BC related work. It looked to him that a bank’s synergy with Airtel was more they have ready-made infrastructure and familiarity in converting hard cash into electronic cash. He also agreed with the views of Dr Shetty and Justin Oliver that the BC phase will have to be an interim phase. He also raised the issue of whether BCs can do cash settlements rather than just work as touch points. He also touched upon the recent developments such as freeing of interest rate caps on small loans; new rural branch opening norms of RBI and the proposed issue of Unique Identity Number and felt that these developments have the potential to change the rules of the game in inclusion.

Mr Deval (UBI) shared the not-so positive experience of the bank in their experiment with post offices,ILFSetc.HewelcomedtheideaofcorporatesasBCssincetheyhaveacommercialfocusandare better organised. He also wondered whether Petrol pumps will be interested in taking small deposits or paying out small cash from such accounts as they have large turnover on sale of oil products. Mr Issar (ICICI)pointedout that asper thenewdefinitionof inclusion, eachaccountholderwillhave an overdraft account and a loan account and so it will go beyond the purview of no-frill savings account. Bank branch networks will not be able to expand coverage and provide all services as per this newdefinition.ButservicingthecustomersthroughBCswillmaketheinclusiontargetattainableinthree years. He stated that ICICI bank is looking forward to working with suitable Corporate BCs.

2. How to address the Regulatory concerns such as cash settlement, adherence to KYC norms etc?

According to the representative of UBI, one of the biggest concerns is the method of cash settlement and ability of the small retail agents to cater to run-for-cash situations. It was observed that RBI can hedge this risk by putting a cap on the amount per transaction. But, if MG-NREGS people queue upbeforearetailshopitwillbedifficulttomeettheircashdemand.So,identifyingtherighttypeofcorporate network outlet will be crucial. It was pointed out that MG-NREGS payments are predictable and could be planned for. Bayer representative felt that such issues are more procedural and can be resolved easily. He also indicated that corporates have the technology and speed to match most unpredictable events. Corporates have a reputation to sustain and identify only those retail agents who can work as BC and not all retailers.

Airtel indicated that the BC activities can be undertaken by taking certain preliminary steps. Electronic form of use of cash will reduce the cost. He also indicated that some of the countries are developing e-money regulators. On the same lines, RBI / GoI can also develop e-money regulators.

3. How long will it take for a corporate network BC to attain viability?

ICICI indicated that under MG-NREGS accounts, the cost of maintaining an account ranged from Rs.10-20.Buttheincomefromthefloatistoolittletomeeteventhiscost.SomeoftheStateGovernmentsare reimbursing partial costs to the banks. There is also need for subsidizing the investment cost. In case number of intermediaries are increased, the cost will also increase. However, he could not specify any period for the BC to become viable.

UBI observed that they expect a BC to break even after 5 yrs. Airtel observed that multi BCs through a single point will improve viability. It would also reduce cost of operations if the same BC is allowed to provide services for more than one bank, something similar to the way mobile retail networks are operating across the country. It was also indicated that the settlement system in mobile phone companies is fraud-proof and similar technology can be developed. The overall feeling was that the area of operation, nature of services offered through the BC, the

61

marketing effort and the technology used will determine the breakeven period. Five years was felt to be the maximum period required to breakeven.

4 Whether there is need for determining areas of operation for BCs?

ICICIobservedthatunderFIitrequiresthatallvillagestobecovered.So,fixingaspecificareaforBCswouldbedifficult.

ITC indicated that it would make business sense if more than one player is allowed in an area depending upon the area. Bayer was supportive of areas reservation for individual retail agents at least in the initial gestation period. Competition from multiple retailers on behalf of different banks would render the agencies unviable. There was no conclusive opinion on the issue.

5. Whether we have plans to meet situations when a BC walks out of the arrangement?

ICICIwasdoubtfulofhowfarthecorporateswillbeabletoinfluencemulti-brandcorporateretailersto remain loyal and carry out BC functions under their management.

ITCwasconfidentthatthiscanbemanagedastheyhaveconsiderableexperienceinhandlingsuchsituations in running their marketing system. Bayer also said that business continuity in every area covered by their retail network is being ensured in the midst of such occurrences which are a normal part of their business. If recognisability and accountability are ensured, then Corporates can meet situations when a BC walks out and the work can be seamlessly transferred to another BC. Business continuity and replacement of retail agents was not a major concern as Corporates deal with attrition in their retail networks from time to time.

SUMMARY :Though some concern was expressed about the use of BCs by banks thus diluting their role, there was a consensus on the use of corporate networks as BCs as it would reduce the physical burden on banks in attending to the banking needs of small ticket clients. Caution should be exercised in selecting the retail networks as BC and a single corporate controlled retail network would be preferable over multi-corporate brand networks and particularly telecom companies. Selection norms for retail outlets shouldbefinalisedwithinputsfromthecorporate.

Break-even will be possible in 5 years and if BCs are allowed to provide multi-services. Training is a critical pre-condition. Sharing of costs of investment, a closer look in to viability of BC operations and selection of corporate that have a reputation in the rural markets and markets of the urban poor are some ideas that would help in easier roll out of the model. While the idea of using Corporates might initially be received with some reservations, the ubiquity of corporate retail networks and their local familiaritywillensurethattheservicesarerolledouteasierforthebenefitofall.

62

ANNEXURE 1 (B)Observations of the experts in the Second Consultation Meet (04 Sept, 2010)

Dr.YSPThoratappraisedtheparticipantsofthefindingsmadeunderthestudy.Hesummarizedthemethodologyandrationalebehindthestudyandreviewedthequestionsthatwereflaggedduringtheprevious consultative meeting held at Mumbai on 8th June 2010 viz., i) Are corporates a practical option for extending financial services? ii)When will they become viable? and iii)What are theconcerns of the Regulator, the RBI?

Attentions of the participants was drawn to the discussion paper which the RBI has put up on its web-site for enlisting public opinion and invititng suggestions from the public at large on use of corporate andNBFCsasBCsofbanks.RBIisoftheviewthatachievingtheobjectiveoffinancialinclusion(FI)requires a combination of organizational innovations and technology application. It also recognizes that FI initiatives will be unsustainable unless it is commercially viable for all the stakeholders viz., the banks and the entities functioning as BCs. Against the above background, the RBI has proposed two distinctpatternsoftheBCmodelusingfor-profitcorporates.(a) banks could enter into a separate agreements with corporates for using their retail networks as

BCswithspecificresponsibilitiesandfunctionsforapaymentofafee.(b) Banks could make corporate itself as the BC making the retail outlet as a Sub-agent of BC. Dr. Thorat reiterated following concerns of the RBI in using the Corporates as BCs:(a) Bankingandfinancialservicesare‘PULL’productsthatare‘SOUGHTOUT’.So,accessibility

combinedwith affordability of such serviceswas found to be critical.With profitmotive ofcorporates (which is natural), there may be ‘mis-selling’ of banking products is one concern.

(b) Providing banking services only to those who patronise the corporates products(c) Misuse of customer related information for their commercial use(d) Unfair and restrictive practices leading to reputation risk of banks(e) Discontinuance of BC outlets due to various commercial considerations such as shrinking of

business etc.(f) Customer protection issues such as transparency, creating better awareness, customer education

and an effective grievances redressal system, while using BCs in general and corporate entities in particular

Dr.Thotatsummarisedthefindingsofthestudyasfollowing:1. Regulatory stance would be positive towards corporate involvement and we anticipate some

favourable developments shortly as a result of discussions that we have had recently with RBI2. Some types of networks are better suited to be BCs; but not all3. We need to have different models of retail agent networks – such as single corporate managed

network, managing agent centric network etc.4. Retailagentsinitiallywanttheircoststobecovered;notreallylookingforprofits5. Conflictofinterestarisingfrombundlingofgoodsandservicesisacriticalregulatoryconcern6. Business continuity in case the retail agents want to withdraw prematurely is a concern for

banks7. The recent insistence of RBI for preparation of plans for establishing points of presence in

unbanked and underbanked villages is likely to accelerate engagement of BCs8. Therewouldbesignificantoppositionfromsomequarterstoinvolvementofcorporatesectorin

providingfinancialservicestotheexcludedpopulation.

63

Observations of the participants• Commercial viability at all levels particularly at the bank’s level, corporate level, BC level

(operator, service provider, technology), BC agent level etc. must be assessed. Unless there isharddata tosupport theproposition it isdifficult toassesssustainabilityofusingcorporatenetworksasBCs.Ruralbusinessisadifficultbusinessandintuitivelycoporateswiththeircontrolover ICT can make the head-start. Corporates will have to undertake few pilots to access the financialviability.

• Transparency,accessibilityandaffordabilityarekeyfactorstogaincustomerconfidence.• IntroductionofUID systemof theGovernment of Indiamayhave impact on the viability of

the BC business. Future pilots need to be designed keeping in view the information and data management system under UID.

• BCsnotonlyconductbusinessonbehalfofthebanksbutalsoexpandsclientbaseofthebanks.Loyal customers of corporate and program participants of NGOs may tend to become customer of the bank who the BCs represent. Therefore, banks have to be more open to share the cost of client acquisitions. It was observed that the client acquisition cost for banks range between Rs. 20-150 per new client.

• Whiledesigninghepilots twoseparatepilotswillhavetobedesignedoneeachfornorthandsouthIndiabecauseofdifferenceincustomerprofileservedbythebanks,penetrationlevelofthebanks etc., in north and south India.

• OpportunitycostatalllevelofBCoperationsshouldbeconsideredwhileevaluatingthefinancialviability and long term sustainability of the BC network business.

• Micro-Finance Institution’s branches can be used as point of sale / presence. However theyshould maintain an arm’s length between their MFI business and BC business.

• BCbusinessshouldbeprofitableonstand-alonebasis.Bankswhiledesigningtheirpilotswithcorporates may approach NABARD for assistance from Financial Inclusion Fund. At macro level same request may also be made to the RBI for initial subsidization of the cost of grounding of BC networks.

• FinancialliteracyofallstakeholdersintheBCnetworkisimportant.Banksandcorporateswillhavetomakeinitialinvestmenttobuildfinancialliteracy.

• Systemshouldbedesignedso thatBCscanalso share theoperationalcontrolasBCsare thefront end of the Banks and Banks are the backend of BCs. Both have to work in consonance to minimize operational and reputational risk.

• RBImayalsolookintotaxincentivesforthecorporatetoimprovetheviabilityofBCbusinessfor corporates and other entities.

• ItisimportantalsotostudythedemandsideoftheBCbusiness.Preconceivednotionsaboutruralmarkets may be misleading and can result into faulty design of the systems and products offered through those systems.

• Onlycollaborativeapproachcan lead todesired levelsoffinancial inclusion. Corporates canalsolookintothepossibilityofencouragingmultiplesocialentrepreneurship.Banksneedtofirstconcentrate on the partnership and contractual arrangement rather than procurement issues.

• Theconsultingteamshouldwritetoregulatorstogetin-principleapprovalofRBItocommencepilots. At the same time, the copy of the report should also be forwarded to the newly constituted Committee for Financial Inclusion under the Chairmanship of the Prime Minister of India with ICICI Bank as the member secretary.

64

ANNEXURE 2Important Circulars of RBI regarding BC/BF

1. The Master Notification and Subsequent Modifications: ByaCircularnotificationonJan25,2006layingdowntheeligibilitycriteriaandrolesofBC/FC

wasissued.Thiswasthenfollowedbyanumberofsubsequentnotificationsthatprovidesscopeto expand the BC/FC network and deepen its operations:

2. March 22, 2006 -onusingnon-bankingfinancial institutionsunderSection25ofCompaniesAct (1956) as BC. In terms of the above circular, under the ‘Business Correspondent’ Model, registered NBFCs not accepting public deposits are among the eligible entities that can be engaged as intermediaries by banks. RBI is in the process of examining the eligibility criteria, etc. of NBFCs who can be assigned the role of Business Correspondent/s by banks. Pending the exercise, banks are advised to defer selection/use of NBFCs as Business Correspondent/s. However, banks can use NBFCs licensed under Section 25 of the Companies Act, 1956 as Business Correspondents.

3. April 24, 2008 - widening the BC net to include retired bank employees, ex-servicemen, and retired government employees.

4. August 27, 2008 – inclusion of companies registered under Section 25 of the Companies Act (1956) as BCs, provided the Section 25 companies are stand-alone entities or they are Section 25 companies in which NBFCs, banks, telecom companies and other corporate entities or their holding companies do not have equity holdings in excess of 10 %;

5. August 27, 2008 - providing the criteria for appointing sub-agents at the grass-roots level to render the services of BCs

6. April 24, 2009 (increasing the operating radius of BCs from 15 km to 30 km)7. Nov 30, 2009 - widening the BC net to include kirana, medical fair price shops, PCOs, petrol

stations, retired teachers and so on; and allowing banks to collect service charges from clients in a transparent manner; and

8. April 26, 2010 – Widening the BC entry norms to cover any Individual including those running Common Service Centres (CSCs).

65

ANNEXURE 3(A)Field Experiences of IT-enabled Financial Inclusion using the BC Model(Excerpts from the Report of RBI’s Working Group to Review the BC Model, September 10, 2009; and www.kbsbankindia.com)

Case I : Zero Mass Foundation as BC in SBI-Tiny Project in Three States

TheSBI-TinyprojectwasthefirstprojectinthecountrytotestthevalidityoftheIT-enabledfinancialinclusion utilising Business Correspondents. Under the project, smart cards were issued in Mizoram (Aizwal), Andhra Pradesh (Medak) and Uttaranchal (Pithoragarh) in 2006 with Zero Mass Foundation as the Business Correspondent. The areas were chosen in such a way that if the project is successful in such places it would easily be successfully replicated in other areas.

Under the project, the photo of the applicant is personalized with address on the face of the card andtwofingerprintscapturedonthechipof thecardforbiometricverificationat thetimeofcashdisbursaltransactions.Thisisasimple,convenientandsecuredmodeofextendingfinancialservicesto the cardholders. The card is capable of containing 16 wallets (account details). Transactions in the accounts, including cash deposits and withdrawals, can be carried out by customers without having to go to the bank branch. The project started on a modest scale with 5000 accounts.

Case II : FINO as BC with Oriental Bank of Commerce Project in Punjab

Oriental Bank of Commerce (OBC) rolled out its BC model in technical collaboration with FINO in Amritsar district of Punjab in January 2009. The project started with enrolment of MG-NREGS beneficiariesaswellasotherpersons.FinotechFoundationaSection25CompanypromotedbyFINOhas been appointed as the BC. The BC ensures that announcements for enrolment were made in the Gurudwara/Panchayat well ahead of the enrollment days so that adequate number of persons gathers on the day of enrollment. The sub-agents employed by the BC are ex-servicemen and former bank staff. Eachsub-agentgivesafixeddepositinhisnameforRs.5,000asasecuritydeposittotheBC.Thecashin transit is insured.

Theenrolmentinvolvesgatheringalltenfingerprints,photo,signatureandotherdetailssothatsmartcardsandbankaccountscanbeopenedinthenameofeachbeneficiary.Thesearecarriedoutbythesub-agentswhocapturethedetailsusingalaptopwithfingerprintreader,digitalcameraandsignaturereader with full power back-up facility. The customer card is a biometric card which stores the customer ID,signatureforverificationandhas10pocketsforvariousproducts.Acustomercanputthroughatransaction and get a receipt. He can get the history of transactions up to the last 10 transactions done. From the base branch of the bank, he can get a passbook also. As creating biometric data base, takingphotographs,andthenkeyinginthebeneficiarydetailsresultedinslowenrollmentprocess,asimpleapplicationformhasbeendevisedtofillinthedetailsandonlybiometricdataiscapturedandphotos taken during enrollment. Other personal details like name and address are digitized/keyed-in bythebackupofficeintheeveningorthenextdayatsomeotherlocation,whichisfullyequippedtocomplete the enrollment process. In case the machine malfunctions, the back-up policy ensures that the machines are replaced within two hours of reported breakdown/ malfunctioning. Also the sub-agent carries enough of backup battery power for enrollment so that the process is not halted due to erratic powersupply.Inashortperiodoffivemonths,theBChasopened13,600accountsunderNREGAscheme in two blocks of Majitha and Anjala. In another two blocks - Verka and Jandiala – 1,500 beneficiarieshavebeenenrolled.

Case-III : FINO as BC with ICICI Bank in Delhi

ICICI Bank appointed a leading NGO working in the urban slums of Delhi and NCR as a Business Correspondent in December 2007. After a careful evaluation process the bank launched two BC outlets

66

at Jahangirpuri and Bawana, two settlement colonies in the northern part of Delhi. These are mainly residential areas with a young population. Small workshops and industries in this area are the main source of income for residents.

Through these outlets, the bank offers a zero-balance savings facility using smartcard technology provided by Financial Information Network & Operations, Ltd. (FINO). Customers transact using a personalized smartcard, which provides biometric authentication when used with an Authentication Device(AD).OnlyabiometricallyauthenticatedoperatorcanoperatetheAD.Atspecificintervals,the transactions recorded on the AD are uploaded and updated in the Bank’s system through a standard telephoneline.Inadditiontoasavingsaccountfacility,thebankalsooffersfixeddepositsandrecurringdeposits to BC customers.

Enrolments are done at small workshops and other locations where customers gathered in groups. The bank and the BC also jointly conducted van campaigns and mass enrolments during the launch of the branch,toincreaseoutreach,andtoeducatecustomersaboutthefinancialproductsofferedattheBCbranches.

TheBCoutletsintheselocalitieshaveincreasedaccesstofinancialservicesfortheresidents.Customersnow have access to a safe and secure means of saving, which enables them to better meet emergency expenditures, and plan for the future. As on March 31, 2009, the BC had acquired a customer base of 2350.

Case IV : IGS as BC with Krishna Bhima Samruddhi Local Area Bank

The KBS LAB operates in three of the least developed districts of Mahabubnagar, Gulbarga and RaichurinAndhraPradeshandKarnatakastates.Topromotefinancialinclusion,KBSLABappointedIndian Grameen Services (IGS), a Section 25 Company as a BC for extending the Banking services to under-served population of all three operational districts through a network of 58 locations. Its products range small value cash receipts and payments; disbursal of small value credit; collection of loan repayment; and sale of micro insurance/mutual fund products /pension products/other third party products. Within a year, KBS LAB has acquired more than 10,000 micro savings customers through the BC outlets, by leveraging the available banking technology.

67

ANNEXURE 3(B)Technology providers and technology used

BC / Technology Provider Technology usedEko Foundation/ Eko Financial Services Ltd

Mobile phone based SMS to transfer payments. The customer’s mobile phone number serves as the bank account number. Transactions are processed through SMS

Drishtee/ A Little World Thumb impression reader, cards, thermal printer and Mobile phone. For HDFC, use of magnetic strip card and POS with mobile connectivity

Atom Sewa / Atom Technologies Mobile-phone-based service with voice-enabled service capability that works on GPRS. The program works like this: • Mobilephone,withahandheldprinterattachedusedwhich

readsmagneticcardsandscansfingerprints.• Customers are issued amagnetic card (like a debit card),

which is swiped on the printer. • Customerdetailsflashonthephone’sscreenandselectionof

appropriate options done by the customer. • Transactiondetailsaredisplayedonthephone’sscreen,and

the details are spoken in local language over the phone’s speaker.

• If the customer is satisfied with the transaction details asspoken over the phone (or displayed on the screen) she/he placesher/histhumbonthefingerprintscanner.

• Oncethethumbimpressionisscannedandmatchedbythescanner, the application encrypts the data and sends the same to the server.

Local Technology Provider Works on radio frequency identification (RFID) technology.The mobile phones work with the smartcards to identify the customer: biometric information captured on the smartcard is comparedwiththecustomer’sphysicalfingerprint.Alow-cost,scalable model. Corporation Bank’s pilots are operating in Goa, Karnataka, Tamil Nadu, and Andhra Pradesh. Corporation Bank enhanced the model and complying KYC norms

68

ANNEXURE 3(C)Connectivity- Pros and Cons

Connectivity Pros Cons1 2 3

Short MessageService (SMS)

1. Easier to build applications2. Already a popular medium to

communicate3. Billing activities can be automated

by light integration with operator’s system

1. Still unreliable - delivery of message is not guaranteed

2. Requires user to remember codes keywords

3. Data size per message is restricted to 160 characters

4. Multiple SMS based transactions can cause user resistance

General Packet Radio Service (GPRS) Code Division Multiple Access (CDMA)

1. Provides ability to build advanced features

2. User interacts with a well designed user interface (UI) and does not require training

3. Can integrate seamlessly with e-commerce scenarios

4. Development skillset for GPRS are widely available

1. GPRS / CDMA still not popular2. GPRS in particular requires separate

hardware and is not present wherever GSM connectivity is available

3. Both in turn do not have a pan India presence

4. CDMA requires specialised skillset which is not widely available

Handset TechnologiesSubscriber Identity Module (SIM) Toolkit

1. Ensure availability of application as and when customer buys a new SIM card

2. Operator is closely associated with the mobile banking project and hence the task of delivery of service is easy

1. Requires operator’s assistance in replacing existing SIM cards

2. Operator lock-in for baks3. Technology may not be inter-operable

in multiple operator scenarios

Mobile Application Development

1. Operator independent2. Development skillset is widely

present for GPRS3. Ability to design and deliver better

features and user interface

1. Development skillset is rare for CDMA2. Data security is a concern

Emerging TechnologyNear Field Comm-unication (NFC)

1. Ease of use2. Experience similar to credit card

usage

1. Still in nascent stages, various pilots being conducted across the world

2. Mobile phones still costly

Mobile Phone as a device

1. Round the clock availability with customer

2. Always on and always connected3. More handsets thank bank

accounts4. Telecom operators already have

sophisticated billing systems and care deliver banking services independent of banks

1. Not built for mobile transactions2. Compared to Point of Sale (PoS) /

Automated Teller Machine (ATM) deviceswhicharebuiltandcertifiedforbanking activities

3. Primarily Personal IdentificationNumber (PIN) based authentication, concerns on ability to remember pin numbers (Efforts are on to integrate biometric scanners whith phones)

Source: Agarwal Gaurav, 2007. “Financial inclusion through Mobile Phone Banking. Issues and Challenges.” CAB Calling, July-September, 2007

69

ANNEXURE 4Risks in agent banking and mitigation

Type of risk Mitigation at bank level Mitigation at customer levelStrategic risk: Agents conduct activities on own account that might conflict with strategicgoals of the bank.

Provision of information to customers through different media and literacy programs to the needy customers. Dissemination of the roles of agents and what they are authorized to do on behalf of banks. Regular, periodic monitoring of agents activities by bank.

Bank fully apprises customers of roles and tasks of banking correspondents. Customers should know what to expect from banking correspondents. Systems should be in place so customers can check with the bank on whether agents’ actions are authorized. When customers approach the bank, banks should make full disclosure.

Reputation risk: Agents render poor quality of service; agents do not meet service standards, harming the bank’s reputation and alienating customers.

Introduce system for seeking customer feedback. Train banking correspondents to ensure their skills are current. Set up service standards for banking correspondents. Contracts with banking correspondents should ensure that agents provide quality service to customers.

Bank gives customers a statement of service quality when they open an account. Banks should put in place system of recording complaints and redress regarding quality issues. Signs detailing how complaints and grievances are handled should be prominently displayed in branches.

Compliance risk: Prudential guidance and regulations are ignored by agents, resulting in service disruption or loss of customer confidentiality.Systems are inadequate and do not ensure banking correspondent compliance.

Establish key prudential requirements to be fulfilledby the bank staff to customer satisfaction. Banks to ensure compliance systems and controls are in place to sustain uninterrupted service. Establish a system of penalties for willful noncompliance. Remove and black list those who breachcustomerconfidentiality.

Bank implements a policy of indemnifying customers for any breach of regulations that adversely affect customer interest.

Contractual risk: There is limited capacity to deliver what was agreed to under the contract, and the bank is unable to enforce the same.

Ensure due diligence of agents is thorough and comprehensive. Enforce through adequate financial securities orperformance guarantees.

Notasignificantconcern.

Access risk: It is difficult togenerate data from agents in a timely manner for reporting to regulator.

Introduce appropriate level of technology; train banking correspondents; provide for standby systems and build redundancies to handle system failures.

Notasignificantconcern.

70

Concentration risk: Banks lack control over the growing businessandinfluenceofagentsin the local area of operation. Agents cross-sell and mis-selling products to maximize incentives. Large operations through a single entity (especially an individual banking agent) make the agent indispensable.

Set up monitoring and supervision systems and establish rapport with customers. Set prudential limits for business through agents consistent with exposure and service quality (like credit exposure limits). Create agent incentives that do not promote cross-selling and miss-selling.

Bank periodically informs customers that services offered by agents are on behalf of the bank and that, even without specific agents, the bank willmaintain service volumes and quality.

Source: CGAP Consumer Protection -Diagnostic Report, 2010

71

ANNEXURE 5Strengths of Telecom companies in operating as BC – Views of Bharti Airtel.

1. Airtel also has the largest rural network covering 450,000 villages i.e. 75% of the total villages of the country, besides all the 5,161 census towns. Airtel has 1.6 mn retailers, 33,000 Rural Distributors and over 50,000 sales force to service the retail network. Apart from these, there are another 0.2 mn retailers selling paper recharges only. This clearly is widest distribution network surpassing 36,000 petrol pumps, 6500 e-Choupals – “We are where the customers are”. Almost all category of FMCG outlets and pharmaceutical outlets are generally telecom retail outlets. Due to the technology advantage, they know the volume, value of transactions done by each retailer on theirnetwork,therebyeasingtheidentificationoftheretailoutletssuitableforbecomingBCs.

2. Airtel also has a joint venture with IFFCO for distribution in rural areas through more than 44,000 co-operatives covering more than 4 million farmers, thereby reaching the hinterlands. These co-operatives have strong relationship with the farmer community similar to other agricultural input dealers like Bayer. Besides the IFFCO41 alliance, Airtel has a hub and spoke distribution model to ensure widespread rural coverage by the channel. The Airtel Service Centres (total of 21,000) are their touch-points in rural not only for selling mobile connections but also for all customer queries and complaints and customer education. The ASC has dedicated access to call centres through retailer helpdesk. All the customers in the locality have the mobile number of the retailer.

3. Majority of the telecom outlets are located at prime locations across the country with high degree of trust on telecom brand outlets. The retailers who deal with telecom products are technology savvy and educated, which will be a huge enabler for promoting financial inclusion.Airtelconducts about 400 mn recharge transactions per year, i.e. 1.1 mn transactions per day or more than 1500 transactions per minute on a 12 hour work day basis, thus bringing scale and viability to the model.

4. Out of the total telecom retail outlets, 50% are dedicated for doing activations (selling SIMs) in addition to selling airtime. All the SIM selling outlets (800,000 in number) are experienced in doing KYC (similar to that of banks). The number of customers for which KYC is done is to the scale of 10 mn per month for an individual telecom operator. KYC criterion is equally stringent under the telecom regulatory environment (in fact all operators are supposed to re-verify their 100% of their base by Oct’ 2010), failing which they will have to pay huge penalties to DoT. All mobile operators spend a large amount of time, energy and money on training new retail outlets which get added on to the network with respect to mobile technology, products and tariff plans.

5. Allowing corporate networks will ensure greater financial inclusion leveraging the existing

infrastructure of an operator. The merits of telco’s distribution/retailer network and how can it be leveraged is highlighted as follows:

o Cash Management: The telecom channel has a well established process for cash management from retailers, distributors. The value of amount that is handled is equivalent or higher as compared to FMCG.

o SIMs for retailers: All retailers are issued a 128k SIM on appointment to carry the easy recharge and VAS with the menu pre-burnt on it. This provides an easy selling experience. SIM is an Airtel property allotted to the retailer for conducting transactions for the customers after signing of subscriber contract. Pre-burnt banking menu on SIMs can be provided to these retailers, which is highly secure and thus suitable for banking transactions. This would require telecom operators’ participation.

41Indian Farmers Fertiliser Cooperative Ltd

72

o Controlling transaction rights to retailers: Creation of a retailer’s account on the e-recharge platform in the distribution hierarchy is required to give him a right to various types of transaction; this is managed by Airtel to ensure control. Similarly, controls can be built on the select retail outlets which will provide BC services; not all retail outlets will qualify to do account opening. The criteria for selecting the retail outlets will range from education level to his standing in the local area. Therefore, despite an outlet selling multiple products, the telecom operator ensures control through technology.

o Activation at retail outlet: Besides, activating a new customer after checking for documentation, retailers are also equipped to de-activate customers through SMS. The unbarring rights on retailers’ SIM are controlled by Airtel and can be blocked in the event of any fraud reported at the retailer’s end.

o Communication medium: Retailers are considered to be our brand ambassadors. All new schemes, consumer offerings, are communicated to retailers on their easy recharge numbers. This facility can be extended to them for providing money management awareness and education to these retailer to function effectively as “banker” of the area.

o Dealer Help desk: A dedicated helpline of trained professional is working 24 X 7 X 365 days to give instant resolution to retailer’s complaints / queries / issues. All retailers’ easy recharge numbers have been granted access to Dealer help desk.

o Retailer’s Suspension: In order to remain active in easy recharge tree, a retailer has to keep his main account active. In case a retailer’s mobile number goes in grace and expired out of Airtel’s customer database, retailer’s rights to transact on easy recharge platform are also withdrawn by suspending him. Due to the technology advantage, mobile companies know the volume, value of transactions done by each retailer on its network. Telecom revenues of category A outlets (10% of total outlets) besides 44,000 IFFCO societies generate high degree of turnover. The data for such retail outlets are available at the central level due to technology.

o This category is a natural choice for cash-in/cash-out networks at select set of SIM selling retailers due to their experience in handling KYC (10 mn per month for Airtel), technology savvy etc.

73

ANNEXURE 6PNB’s BC model in Udaipur District

74

ANNEXURE 7Training Module for Potential Business Correspondents (BCs)

Duration : Two days

Who should attend? One selected / authorized representative of the Corporate Network Outlet (CNO) One support staff from the same CNO (Optional)

Where it will be held?i. Onedayintheidentifiedbankbranch/RegionalOffice/ZonalOfficeoftheBank.ii. One day on the spot training with necessary equipments.

Objective of the Programme :Sensitise Business Correspondents in various tasks to be performed by them such as: Identifying potential customers Familiarising BCs on KYC norms, banks requirements etc., Pre-cautions to be observed before enrollment Counseling the potential clients / people about bank’s products Putting through small-value transactions of customers of the bank. MarketingbanksfinancialproductssuchasMutualFunds,Insuranceetc. Responsibilities of BCs to the bank and the corporate Do’s and Don’ts for BCs

Design of the programme :Training : Medium of instruction will be a combination of English / local language. Delivery of instructions only - through Power Point Presentation / Video Sessions to be handled by those who are familiar with BC work in the bank. o One session- covering objectives of BC programme as listed above o It should include Video / CD presentation covering live case of a BC working elsewhere. o One session- Types of banking products -Deposits, loans and remittances. Concerned Corporate (if available) representative associated with BC work to inform about the

role of the corporate in the BC related work. Overview of various skills needed by BCs for their effective functioning Follow up :Once the training is complete, the BCs and the bank / branch of the bank will work in tandem for effective implementation of BC work. For this, IdentifiedBank representativewill visit theBC every day for thefirst 15 days to familiarize

himself/ herself and the BC in various activities / tasks to be performed. BankshouldensurethattheBCoutlethasbeenprovidedwithsufficientnumberofpamphlets,

message slips, stationery, Signage, services offered by the BC etc., recouped from time to time. Bank and BC should ensure that the CNO has back up for electricity, computer systems. Give dry run for a few days before commencing providing services to the Public.

75

EXHIBIT – 1aProfile of collaborating banks in the study - Union Bank of India (UBI)

1. All India -Overview The Union Bank of India (UBI), one of the leading Public Sector Banks(PSBs) is having 2835

branches (30 June 2010). The has lead bank responsibility in 14 districts in the country. It therefore, it attempts to provide FI related services using technology and BC systems in these districts.

TheBankwithacommittedvisionofreaching theunreachedbyextendingfinancialservicesatanaffordablecostonan“ongoingbasis”has takenupfinancial inclusion initially for ruraleconomically disadvantaged population. As a strategy, the bank has been using three key componentsoffinancialinclusion.Theseare,

i. Adopting appropriate technology and user friendly productsii. Branch segmentation to enable focused approachiii. Education and awareness and social commitment

i. Appropriate technology and user friendly products The Bank has introduced a safe and secured biometric smart card technology which recognizes

fingerprintofthecustomerusingahandhelddevice.Smartcardenablesthecustomertodrawand deposit cash at the place of his work. The card also acts as an e-passbook. This enables and encourageslargenumberofhithertofinanciallyexcludedtousethebank’sservices.Thesmartcard has 15 pockets each capable of holding and handling 15 different services. In addition, the bankhasintroducedanumberofuserfriendlyfinancialproductssuchasSaubhagya:-ADepositlinked loan on revolving basis, Bhagya: Term loan of small amounts, Kalpataru: - A Medium term loan on revolving basis for NDDB smart cardholders, Kamadhenu: - A Medium term loan exclusively for purchase of milch cattle and Aam Aadmi Yojna (Micro-Insurance). Leveraging on the Core Banking Solution (CBS) introduced covering all its branches, the bank also provides remittance facility for the use of migrant hawkers who were resorting to non-banking channels for remittance. There are two modes of operations under this:

i) Biometric Card to Biometric Card remittance ii) Biometric Card to CBS account

At the originating end remittance is affected only by way of transfer transactions from the No-Frill account. The minimum amount of transfer is Rs.100 and the maximum amount is Rs.10000 per day keeping in mind the regulatory stipulations of No-frill accounts.

ii. Branch Segmentation : Approximately1000ruralandsemi-urbanbrancheshavebeenidentifiedwithfocusonconversion

of villages covered by them into “100% banking habit villages.” At present, the Bank has converted 8955 villages into 100% Banking Habit Villages across the country. Out of 14 lead districts, 4 lead districts Idukki and Ernakulum in Kerala and Azamgarh and Jaunpur in Uttar Pradesh are covered under the programme so far.

iii. Education and Awareness and Social Commitment : The bank has set up Village Knowledge Centers (VKC). At these centers, internet facility is

provided and a dedicated officer of the bank acts as a relationshipmanager to help the localpopulation to access information on crops, fertilizer prices, weather conditions, etc. At these centers, farmers, landless laborers and other artisans are encouraged for formation of Self Help Groups,Farmersclubsetc.90oftheseVKCsalsofunctionas“UnionMitr”whichoffersfinancialcounseling to villagers free of cost. In addition, the bank has also opened 5 Financial Literacy and Credit Counseling Centres (FLCC) in 5 of its Lead Districts. As a support system, the bank has been opening Customer Service Points (CSPs) and as of June, 2010. it has 2624 such CSPs in rural areas.

76

Status in Study areas:a. InSuratdistrict,thebankishavingitsregionalofficeatSurat.Ithas22branchesofwhich6

are rural and semi-urban. 16 branches are urban branches. It has in aggregate, 135,340 savings / deposit accounts in these branches and 6123 loan accounts with a per branch average accounts of 6150 and 278 respectively. All its branches are linked to core banking system (CBS). It has 15ATMs of which one is in the rural area. It does not have support of any BC in the district.

b. In Udaipur district, the bank is having relatively lower number of branches operating. It has only 5 branches of which 2 branches are rural and 3 are urban. It has 3 ATMs all located in urban areas. Here too, it does not have any BC operating for the bank.

With technology in place and the experience of BCs in other locations, the bank has potential for expanding its branchless banking by making use of BCs in these districts.

2. Status of BCs : a. Status - All India : The bank has 6 Business Correspondents (BCs) working for them mainly operating in the

districts / areas where the bank has lead bank responsibility. The BCs working for the bank are Fino Finetech Foundation, Zeromass, Seed, Cooptions, CIGF and Sarvalabh. Though the general strategy for the BCs is to provide all the basic banking services, the bank has used them effectivelytoprovidelocationspecificortheactivitybasicbankingservicesthroughtheBCs.For instance, for the dairy farmers covered under NDDB (milk pourers), the bank has introduced smart card based payment solutions on pan-India basis. It has given a foot hold in the new area of business. As of March, 2010 the bank has enrolled 89134 milk pourers (out of 12.4 million families covered under NDDB) using Bio-Metric Smart Card technology. The solution is made available at nominal charge that facilitates payment of milk receivables on fortnightly basis to the pourers at their door step, helping the pourer to save expenses on transportation and loss of day’s wages.

Under the BC model, the bank has been able to open 2.8million deposit accounts of which 1.5 millions are under operation. The BCs have been able to generate a business of Rs.9,500 million to the bank (As on 31 Mar 2010). It has an ambitious plan of reaching 5.7 million accounts in over 15,000 villages by 2011-12.

b. Status of BCs in Study areas : Under the present study, in the two districts covered viz., Surat and Udaipur, the bank does not

have any BC working for them. This is mainly because that the bank does not have any lead responsibility in either of the two districts. With the technology in place and the BC system available, the bank is poised to make use of the corporate networks as BCs in these districts as well.

77

EXHIBIT – 1bProfile of collaborating banks in the study - ICICI Bank Ltd

1. All India -Overview The ICICI Bank Ltd, one of the leading new generation banks has pioneered the use of information

technology for increasing its outreach and growth in various parts of the country. It has 2,016 branches spread across a number of states (30 June 2010). In addition, it has over 1,000 ATMs located in strategic locations for providing branchless banking services to its customers.

a. Udaipur district: Recently, the ICICI Bank has taken over the Bank of Rajasthan (BoR), another private sector bank

with a strong presence in Rajasthan. The BoR is a listed old Indian private sector bank with its registeredofficeatUdaipurinRajasthan.Asat31March31,2009,theBoRhad463branchesand 111 ATMs and total assets of Rs. 172.24 billion, deposits of Rs.151.87 billion and advances of Rs. 77.81 billion. Around 40% of the branches of the Bank of Rajasthan are located in rural and semi-urban areas.

The Mewar Aanchalik Gramin Bank (MAGB), the Regional Rural Bank in the district is sponsored by the BoR. With BoR merging with ICICI Bank, the MAGB will become the only RRBsponsoredbyanewgenerationprivatesectorbank.Thisdevelopmentissignificantforthebanking sector as it is likely to change the banking scenario in the district. Though it has just 5 branches of its own in Udaipur district, the merger with BoF would also give it a great push to its business in rural and semi-urban areas in the district,

b. Surat District : The bank has 13 branches in the district with just one branch located in rural areas. It has in

aggregate over 130200 SB / deposit accounts and 54670 loan accounts with a per branch average of 10,000 SB / deposit accounts and 4200 loan accounts. It has also 57 ATMs located in various parts of the district.

c. Bank Net work Information - district wise Position as on June 30 2010.

Particulars Udaipur district Surat District1.a ControllingOffice Udaipur Surat1.b District headed by RM/DM Regional Head (AGM

level)Regional Head (AGM

level)2 No. of Branches in each of the districts 5 132.a Number of rural branches 0 12.b Number of semi-urban branches 2 02.c Number of urban branches 3 33. Number of ATMs in the district 15 573.a Number of ATMs in rural areas 0 04 Number of Savings / deposit a/cs 40999 1302125 Number of Loan accounts 18232 546736 No. of BCs in the district Nil Nil6.a Names of BCs working for the bank Not applicable Not applicable6.b Types of services entrusted to the BC (s) Not applicable Not applicable6.c No. of A/cs opened by BCs Not applicable Not applicable6.d No. of A/cs being serviced by BCs Not applicable Not applicable6.e Volume of business generated thro BCs Not applicable Not applicable

78

2. Status of BCs a. Status- All India ICICI Bank uses the services of a BC for providing some of the basic banking services to

the clients where it is unable to reach out through its network in the districts. The BCs are expected to provide sourcing and servicing of no frills savings accounts and cross sell of deposit accounts, life and general insurance for the un-banked/under-banked in the locations where they are working. The bank typically enters into an agreement with the prospective BC who in turn, agrees to provide the services to the clients, subject to the terms and conditions and for the considerationspecifiedintheagreementexecutedbetweentheBankandtheBC.Onanoverallbasis, the expectation out of the BC is that the BC shall exercise the same high standard of care in performing the Services as would be exercised by ICICI Bank if the activities were conducted within ICICI Bank and not outsourced. The scope of the agreement includes, among other things, the following salient features:

1) Scope of activities 2) Terms of payout 3) Responsibilities of the BC 4) Inspection and audit 5) Undertakings by BC 6) ObligationofBConconfidentialityofthedata The bank has appointed 19 BCs in 10 states (Tamil Nadu -7, Kerala -1, Haryana -2, Orissa -1, West

Bengal -1, Delhi -1, Uttar Pradesh -2, Maharashtra -2 and Madya Pradesh -2). While other banks have used the services of Information Technology service provider companies for functioning as BCs, ICICI Bank has FINO Finetech Foundation in one location and all other 18 BCs are NGOs and NGO -MFIs doing the role of BCs. . As at the end of 30 June 2010, over 0.22 million new accounts have been opened using the services of BCs. The bank could mobilize an aggregate deposit business of Rs.9.00 million through the BCs.

b. Status of BCs under the study areas : Under the present study, in the two districts covered viz., Surat and Udaipur, the bank does not

have any BC working for them. With the taking over of BoR and the control in running the MAGB, the ICICI Bank is expected to expand the use of BCs in Udaipur district. In Surat district also, it is expected to commence BC used services in course of time.

79

EXHIBIT – 2aProfile of study district- SURAT42

Overview :Surat, one of the 25 districts of Gujarat, is the biggest district in South Gujarat and also one of the major industrialized cities in Gujarat state. It has 9 blocks and 760 villages.

The district has good land and water resources through 5 of its perennial rivers for cultivation of a number of food and non-food crops. Apart from sugarcane, paddy, jowar, cotton, pulses, oil seeds, groundnut, banana and vegetables are also cultivated. The district has a good network of distribution of agriculture inputs and marketing of crops.

The population of the district was 4.99 million with 189,000 families living below poverty line. It has a literacy level of over 75 per cent and one of the highest in the State. The rural population comprising of 557,000 rural households was 1.35 million forming 32 per cent of the total population. Besides, it has a huge migrant population (estimated to be more than 1 million) mainly working in textile and diamond cutting industries.

The western part of the district is industrially developed but towards the eastern and north eastern side, industrial development has not taken place in the same manner. The major industries are textiles, steel, petrochemical, fertilizers, chemicals, engineering, sugar mills, paper mills, milk processing, cement manufacturing. Besides, Zari, Diamond Cutting / Polishing and Art Silk Industry are in the SSI sector.

There are 46,555 registered SSI units providing employment to about 227,000 persons. In the textile industry, there are around 26,000 Powerloom providing employment to about 238,500 persons. Similarly, there are about 500 Texturing units providing employment to about 5,000 persons. The 381 Dyeing & Processing houses situated in the district provided employment to about 1,00,000 persons. The Jari industry with about 6600 units is providing employment to about 45,000 persons. The diamond industry which imported rough diamonds for cutting and polishing has about 10,000 units provides employment to about 400000 persons.

Banking profile :Under the Lead Bank Scheme, the Bank of Baroda is the Lead Bank in the district. NABARD is having itsDistrictDevelopmentManagerpostedinthedistrict.Apartfrom225PACSaffiliatedtoSuratdistrictcooperative bank, the district is served by 277 branches of 40 commercial banks, 3 branches of one RRB, 46 branches of District cooperative bank and 8 branches of GSCARDB. Surat City being major hub of Diamond and Textile industries, more than 50% of branches of commercial banks are urban and semi-urban. The total deposits of the banks in the district amounted to Rs.189030 million with loans outstanding at Rs.134490 million. The CD Ratio of the district was 71 (31 March 2009). This is due to industrial advancement and a large number of NRIs in various blocks of the district. All the branches of the RRB and the Surat DCCB are computerised. The Surat District Coop. Bank’s Piplod branch receivedISO9001-200certificateduring2008-09.

UnionBankofIndia(UBI)ishavingitsregionalofficeatSurat.Ithas22branchesofwhich6areruraland semi-urban. 16 branches are urban branches. All its branches are linked to core banking system (CBS). It has 15ATMs of which one is in the rural area. It does not have support of any BF or BC.

Microfinance :At the end of March 2009, over 5,550 SHGs were savings linked and over 1,510 of them were credit linked with banks. However, only 11 banks comprising 9 commercial banks, one RRB and one DCCB

42Based on NABARD-PLP-2010-11, Directorate of Industries and Commerce, Govt of Gujarat and discussions with Union Bank of India and State Bank of India.

80

were participating in SHG linkage programme in Surat district. There are a number of NGOs and Federations are functioning in the district. There were 67 Farmers’ Clubs promoted by banks in the district.

Infrastructure :Allthe760villagesconnectedwithpuccaroadsandelectrified.Thereare362postofficesservingataround7900populationperpostoffice.Almostallthevillagesarecoveredbybankingsystem.

Financial Exclusion Though the average number of villages served by a bank branch stood at 2, the coverage was not even in all blocks, especially in rural areas.

Underfinancialinclusion,no-frillssavingsbankaccountshavebeenopenedbythebanksinthedistrict.The block wise details of households having bank accounts and those not having bank accounts are as under :

No Block No. of eligible HHs

HHs with bank a/cs

% of HHs covered

HHs without bank a/cs

1 Bardoli 20007 19307 95.50 7002 Choryasi 28067 23756 84.64 43113 Kamrej 24883 19813 79.62 50724 Mahua 14496 13772 95.01 7245 Mandvi 36702 28296 77.10 85066 Mangrol 19098 18886 98.89 2127 Olpad 12260 8914 72.71 33468 Palsana 12028 8402 69.85 36269 Umarpada 2181 1944 89.13 237

10 Surat City 282526 221096 78.26 6143011 Bardoli City 10456 9789 93.62 667

Total 462704 373975 80.82 88831

As such there is immense potential for providing banking services to the people in the district. Some ofthemajorreasonsattributedforfinancialexclusionwasmigrantpopulation,unwillingnesstoopenbank accounts etc.

Business Facilitator (BF) /Business Correspondents (BC) :Though, reputed NGOs/ Voluntary Organisations and Federations are operating the district mainly working with the disadvantaged sections of the society, not much headway has been made in appointing BCs or BFs by any bank. Only SBI has commenced appointing BCs for providing some of the banking services in the district. The NGO arm of FINO Technology services is the BC working with SBI for the last two years. It has a target of bringing in 1.50 lakh new customers to the bank. By the end of May, 2010, it has been able to issue 31,000 smart cards and help new customers to have savings related banking services with the bank. Other services such as loan disbursement, recovery, remittance and marketingofotherfinancialproductshavenotbeenintroducedthroughtheBC.Further,theexistingcustomers are also not provided services by the BC. The new accounts opened by the BC are yet to be integrated with the bank system.

81

EXHIBIT – 2bProfile of study district - UDAIPUR43

An Overview :Udaipur district, generally hilly, is situated at the southern tip of Rajasthan adjoining Gujrat. It is one of the 33 districts in the State of Rajasthan. It is divided into 11 administrative blocks of which 8 blocks are tribal dominated. It has 2458 villages. It is part of the Mewar region of Rajasthan.

Agriculture is a predominant activity with approximately 75% of farming is dependent on rain fed conditions. Dairy is an important allied activity in the district. Cottage and village industries, mineral based industries, transport operators and rural tourism are the other major activities of the district. Major crop of the district is maize in food grains and pulses and oil seeds. Fruits like guava, papaya, citrus fruits and aonla are also produced in the district. A cycle of drought occurs once in every 4-5 years in the district. There are about 0.29 million land owners with land holding ranging from less than 0.50 ha. to more than 20 ha. (1995-1996)

The total Population of the district, as per 2001 census, is 2.63 million. It has higher proportion of rural population (82.5%) than State’s average of 77% and National average of about 74%. Proportion of tribal population which is about 46.2% in the district indicates predominance of tribal population. Literacy rate is lower in Udaipur at 59.26% (Rural - 52% and urban- 86%) against the State average of 61% (2001 Census).

The proportion of male and female population is 51 and 49 respectively. As per 2002 census, the number of Below Poverty Line (BPL) families in the district was 45 per cent. The literacy rate of the district is 58 per cent. Agriculture is the main economic activity of the district.

Occupational Pattern :As per the census data (2001) available, there were 747,582 workers in the district. Of these, 468,765 forming around 62.71 per cent of the total workers were cultivators and agricultural labourers. Out of the total working force, about 60 per cent women are engaged in agriculture based occupation.

Banking Profile :Under the Lead Bank Scheme, the State Bank of Bikaner & Jaipur (SBBJ) is functioning as the Lead Bankofthedistrict.TheworkoftheLeadBankOfficeishandledbyanofficercalledLeadBankOfficer (LBO)postedby theSBBJ. TheNABARDhas itsDistrictDevelopmentManager (DDM)positioned in the district. Both the LDM and the DDM are working in tandem and provide a variety of support measures in taking action on bank related developmental activities in the district. The district has 215 branches of banks of commercial banks, cooperative banks and the Regional Rural Bank.

Banking Network- Udaipur districtSr. No Agencies No. of Banks Total

branchesRural and

Semi-Urban1 Public Sector Commercial Banks 22 152 532 Private Sector Commercial Banks 5 153 Cooperative Banks 2 24 114 Mewar Aanchalik Gramin Bank 1 39 30

Total 30 215 109

43BasedonthePotentialLinkedCreditPlan-2010-11ofNABARD,literaturefromtheLeadBankOffice,Udaipurandthewebsiteoftheofficeof the district collector.

82

The spread of rural branches is considered adequate in 6 of the 11 blocks viz., Mavli, Bhinder, Girwa, Salumber, Kherwada and Badgaon blocks facilitating effective banking services. In other 5 blocks viz. Kotda, Jhadol, Lasadia, Gogunda and Sarada, the banks have larger population to serve. Recently, the ICICI Bank Ltd., a new generation private sector bank with foreign equity has decided to take over the Bank of Rajasthan (BoR), another private sector bank with a strong presence in Rajasthan. The process is on. Mewar Aanchalik Gramin Bank (MAGB), the Regional Rural Bank in the district is sponsored by the BoR. With BoR merging with ICICI Bank, the MAGB will become the only RRB sponsored byanewgenerationprivatesectorbank.Thisdevelopmentissignificantforthebankingsectorasitislikely to change the banking scenario in the district. Deposits :The bank deposits in the district have grown at a minimum rate of 20 per cent per annum. From a level of Rs.425.26 million in 2006-07, it grew to Rs.518.00 million in 2007-08 and to Rs.680.74 million in 2008-09. The growth of deposits was highest by the commercial banks which had a share of about 90 per cent with other category of banks’ share at 10 per cent. .

Loans :Unlikeinthecaseofdepositswhichmaintainedanannualgrowthofover20percent,thecreditflowin the district was sluggish. The loan outstanding for all banks stood at Rs.253.00 million in 2006-07 which grew to Rs.298.00 with a modest growth of 18 per cent. It grew to Rs.325.12 million in 2008-09 with a fall in growth to 9 per cent over the previous year. After excluding the numbers of defaulters and those who are not willing to have Kisan Credit Cards (KCCs), the number of eligible farmers in the district for KCCs would come to about 0.18 million. Further, the credit requirements of share croppers/tenant farmers/oral lessees need to be addressed by banks. State Bank in collaboration with ITC is trying to market KCCs among the farmers not covered so far in the district in the areas where their branches are situated. It was reported that the scheme was working well.

Credit Deposit Ratio :With the deposits increasing at a higher proportion than the loans issued by banks, the credit deposit ratio (CDR) declined every year. The CD ratio for 2006-07 stood at 59 per cent and it came down to 57 per cent in 2007-08 and further down to 48 per cent in 2008-09. The Commercial banks showed higher level of CD ratio which stood at 47 per cent and for the RRB it was just 32 per cent.

Micro - Finance :Underthemicro-financeprogramme,theSHGBankLinkageProgrammeofNABARDisoneofthemajor initiatives working well in the last few years. By end of March 2009, nearly 91,000 poor families through 7,007 SHGs have been credit linked with banks. There are 26 NGOs associated with themicro-financeprogramme.Besides,thestategovernmentisalsoencouragingimplementationofmicro-financeprogrammethroughitsvariousdepartments.There are more than 80 Farmers Clubs in the district. These clubs help the farmers in building a relationship of trust with the Bank.

Infrastructure :Infrastructure availability is one of the indicators of development. The district, out of --- villages, 1383 villages were connected with pucca roads. Number of transport vehicles available were 21,552 per1000sqkm.Theproportionofvillageselectrifiedwas91percent.Ofthetotalconsumersinthedistrict, it was observed that rural consumers formed 60 per cent of the total.

Financial Exclusion :In Rajasthan, 47.6 per cent of households reportedly do not have access to bank credit. The pilot projectforfinancialinclusioninthestateofRajasthanwaslaunchedon25August2006atRajsamand(SBBJ)withtheobjectiveofachieving100%financialinclusion.Encouragedbythis,theprojectwasextended to Dausa, Dholpur, Dungarpur, Jhalawar and Sriganganagar districts. Emphasis on opening ofSBaccountsforthepurposeofNREGShasledtofinancialinclusionofalargenumberofthoseunder BPL and other poor families.

83

Status of Financial exclusion in Udaipur district :While, the short credit requirements of farmers are taken care of by the cooperative banking system, through a good spread of PACS/LAMPS and branches of DCCB, CBs and the RRB cater to other credit requirements of farmers and others in the district. With an average of over 25000 people per branch coverage in the district, CBs and the RRB have to double up in providing banking services covering an average of 20-25 villages. They need to expand their outreach through business correspondent and business facilitators. Tehsil-wise population and number of bank branches :Tehsil Population

(Number)No. of branches

(all banks)Average population

per branchGirwa & Badgaon 740863 129 38993Vallabhnagar (Bhinder) 230818 15 15388Dhariawad 214098 3 71366Gogunda 151575 7 21654Jhadol 193810 8 24226Kherwada 268976 14 19213Kotda 183504 5 36701Mavli 213796 15 14253Salumber 212492 11 19317Sarada 223380 8 27923Total 2633312 215 25079

Note : City branches included in Girwa

Status of BCs in the district

Thoughanumberofbanksareoperatinginthedistrict,itisreportedthatthefirstBCwillbestartingitsoperations. The Punjab National Bank (PNB) has tied up with a prominent NGO (HEADs) for rolling out its BC operations in select areas with technology support from ILFS. It is yet to start functioning in the district.

Though a good banking network is in place in the district, BC related activities have not picked up so far in Udaipur district.

84

EXHIBIT - 3List of Persons contacted by the Study Team

Title Name Designation OrganisationMr M V Satyaprasad Joint General Manager, Cluster Banking

GroupICICI Bank Ltd

Mr Issar Utpal Deputy General Manager, Financial Innovation

ICICI Bank Ltd

Mr Ranjeet Sainani Chief Manager, Rural & Inclusive Banking

ICICI Bank Ltd

Mr R Ganesh Deputy General Manager ICICI Bank LtdSmt Rekha Nayak Deputy General Manager, Regional

OfficeUnion Bank of India

Mr Subhash Deval Assistant General Manager, Rural & Agri Business Dept

Union Bank of India

Mr I L Patel Manager,RegionalOffice Union Bank of IndiaMr Girish Chaudhari Senior Manager, Station Road Branch Union Bank of IndiaMr S A Bhole Branch Manager, Textile Market Branch Union Bank of IndiaMr PC Katoch Branch Manager, Vairav Branch Union Bank of IndiaMr Arjun Wasava Branch Manager, Sadhier Branch Union Bank of IndiaMr Jain Deputy General Manager, Regional

OfficeUnion Bank of India

Mr Meena Branch Manager, Kurabar Branch Union Bank of IndiaMr Rajendra Prasad Chief Manager, RBO –III SBI, H P branchMr P R Patel Manager SBI, HP branchMr U N Sagar Manager, NPA, Regional Business

OfficeState Bank of India

Mr Manohara Raj Senior Vice President HDFC Bank, ChennaiMr Amaram Vice President HDFC Bank, MumbaiMr ND Wani LeadDist.Manager,RegionalOffice Bank of BarodaMr PB Kakadiya LeadDist.Manager,RegionalOffice Bank of BarodaMr Deepak Bhai

DimmerBranch Manager Surat Dist Coop Bank Ltd

Mr Jayanthi Bhai Patel Branch Manager Surat Dist Coop Bank LtdMr Sameer Patel Officer Surat Dist Coop Bank LtdMr Ravindra Shankar

BhamreAGM- Dist Development, Surat NABARD

Mr Yogeshwar AGM- Dist Development, Udaipur NABARDMr Dhaval Parikh Dy Com. Of Industries & General

ManagerIndustries Commissionerate, Govt of Gujarat

Mrs Usha Thorat Deputy Governor Reserve Bank of IndiaMr Greg Chen Co-ordinator, South Asia CGAP, DhakaMr Sumit Agarwal Dirctor Shivani Vehicles P Ltd /

Redistribution Stockist of HUL

85

Mr Ajay Kumar Dirctor HMT Ltd (Tractors Div)Mr Jens Hartmann Country Head India Bayer CropScience,

South AsiaMrs Manorama

ChivukulaGeneral Manager -Finance Bayer CropScience

Mr Pravin K Trama General Manager -Zonal Finance & Accounts

Bayer CropScience

Mr Anjaneyalu Senior Executive Bayer CropScience Mr Ramesh Menon CEO- Maharashtra & Goa Bharti Airtel LtdMr Sriraman

JagannathanCEO- M Commerce Bharti Airtel Ltd

Ms Nehar Gupta Executive Bharti Airtel LtdMr Pawan Bakshi Executive Bharti Airtel LtdMr Anubhav Agrawal Branch Manager ITC Ltd - Agri Business

DivnMr Praveen Chaudhari Executive ITC Ltd- Agri Business

DivnMr C.V Sarma Executive ITC Ltd- Agri Business

DivnMr Vipin Sharma CEO ACCESS Dev ServicesMs Radhika Aghase Asst Director ACCESS Dev ServicesMr Rajesh Jain Associate Vice President ACCESS Dev ServicesMr Alok Prasad CEO MicrofinanceInstitutions

Network, GurgaonMr Rakesh Sehgal Dy General Manager (Retail Sales) Indian Oil Corporation

LtdMr S P Srivastava Senior Manager (Retail Sales) Indian Oil Corporation

LtdMr Nemi Chand Jain President Manav Rozgar Kshamta

Vikas SansthanMr Ashish Bhatnagar Secretary Manav Rozgar Kshamta

Vikas SansthanMr Suresh Bhai Dealer - IOC MS Fuel CentreMr Dinesh Bhai G

PatelPartner -IOC Ayushya Petroleum

(KSK)Mr Dansukh Bhai &

Ramu Bhai PatelPartners Manan Agro Chemicals

Mr L L Jain Proprietor Sudharshan Seed CoMr Shanthilal Jain Partner Rangeela Krishi KendraMr Anut Proprietor Gayathri Krish Seva

KendraMr Sundarlal Lohe Sanchalk, ITC Ltd Entally Road, VannaMr Mahendra K.

MandotDistributor - ITC Ltd Mahendra Agencies

Mr Chandra Kas Lav Kush Pesticides and Seeds Mavli Mr Ranjitbhai Mistry Proprietor Jaydeep Bio & Agro

Service Centre

86

Mrs /Mr

Shamji Bhai Patel & Geetaben S Patel

President & Secretary Bapa Sitaram Charitable Trust

Mr Bhavesh Rafaliya Sales Executive St. Morison Div of Aamorb Pharma

Mr Nathu Lal Mehta Partner Nakoda MarketingMr Manohar Sharma Manager Shree Maheswari BhavanMr Suresh G Patel Estate Manager Shree Mahuva Sugar

FactoryMr Rohit S Mehta President Surat Diamond

AssociationMr Darshan Raval District In Charge FINO-SBI projectMr R A Saboo Partner Manbhari PrintsMr VS Bhadauria Chair Professor, BoB Chair on Rural

FinanceInstitute of Development Studies

Mr R Bhaskaran ChiefExecutiveOfficer Indian Institute of Banking and Finance

Dr SL Shetty Advisor (Retd)Former Director and Currently advisor

Reserve Bank of IndiaEPW Research Foundation

Mr Justin Oliver ChiefExecutiveOfficer Centre for Micro FinanceMr M S Sriram Former Professor / Consultant Indian Institute of

Management(A)Mr S Thyagarajan DGM-Faculty Member College of Agricultural

Banking, RBI, PuneMr M.Balakrishnan AGM Indian Bank, ChennaiMr S.N.Mishra GM Indian Overseas Bank,

Chennai

90

edge

com

mun

icat

ion@

gmai

l.com