Hiccups over the last mile: Biz correspondent model may need overhauling

Tucked away in the Reserve Bank of India’s (RBI’s) Annual Report for 2021-22 is this nugget: the total number of outlets serviced by business correspondents (BCs) in the country shot up to 3,257,251 in December 2021, from just 519,147 a year before — an increase of 527 per cent! And there’s only a footnote by way of explanation for the uptick in BCs: “There is a significant increase in data reported by a few private banks.”

Incredible as these numbers are, they should be seen in the context of the churn underway in the BC world.

Launched in 2006, the BC model is essentially a regulator-led effort that not only aims to make financial services accessible through a branchless banking facility, but also supports the national agenda of job creation. This architecture had come into being when there were hardly any fintechs, and digital was nowhere close to what it is today. This order is now history.

Explains Sameer Kochhar, chairman, SKOCH Group: “You had differentiated licences with those looking at a back-door entry into banking. Payment banks (PBs) were conceptualised to eat the BCs’ lunch. They failed, and failed miserably.” He adds: “The fintech wave and UPI took away the payments’ piece which was a major bread-earner for BCs.”

Then, again, banks have acquired micro-finance institutions (MFIs), while some of the bigger BC firms now want to become MFIs, rather than continue to be mere agents of banks, or PBs. And while each party in this food chain is differentiated by regulation at the back-end, it’s a unified front for the customer.

So, while customers may be dealing with just one entity, it’s a network of all manner of regulated entities. In the example of, say, mutual fund units sold via a BC to an MFI customer, the asset management company is under the Securities and Exchange Board of India, even as the MFI is on the radar of Mint Road.

The churn

“The BC model has transformed in the last decade, with the emergence of fintech-BCs and select banks taking the lead in providing API (Application Programming Interface) banking to extend a large number of services earlier only possible through bank branches and automated teller machines to BC outlets,” points out Sunil Kulkarni, chief executive officer (CEO-Designate) of the Board of Business Correspondent Federation of India — the self-regulatory body for the industry.

And that’s why, even in the most challenging of times during Covid-19, BC outlets continued to deliver government benefit payments using the Aadhaar-enabled Payments System (AePS). Today, nearly 400 million AePS transactions worth Rs 30,000 crore take place every month, mainly through BC outlets servicing banks of all hues — state-run , private, small finance banks, PBs, regional rural banks and co-operatives.

But the quality of BCs and their ability to stay put at the field level is a matter of concern. A white paper by the Indicus Centre for Financial Inclusion in March 2021 observed that more than a quarter of the agents were losing money. One of the reasons is that the inadequate compensation to banks for government transfers leads to lower compensation to BCs. And this, in turn, leads to poor training, service quality and restricted access for the public. 

In addition, there has been a trend of rising share in non-dedicated agents. While 45 per cent of the agents surveyed in 2017 were dedicated agents, 36 per cent of these reported making losses, compared to just 21 per cent in the case of non-dedicated agents. Further, 34 per cent of the dedicated agents expressed their intent to start other businesses as well, to supplement their incomes. The high share of non-dedicated agents prevents them and their customers from benefitting from specialisation.

Room for improvement

Perhaps the poor earnings of BCs may have something to do with the way their compensation is structured. In areas where banks have not opened a branch or set up an ATM, local shop-owners are trained to offer the services of BCs — which typically earns them Rs 5,000 a month.

In FY19 and FY20, the Central Board of Direct Taxes introduced amendments to Section 194N of the Income Tax Act with the clear intent of discouraging the use of cash and accelerating the transition to a less-cash economy. Specifically, the Act mandates the deduction of TDS on cash withdrawals at the rate of 2 per cent if, at the time of withdrawal, the aggregate amount of cash withdrawn by any individual exceeds Rs 1 crore during the previous year.

In the case of recipients who have not filed income tax returns every year for at least three years — which is common among low-income citizens — the Act becomes even more stringent. It states that for this group of people, a TDS of 2 per cent on cash withdrawals will apply if the aggregate amount withdrawn by the recipient in the previous year is between Rs 2 million and Rs 1 crore. If the amount exceeds Rs 1 crore, the TDS will increase to 5 per cent.

Unfair burden

But it was also recognised that this would create an unfair burden on individuals and institutions involved in handling substantial amounts of cash as part of business operations. An explicit provision was made that these regulations would not apply to “any BC of a banking company.”

The irony is that even when the BC produces proof of status (through a letter from the BC-sponsor bank), what happens in practice is interesting. In cases where the BC is affiliated to a bank that is different from the one where the cash withdrawal is conducted — quite common in rural areas where BCs have personal bank accounts with local banks and serve as BCs on behalf of other banks — banks refuse the TDS exemption.

While the number of BCs has mushroomed, there are issues associated with each type of BC — ranging from individuals to corporate BCs — as well. “The original idea was to have BCs do both asset and liability products, but individual BCs which constitute the overwhelming majority are mainly into cash-in, cash-out. The RBI-mandated BC certification is the key to ensuring that quality is maintained and that they graduate to full service provider status,” says Alok Misra, CEO and director, Microfinance Institutions Network.

In a pan-India survey conducted by the RBI in October 2020 to analyse the effectiveness of initiatives in the BC sphere (75 per cent were deployed by corporate BCs, and the remainder directly by banks),  the majority of respondents indicated an overall improvement in knowledge, capabilities and expertise of BCs in response to RBI initiatives. Progress in BC certification was tepid in the north-eastern region owing to lack of awareness.

All said and done, the BC model may be ready for an overhaul.