Ramesh S Arunachalam
Rural Finance Practitioner
While the idea of using business correspondents is perhaps appealing because of various benefits it may seem to provide, as noted earlier in the earlier posts, there are huge risks as well - especially, in the present micro-finance/financial inclusion environment in India (and contexts) where there are many controversies with regard to financial services provided, service delivery methods used, prices charged etc by the outsourced entities (such as BCs). Therefore, it is imperative for banks to have an appropriate due diligence process in selecting their business correspondents (BCs). They must, at all costs, avoid appointing all and sundry as their BCs, just to meet any (internal or regulatory targets), that may be imposed on them from time to time
Specifically, the banks must develop criteria that enable them to assess, prior to selection, a BC’s capacity and ability to perform the various required activities effectively, reliably and most importantly, to a high standard, together with any potential risk factors associated with using a particular BC. Key emphasis must be put on ensuring that the BC is sensitive to the needs and situations of low-income clients and/or excluded segments of the population. The bank must also ensure that adequate client protection measures are in place in the entire scheme of “outsourcing” to BCs and their (internal) auditors must verify the implementation of these in real time.
Among other things, such due diligence should include assessments with regard to the following (not exhaustive by any means):
(1) Whether the BC is qualified and interested in performing the specified tasks?
(2) Whether the BC understands and can meet the objectives of the Bank in performing the specified activities?
(3) Whether the BC’s has the financial soundness, managerial capacity and all other resources in adequate measure to fulfill its obligations and successfully perform its role as a BC and the various (outsourced) activities? and
(4) Whether the BC has the reach, resources and capacity to meet any special needs of the envisaged clients and/or the bank?
In case the bank has any special needs - such as servicing geographically dispersed/disadvantaged clientele and/or performing any special activities for them – the reach, capacity and resources of the BC must specifically be assessed with regard to such activities and they should not be outsourced to a BC who does not meet these criteria. That is critical and making the assumption that the BCs will over time acquire the expertise has, many a time, proved costly, in similar situations
Further, if a BC fails, or is otherwise unable to perform the outsourced activity, it may be costly or problematic (for the bank) to find alternative solutions. Transition costs and potential business disruptions should thus also be considered as well as the larger (regulatory and other) implications of not being able to complete such activities
Lastly, additional concerns may exist if the BC to be appointed is to service a remote and/or communally sensitive area (Nizamabad in AP is one such example). In such areas, in case of an emergency or extraordinary situation, the bank may find it more difficult to implement appropriate responses in a timely fashion. Therefore, senior management of the bank may also need to assess the local or special conditions that might adversely impact the BC’s ability to perform the various tasks effectively for the bank.
While the above provide some guidelines with regard to assessing BCs and choosing those who meet the various criteria in terms of resources, capacity, goal congruence and other aspects, the key point that should not be missed is the aspect of doing due diligence. Banks have been very naïve in choosing their partners and have consequently, found themselves in rather precarious situations. Therefore, it is sincerely hoped that they follow a proper process of selecting BCs so that there is a pareto optimal situation for all stakeholders concerned…
Have A Great Day!