Where Angels Prey

Where Angels Prey is a novel by Ramesh S Arunachalam. Please refer to www.whereangelsprey.com for more information

Wednesday, June 20, 2012

Critical risk and issues in regulating bank business correspondents

Ramesh S Arunachalam

The business correspondent model to financial inclusion can work, but since it transfers various types of risk, responsibility and management compliance to third parties, it requires appropriate regulation and supervision

With the ongoing bidding for the whole of India, the business correspondent (BC) model is surely on its way to become a pan-India effort of huge scale and deep penetration with regard to financial inclusion. While I am certainly not comfortable with the (low) bidding values and have discussed it in a previous article Business correspondent model at near-zero cost may fail with deep negative impact, I do however believe that the BC model can perhaps effectively serve the cause of financial inclusion if it is structured appropriately. That said, in my opinion, there are many risks and serious regulatory and supervisory issues that need to be addressed by the RBI for this to become a reality. The key ones are briefly highlighted hereafter.

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  1. Hi Ramesh, I've read your thoughts about the Business Correspondence with interest; and a bit of confusion and concern, I will add. I'm intrigued: does this mean all sorts of social security payments and subsidies are supposed to now be channeled through a bank linkage? And, always through a monopoly, at that? It seems a very odd way of dispensing government aid - maybe you can briefly clarify what the big strategic idea behind it is. Thanks, Phil

  2. Thanks Phil. Technically yes but whether it will really happen is another matter. There is a sort of a monopoly for a cluster and India is around 20 clusters and that is also a worry. The near zero bidding costs are also a huge worry and I heard that the latest is 0.02% for the Rajasthan and Delhi cluster. I am not sure how a BC can operate under such margins! Good luck to them and the whole BC thing requires microscopic examination. I will discuss the strategic ideas in a separate post. Cheers and Have a nice day!