ET In the Classroom: Making a Case of Financial Inclusion

What is a ‘business correspondent’ model?

In 2006, the Reserve Bank of India allowed banks to use non-bank intermediaries as business correspondents, or business facilitators, to extend banking and other financial services to areas where the banks did not have a brick and mortar branch present. The objective behind it was to aid the process of financial inclusion and consequently take banking to the remotest areas of the country and make them bankable.

What do these correspondents do?

The business correspondent is nothing but a bank-in-person, who is authorised to collect deposits and extend credit on behalf of the bank of small-ticket sizes. He also recovers principal interest of small value deposits, sale of micro insurance, mutual fund products, pension products, receipt and delivery of small value remittances/other payment instruments.

Who is eligible to be a banking correspondent?

RBI has allowed a host of entities to act as business correspondents (BCs) of banks. These include NGOs/MFIs set up under Societies/Trust Acts; societies registered under Mutually-Aided Co-operative Societies Acts, or the Co-operative Societies Acts of States; Section 25 companies, which are not-for-profit companies; companies in which NBFCs, banks, telecom companies and other corporate entities or their holding companies do not have equity holdings in excess of 10%; post offices and retired bank employees, ex-servicemen and retired government employees.

How is a business facilitator different from a business correspondent?

Very often the term ‘business correspondents’ is used interchangeably with the term ‘business facilitators’ (BFs). But RBI makes a clear distinction between the two. BFs are allowed to undertake only facilitation services like identification of borrowers, collection and preliminary processing of loan applications, including verification of primary information, creating awareness about savings and other products, processing and submission of applications to banks and promoting and nurturing SHGs and follow-up of recovery and debt counselling. However, facilitation of these services does not include conduct of banking business by BFs, which is the exclusive function of business correspondents.