FINO becomes common Banking Correspondent for Jharkhand

NEW DELHI: Sources told ET that FINO, India's largest banking correspondent company, has won the Bank Of India tender to become the common Banking Correspondent company for all public sector banks operating in Jharkhand. The tender had to be called after the Finance Ministry's Department of Financial Services (DFS) triggered a sweeping reorganisation of the Bank-Business Correspondent (BC) model in April.

It suggested that India be divided into 20 clusters. And that a common BC be appointed for all public sector banks operating in that geography. Such a move, said the DFS, would improve the economics of the BC model. Right now, almost all the BC companies in India are in the red. The Jharkhand auction, which took place yesterday, was the second tender to be awarded.

The first had gone to Mumbai-based Vakrangee Finserve. In rural finance circles, both tenders have raised eyebrows. Vakrangee had won the Maharashtra tender after bidding 0.48% for cash management. And, now, FINO has bid even lower -- 0.35% -- to win the tender for Jharkhand and parts of Bihar. These low bids have raised eyebrows because the BC companies have been struggling to break even with the existing 2% margin they get for delivering NREGA and pension payments.

Now, in the new dispensation, as a senior manager at SBI, speaking on the condition of anonymity, told ET that one reason why FINO bid low could be lower technology costs. In the new system, for instance, the account information will be held by the banks. All FINO has to do is make payments and extend other banking services. However, this is challenged by what FINO's head, Manish Khera, himself had told ET a month ago: "In this business, 10% of the cost is technology, 90% is people and processes."

Also, the old system where banks used to transfer the entitlements (say, the full amount of NREGA payments to be paid out) to the BC company which used to then deposit into the NREGA workers' accounts will not be used any longer. From now on, all accounts will be maintained in the core banking system. Villagers will have the freedom to make their withdrawals from any BC they choose. It is not clear what this portends for the BC companies and their village representatives. Will they have to use their funds as working capital in the villages and later get the cash they pay out reimbursed from the banks?

If so, that will be one cost. There are other costs -- like the salary for the village agent, the cost of moving cash to all villages in the cluster, not to mention the need to insure against theft and the organisational overheads themselves. In response to a questionnaire asking about the arithmetic that underlies the 0.35% number, FINO's emailled response said: "The one state one BC model is in its infancy with undetermined dynamics.

FINO, the largest BC in the country is strategically supporting the model actively engaging all banks and minsitry in trying to esure the larger efforts being made by the system bear fruition. As of now only 2 clusters have been bid. More clarity will emerge with time." A similar questionnaire sent to Vakrangee shortly after it won the Maharashtra RFP has gone unanswered so far. For now, the third auction will take place tomorrow -- for Chhattisgarh.