From BC to modern banking

Beyond banking correspondents.

The Reserve Bank’s go-ahead to for-profit companies with large sales networks to act as business correspondents (BCs), read retail agents of banks, is a step forward for financial inclusion — over half the population lack access to banking services.

The move would make it possible to scale up the reach of financial services for the unbanked, particularly in tandem with a provision for charging fees for the BCs’ services.

The BC model is an improvement on the brick-and-mortar bank branch model, but falls far short of permitting full deployment of the new technologies that wait to be harnessed into a robust, viable and supervised system of inclusive banking.

Mobile phones are well suited for originating, executing and settling financial transactions.

Mobile phones, in combination with the unique identity project and the entirely scalable work of the Credit Information Bureau of India Ltd (Cibil), which tracks individual credit histories, make it possible to extend the reach of formal finance to every Indian.

One simple way to achieve this is to give a banking licence, graded, to begin with, to a joint venture between a telecom service provider and an established commercial bank.

Such a joint venture would marry professional banking expertise with the technological and transactional capability of telecom service providers to generate good business from millions of individually small transactions.
    
Such a move would also leverage India’s large mobile network — 500 million plus subscribers and set to reach the billion mark soon — to achieve financial inclusion fast.

Once Cibil’s inputs become crucial to getting a loan cheap or not at all, borrowers would have a powerful incentive to repay loans, just as in the case of microfinance loans, where the default rate is next to nil.

Biometrics backed unique identity numbers would be of great use to meet know-your-customer norms and avoid duplication/impersonation problems.

The key is to have proactive policy so that banks and mobile players can join hands to change the paradigm and rev up financial access. The absence of a precedent elsewhere in the world should not deter the government and the regulator.