MICROCAPITAL.ORG STORY: India Goes For Agent Banking – Reserve Bank Of India To Encourage Indian Microfinance Institutions To Adopt ‘Business Correspondent’ Model To Improve Outreach And Relax Requirements On Transaction Reporting

It was recently reported in India’s Economic Times [1] that the central bank, the Reserve Bank of India (RBI) [2] may widen the scope of the ‘Business Correspondent’ model for Indian MFIs following receipt of preliminary feedback from some Indian banks. Under the Business Correspondent model, banks are entitled to engage intermediaries to disburse ‘small value credits’, recover principal and interest payments, collect ‘small value deposits’, sell microinsurance or pension products and receive or deliver ‘small value remittances’ according to information on the RBI website [3]. The intermediaries engaged as Business Correspondents must be ‘well established’ and enjoy a good reputation locally. The idea is for Business Correspondents to improve an MFIs outreach without compromising the quality of services provided to microfinance clients. The RBI has now proposed to ‘unveil new norms for Business Correspondents’ in a way that would relax certain requirements and widen the geographical coverage of many MFIs. The RBI’s aim is to encourage more ‘banks with scattered branches particularly, private and foreign banks’ to adopt the Business Correspondent model. Examples of intermediaries that can be engaged as Business Correspondents include ‘NGOs, farmers’ clubs, cooperatives, community based organisations, IT enabled rural outlets of corporate entities, post offices [and] insurance agents’.

The RBI was also reported to be considering the relaxation of requirements on transaction reporting. According to the report in the Economic Times, ‘transactions now need to be reported in the books of banks within 24 hours’. This is onerous particularly in relation to ‘distant transactions in rural areas’ said a banker explaining the rationale for such a move. 

An officer of the RBI was further quoted as stating that the central bank was ‘not in favour of capping the interest rates charged by banks’ although the regulator was concerned about the ‘lack of transparency in lending practices’. The officer added that there was a need to promote more transparent pricing mechanisms. In addition to the developments mentioned above, the Indian government is also working towards tabling a Microfinance Bill in Parliament. The report in the Economic Times mentioned that India’s National Bank for Agriculture and Rural Development, which has pioneered several microfinance initiatives in the country, is expected to gain regulatory powers over non- deposit taking entities under the proposed Bill. 

By Chinq Yee Chong, Research Assistant  

Bibliography  

[1] Article on the Economic Times entitled ‘RBI may widen scope of correspondents’:  http://economictimes.indiatimes.com/news/economy/policy/RBI-may-widen-scope-of-correspondents/articleshow/5117615.cms  

[2] Reserve Bank of India: www.rbi.org.in/  

[3] Information on RBI website on ‘Business Correspondent’ model: http://www.rbi.org.in/Scripts/BS_CircularIndexDisplay.aspx?Id=2718  

[4] National Bank for Agriculture and Rural Development: www.nabard.org/

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