India: MFIs Demand More Incentives for Working as Business Correspondents

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Aug 2014
India, August, 11 2014 - Microfinance institutions (MFIs), through a reach of nearly 30 million rural borrowers, are expected to play a significant role in government's plans, particularly with RBI recently relaxing norms on business correspondents banking model.

In June the Reserve Bank of India (RBI) allowed banks to appoint NBFC MFIs as business correspondent, a step in sync with the new financial inclusion programme of the government.

However, so far, the experience of MFIs, which have been operating as business correspondent of banks through their not-for-profit wings, has been ridden with operational difficulties.

Ahead of Prime Minister Narendra Modi's announcement to roll-out a new financial inclusion programme on August 15, the microfinance representative body (MFIN), is likely to raise the issue at a meeting with the Union ministry of finance and banks on August 11.

Instead of being business correspondent, the MFIs want to be agents of banks, which will given them more operational freedom, according to Samit Ghosh, president MFIN and founder of Ujjivan.

Several MFIs have already started experimenting with new models to work with banks.

For example, Janalakshmi Financial Services, which used to serve as BC of Axis Bank, put its alliance on hold. Instead, it has now tied-up with DCB (Development Credit Bank) to launch a co-branded prepaid card for disbursal of small loans by Janalakshmi Microfinance. The product is administered in association with Jana Urban Foundation.

"The business correspondent model with Axis Bank was a very amicable arrangement, but our priorities changed. At the moment the plan is on hold. Now, we have tied-up with DCB for prepaid cards, " said V S Radhakrishnan, managing director and CEO of Janalakshmi.

According to survey by microfinance institution network (MFIN), published in February this year, nine out of 14 MFIs closed their operation as BCs in the recent past. According to the MFIN survey, of the 14 MFIs that had formerly been business correspondents with banks, four were profit-making; nine were loss-making, while only one achieved break-even in their BC operations. The MFIs cited lack of support from banks as the key reason to stop the operations.

It is expected that Prime Minister Narendra Modi will announce plans to open 75 million new bank accounts over the next one year on the Independence Day.

Microfinance institutions (MFIs), through a reach of nearly 30 million rural borrowers, are expected to play a significant role in government's plans, particularly with RBI recently relaxing norms on business correspondents banking model.

This apart, according to the MFIN survey, business correspondent model was not suitable for small MFIs due to low revenues and high operational costs. Also, a few MFIs perceived banks as competitors who may poach the good clients of the MFI once they are linked through the BC channel, the report said.

The two key issues with MFIs are regarding the remuneration and the reluctance of banks to open the basic savings account for borrowers, according to Ghosh.

"The model did not work with MFIs. We will now see, how can MFIs work outside the BC arrangement as agents for banks," said Samit Ghosh, president MFIN and founder of Ujjivan.



 

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