NBFC-MFIs as business correspondents – Who benefits? (Part-II)

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NBFC-MFIs as business correspondents – Who benefits? (Part-II)

by Abhishek Anand and Manoj Sharma
Jul 13, 2014
6 min

In this blog, the MicroSave team examines the advantages and disadvantages of the BC model for NBFC-MFIs in detail.

As we highlighted in NBFC-MFIs As Business Correspondents – Who Benefits? (Part-I) the benefits for NBFC-MFIs and banks are pretty clear – we summarise them below.

Benefits of the BC Model for Key Stakeholders (from Microfinance in India – Is Business Correspondent (BC) the Way Forward?)
Benefits for NBFC-MFIs	Benefits for Banks
The model significantly de-risks MFI operations. Operating as agents of banks almost entirely removes political risk from the equation. Banks and their agents come under the sole purview of the Reserve Bank of India, and the possibility of state government interference will be significantly minimized if not altogether eliminated – particularly when poor people’s savings are involved.	Banks are struggling to establish agent networks that can profitably and reliably service the low income, unbanked segments of the economy. While they have been successful in opening accounts, they have not been as successful in promoting transactions. As they expand the range of services and seek to drive credit through agent channels, banks will have to depend on MFIs that understand this segment and have built systems and processes to serve it.
MFIs will be able to offer a wider range of products and thus to meet the real financial needs of the clients rather than pushing credit alone and optimistically claiming that it is for entrepreneurial activities.	Banks can reflect the assets and liabilities in their books thus enhancing their balance sheets. Banks can increase the spread and share the risk-return of lending to the low-income sector with the MFIs in a more realistic manner.
Savings is a service that is universally needed by people in the low-income segment. Offering the poor a range of financial products such as savings, pension, and remittance services will create a higher degree of client satisfaction, and thus customer loyalty and reduced default. The savings history of clients will also enable better credit appraisal and will help (to some extent) address the problem of multiple borrowing.	Banks will partner with MFIs that have built much more cost-effective outreach channels. The operating expense for an MFI branch that can service 2,000 – 3,000 clients is in the range of Rs.5-600,000 per annum. One entry-level officer in a bank will cost as much. Banks, on account of cost considerations alone, will struggle to directly service the low-end market; tie-ups with MFIs provide tremendous opportunities.
The BC relationship will also open up the possibility of appointing agents in villages to offer savings and pension services. While client origination can remain with the MFIs, agents can deal with day-to-day operations and settlement can take place with the MFI on a daily basis. This should reduce the cost of operations, and the economies achieved can be passed on to clients.	The banking regulator will be more satisfied when it knows that banks have their skin in the game. If banks use and monitor MFIs as banking agents this will inspire confidence in the regulator that they are maintaining the requisite oversight and due diligence.
While some of the existing MFI-bank credit relationships are manual in nature, most BC relationships typically ride on either card- or mobile phone-based technology as the front end. This will enable better and more efficient cash management at the MFI end. Currently, 1-3 % of the total cash at the MFI is typically either in transit or stacked in vaults in the numerous branches. This can be an instantaneous process riding on technology.	Banks can leverage MFIs’ local knowledge and cash and risk management skills to build a manage a network of agents that will allow them to reduce the cost of many of the core operations, reduce over-crowding in their banking halls, increase sales and service to high-value customers and increase the quantity and quality of their rural loan portfolio.
MFIs and their agent networks can also be conduits for direct benefit transfer payments, thus earning additional commission revenue to the model. This will diversify income sources, enhance revenue for the front-line agents and the MFI BCs and introduce the MFI to new clients and opportunities to cross-sell to them.
MFIs can build efficient channels to offer financial services and work with multiple banks to reach the under-banked/unbanked segments. Banks will be interested in such tie-ups not only because of the regulatory pressures but also because once they begin servicing this segment, they will realize the potential that it holds.

Of course, there are disadvantages too, and (drawing heavily on MicroSave’s study of the potential for MFIs to acts as business correspondents (BCs)) we highlight these below.

Beyond the opportunities presented by the BC model, MFIs need to be cognizant of the adverse impacts that embracing the BC model may have on their current business. We consider below three main types of impacts, though the severity of each may vary depending on the type of MFI. In many cases, these threats are flip-sides of some of the benefits discussed above.

Impact on group meetings. The group articulates the methodology of most MFIs, so they need to be careful in assessing how the introduction of front-end technology and BC operations can support or disrupt the conduct of group meetings. This depends on how the BC channel is structured:

Field officer or group leader acts as the front-line agent. In this case, savings operations would be conducted during the group meeting. Offering saving services along with credit will result in longer group meetings. In fact, MFIs might opt to shift savings operations to a separate meeting in order to preserve the focus of the credit meeting on repayment. Increased duration of group meeting or more frequent meetings will lead to a reduction in loan officer caseload, which will affect the business turnover and profitability for NBFCs.
Third-party outlets acting as front-line agents. BC operations with technology enablement can help in making meetings cashless, and that can reduce meeting duration or frequency. Cashless meetings may be more attractive to business-oriented MFIs and especially NBFCs, but they may challenge the models of those with a more didactic approach to development.

Erosion in repayment discipline. MFIs also need to make sure that BC operations do not lead to loss of group liability, which is one of the core principles of group-based microcredit. This may happen if meetings are less frequent, or if the availability of individual products from banks leads people to question the usefulness of group-based products. Loan repayments using technology-enabled BC channels may also lead to a situation where clients blame non-repayment of loans on the front-line agents – or technology-related problems (“The system was down”, “I’d lost my mobile phone”, “The agent didn’t have liquidity”, “I sent money to the wrong account”, “I forgot my PIN”, etc.).

Cannibalisation of existing business. Most MFIs suspect that in the long run, banks might be potential competitors for their lending business. NBFCs and not-for-profit MFIs, which offer microcredit as their core business, suspect that banks may gain access to their clients through the BC channel and start extending credit directly to them. Or, perhaps more immediately, NBFC-MFIs may be uncomfortable with the idea of lending off-balance sheet on behalf of banks; or struggle to negotiate the right commercial arrangements with banks to do so.

The burden on institutional capacity. MFIs need to evaluate the existing management capacity–skills and bandwidth—to negotiate with the multiple stakeholders involved in BC operations. NBFCs with larger operations and used to managing relationships with funders and investors may not find it very difficult to manage the new relationships, although for regulatory reasons they will need to place a separate corporate identity and team to manage this. MFIs and NGOs with smaller operations and with little experience of managing strategic relationships may find it trying and may need to bring in dedicated people with the right caliber. Institutional capacity will also need to effect the cultural change that MFIs need to undergo in order to offer savings along with the credit.

These advantages and disadvantages will require careful research, analysis, strategic planning, and negotiation – the steps to making the transition (and indeed the initial decision on whether to do so or not) are examined in the next blog “NBFC-MFIs As Business Correspondents – What Will It Take?”

More details available in our Agent Network Management for MFIs brochure.