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The Last Mile

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My name is Sushila S. Patil," the 80-year-old lady in a purple saree tied the traditional Maharashtrian way, speaks into the automated-IVR (interactive voice response) menu of her business correspondent or bank saathi, Jivaji Patil's phone. She has come to deposit her monthly pension of Rs 400, collected from a post office a few kilometres away. Patil, the 48-year-old grocery store owner, is the face of the Kohlapur-based Ratnakar Bank in Nipani village, Belgaum district, Karnataka. "It is a matter of pride to be trusted by nearly 1,500 people with their money on a daily basis."

Business correspondents (BCs) such as Patil help banks expand their reach and offer a limited range of banking services at a lower cost than brick-and-mortar branches. In January 2006, Mint Road asked banks to rope in BCs — third parties instead of their own employees — to help them sew up their last-mile connectivity. Both individuals (grocery or kirana shop owners, public telephone booths operators, retired teachers and panchayat officials) as well as firms (from franchisees or agents of telcos to non-bank finance companies and their agents) can pad up to bat as a BC.

The Karur-based (Tamil Nadu) Lakshmi Vilas Bank (LVB) has covered 5,800 people in 12 villages with 36 BCs and plans to add 12 more villages. Says G. Sampath, LVB's assistant general manager and head, financial inclusion team: "We have surveyed 36 villages to inform BCs how many people have bank accounts and how many don't." But the bank's BC, Nandini Devi, who opened over 100 accounts last year in Veerarakyam village, admits: "It is very difficult to convince simple people about the benefits of savings." The heady part is women in these villages who opened accounts are not pestered any more by their men folk for booze money.

K.R. KAMATH, CMD, PNB "In the villages, the youth want to live life like in the metros. How do you get a BC to stay invested in the job?" (BW pic by Sanjay Sakaria)

In his 30s, Rakesh Sharma, Punjab National Bank's (PNB) BC for the past four years in Fauladpur village in Rajasthan, narrates an incident: "A drunk man tried to beat me up because he thought I was a fraud. People think we get huge commissions. It was hard to convince them initially." Sharma, who earlier helped out his brother in a grocery shop is now seen as a chalta firta (walking-talking) bank. He does not get a fixed salary; his take-home depends on the number of transactions a month. The target is 400, and he makes between Rs 4,800 and Rs 6,000 a month.

Grit Your Teeth
How has the BC model fared so far? One measure to gauge it would be the statistics on no-frill accounts, where you don't need to keep a minimum balance. You will be told there are 74.32 million no-frill bank accounts. Of which a shade over a third (about 28.2 million) was opened by BCs. At last count, banks had deployed 75,316 BCs. More villages (76,801) are now covered by BCs compared to branches (22,684). In 2009-10, the gap was narrower: 33,158 covered by BCs compared to the 21,499 covered by branches.

You will think scores of the ‘unbanked' are now in the warm embrace of banks due to the valiant efforts of a Devi and Sharma on the field. But a mere 12 per cent are functional accounts where you get to see transactions (the range is between 3 per cent and 20 per cent); the rest have simply rolled over and died. In the ones with a life breath, the balance is a piffling Rs 30-75. The funds in no-frill accounts (banks' standalone plus BC-led) stood higher by 25.44 per cent, at Rs 6,566 crore at end-March 2011 than the previous year. But this is largely due to payouts under the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA).

FINO: India's largest BC. It offers solutions anchored around biometric smart cards, hand-held devices and micro deposit machines. Its investors are ICICI Bank, ICICI Lombard, Corporation bank, Indian Bank, Union Bank, HSBC, LIC, IFC, IFMR Trust, Intel Capital and Blackstone

OXIGEN: Has an agreement with SBI through its partner Sahyog Micro Finance Foundation. You can also first enroll as an Oxigen Web Retailer and then apply for SBI Kiosk Banking

EKO: Has 1,500 agents. In July 2011, US-based Creation Investments Social Ventures Fund, invested $5.5 million in Eko

ALW: It creates last-mile operations in villages. Zero Microfinance and Savings Support Foundation, affiliated to ALW, has been appointed as a BC by 15 banks

Ratnakar Bank opened 12,000 accounts covering 195 villages; Aseem Gandhi, business head (agri & financial inclusion), says: "There is a long gestation period for activation of these accounts, and only 35 per cent have a balance." You will be shocked to see the overdrafts (or credit) given to these depositors. At end-March 2011, it was Rs 198.73 crore spread over 42.38 million account holders. In other words, just about Rs 47 per head, less than a dollar. It is a jump over 2009-10, when all of Rs 9.06 crore of overdraft was offered to 2 million account holders (or Rs 45 per account). "You have to tailor products to this audience. Right now, it is mostly the liabilities side," says Tilisa Gupta Kaul, head of microfinance, agri-lending and gold loans at the Thrissur-based (Kerala) Dhanlaxmi Bank.

If BCs are the key to foster financial inclusion in our 6,00,000 villages, you still have to cover 5,00,000 with no banking services. Only 60 per cent of Indians have a deposit; a mere 9 per cent of us avail of credit; 145 million households do not have an anna in or from a bank. Nearly 14,000 are serviced by a single branch. And now banks are using BCs to reduce the cost of servicing the urban poor, much as they use ATMs and Internet facilities to service the urban middle class and rich, and to reduce the ballooning operational costs. In 2010-11, operating expenses for the Indian banking sector grew by 23 per cent to Rs 1,23,129 crore.

Sameer Kochhar, CEO of the Gurgaon-based Skoch Consultancy, points out that urban service centres grew to 3,653, up by 763.59 per cent in 2010-11; rural was up by 67.60 per cent at 54,698 (below the secular average — urban plus rural — of 76.60 per cent). Kochhar, who has written two books on BCs, says: "It is profitable in urban areas. Transaction volumes are higher. Banks make fees." If you go by the grapevine, over Rs 2,500 crore has been blown up since 2006 to tom-tom the BC model. In other words, a few advertising agencies laughed all the way to the bank.

The Emperor's Clothes
Speak to different people involved in the BC business and you will get completely different views the progress. To its critics, the BCs have been a huge failure. What started out as a means of financial inclusion has barely scratched the surface. The BC model itself is fraught with problems — ranging from finding people who will remain long enough in the job to finding a means of making the whole operation cost effective.

ASEEM GANDHI, BUSINESS HEAD, RATNAKAR BANK "BCs have increased the cost of delivery." (BW pic by Subhabrata Das)

For the true believers though, BCs have made a huge difference to the lives of millions of hitherto unbanked people. They have helped banks offer services to areas where no banking would have been possible by any other means. The truth lies somewhere in between those two extreme views. Yes, the BC model has lagged far behind in terms of targets and a large number of people in the country remain unserved by any bank. And yes, it probably needs a major overhaul to be more effective. But at the same time, it has also represented a big step of sorts.

Big Daddy State Bank of India (SBI) has opened 8 million no-frill accounts aided by 12,800 BCs. By end-March 2012, it is certain to meet its target of 12,800 hamlets with a population of less than 2,000; the bank has covered 12,329 till date. SBI's success in Rajasthan's Kothputli tehsil through kiosks (BC: Oxigen) sees Rs 50 lakh in transaction volumes a month (Rajasthan clocks Rs 9-10 crore in volumes); as many as 1,000 new bank accounts are opened and 1,500 transactions happen a month. SBI wants to sell loans and kisan credit cards soon. Yet Jayanta K. Sinha, chief general manager (rural business) at SBI, concedes: "You cannot achieve what you could not in 200 years of branch banking in just six years with BCs. Give it some time."

Manish Khera, CEO of the Mumbai-based BC outfit, Financial Inclusion Network and Operations (Fino), grants you the point, "Fine, you have dormant accounts", but, "how many no-frill accounts did banks open in the first 60 years of Independence? Look at the figures now. Would they have achieved these numbers without us BCs? And it has been achieved without violating KYC norms." But Kochhar points out the skew at the systemic level. "Remittances in no-frill accounts in the last quarter of 2010-11 was Rs 1,574.22 crore. SBI's share was 69.15 per cent." In other words, SBI is hogging the lion's share of the business conducted via BCs.

STAGE 1: BCs are signed up based on location and interaction with villagers. The Master BC is paid an upfront set-up cost; fees for origination; incentives for higher account balances and transaction flows. Master BC pays sub-agents, depending on business generated

STAGE 2: The RBI is informed about the details of the Master BC; and the areas the banks plan to tap

STAGE 3: The BC's sub-agents scout the catchment area. They are guided by the bank, at times with the help of a survey that tells them what the potential within an area is like

STAGE 4: The BC finds a customer; takes information to sign him or her up; creates a finger-print record of the customer on a hand-held device

You will find it hard to come by a verdict in any Reserve Bank of India (RBI) tome on the success or otherwise of the BC movement; you have one in the Report on Trend and Progress of Banking in India (2010-11). Under no less a sub-head as ‘The extent of financial exclusion is staggering', it said there was a need to strengthen the financial inclusion drive through well thought out policies. Some time ago, HDFC Bank almost junked the model. It is now pilot-testing a new one led by its own field officers. The bank is vary of "reputational risk". (Rumours are that some BCs were mis-selling products). As a class, private banks want to stay off-record. "Do you want us to offend the authorities?" asks a voice. Another says: "We cannot manage small-ticket retail loans in urban areas, and you expect us to play on a turf we have no idea about." The problem for them is that the BC model does not make economic sense — and it is detrimental to shareholder returns.

JAYANTA SINHA, CHIEF GENERAL MANAGER, SBI "You cannot achieve what you could not in 200 years of branch banking in just six years with BCs." (Subhabrata Das)

Even altruistic state-run banks turn coy about the subject. A senior Central Bank of India official wants his pension to be safe, but let's the cat meow: "Banks have not even covered 1,00,000 villages, but this lot (covered) are among the most densely populated. It is natural for banks to go to villages (with BCs) which make business sense." And that in a nutshell is the problem. Even though the BC model is low cost compared to branch banking, the economics still do not make sense if the total volumes of transactions are to be considered.

And then there is a problem of retaining and motivating BCs. K.R. Kamath, Punjab National Bank's chairman and managing director, spells out the bitter reality. "The world has changed. Even officers are concerned about their families when they get a rural posting, like their children's schooling. In the villages, the youth are now exposed to so many things and they want to live life like in the metros. How do you get a BC to stay invested in the job?"

A classic example is SBI's Kothputli BC: Take 22-year-old Haridwarilal Jahangir, who pursues a Masters in History from LBS Government College. He is employed by Oxigen. In fact, Oxigen went around Kothpulti's computer institutes to shortlist people for this job. They were on the hunt for a computer-literate 12th pass with the ability to park Rs 10,000 as a non-refundable deposit with the company. Jahangir signed up, but would not like to continue for long and would prefer a government job.

BRAZIL: Brazil's second-largest bank Caixa collects savings from the poor. It uses BCs to deliver doorstep banking. Others like Banco Popular and Lemon Bank use thirdparties. The Caixa agent uses PoS machines, cellphones, a barcode scanner, and a teller machine with a screen in the store. Caixa delivers savings, credit, remittance, government benefits, pension receipts, bill payment and mobile phone top ups

SOUTH AFRICA: Mzansi accounts were launched in 2004. It is delivered by four banks — Absa, First National Bank, Nedbank, Standard Bank, and state-run Postbank. There is no fee, except for ATM usage

MEXICO: In November 2007, BancoWal-Mart opened in existing stores to avoid the cost of new branches. A Banco Wal-Mart account can be opened for as little as $5

The operational issues are not going unnoticed. An RBI working group set up to review the BC model, headed by P. Vijaya Bhaskar, chief of Department of Banking Operations & Development (an executive director now), noted: "The annual reports of banks generally do not include the progress in respect of extending banking services through the BC model and the initiatives taken by banks in this regard." You have no idea why they are reluctant.
A little while back, banks ran to North Block to spill their no-frill woes. It also blew the lid off the bank-BC problems. The biggest issue was the cost of operations. A server connects 1,000 villages; a BC serves 200 accounts with an average of four transactions in each of them. An account opening kit has a laptop, camera, scanner and stationery and is meant to service 50 contiguous villages. The payment to a BC is about Rs 3,500 a month; cash management charges are 0.40 per cent of the transaction volume. These are the "outsourced costs". What's not included are banks' own HR and IT costs.

North Block was told the break-even would be at Rs 7 per transaction. It would go up if there were to be less than four transactions a month and the amounts involved were less than Rs 800 a month. Capital costs were shown as Rs 240 per account with a recurring cost of 2.40 per cent on the transaction volume. SBI's Sinha says the cost (all told) of running a single "account sourced through a BC works out to Rs 195". The math bites. "It provides last mile connectivity. But it has increased the cost of delivery and the bank is yet to see any meaningful returns on this investment," says Ratnakar Bank's Gandhi.

MANISH KHERA, CEO, FINO "How many no-frill accounts did banks open in the first 60 years of Independence?" (Debasish Dey)

Here's one analogy that will make it clear. "You have to understand whether you sell a Lifebuoy soap in Mumbai or Jhumri Talaya, it costs the same. It is actually more in Jhumri Talaya as you have to transport it and the sales volume will be low," says Sanjay Panigrahi, CEO of the Kolkata-based Srei Sahaj e-village, a BC firm which operates in Uttar Pradesh, Assam, Orissa, Tamil Nadu and West Bengal. It bleeds. "Unless banks receive capital from the government in the form of capital subsidy, the cost will be a debit to the P&L," bankers wailed to North Block. They sought a subsidy of Rs 50 for every new no-frill account opened; they got it. The unbanked are now carpet bombed; no-frill accounts have zoomed with the help of the Rs 50 pain killer.

The Life Of A BC
Khera blames banks. "Have you ever seen an advertisement or even a leaflet from banks saying that they now offer 6 per cent on a savings account? SBI says it is a banker to every Indian. What about the people in the remote parts of India? They are bonafide customers of the bank." He is categorical that BC is just a channel; the principal is the bank, it is its responsibility to offer products and services suited to the catchment area. Khera's view echoes in the RBI review: "The BC model is largely perceived as a channel for undertaking only liability side business (deposits)... If BCs are used merely for this purpose, the income generated by BCs will not be sustainable over a period".

Life as a BC is tough. In Fauladpur village, Shanthosh has managed to save Rs 100 this week and is excited to know that her balance has reached Rs 759. The BC, Sharma, says the server is slow and the machine struggles to recognise the fingerprints of a few ladies who work in fields. But Shanthosh is happy she doesn't have to go to the local zamindaar.

"Oon zamindari ke kaam se ye manne bhala laage. Zamindaar bhi paisa dena taal jaayo par Rakesh ko to kabhi bula liyo". (I like this mode of saving money more than lending or depositing with the zamindaar who used to refuse to pay money at times, but we can call Rakesh anytime we need money). For Pappi, a local, it is the convenience. "Maare ko door jaana na jachchce" (I don't like to travel far to visit a branch).

WHAT BCs CAN DO Seven out of 26 state-run banks defaulted on their priority-sector lending targets in 2010-11

Patil, who works for Ratnakar Bank, says remuneration is not much. For every transaction, he gets a rupee as commission; a new account fetches him Rs 7; in the past six months, he has made Rs 1,700 in commissions. LVB provides lockers to BCs to hold Rs 10,000 in cash; anything above the amount has to be deposited in the bank. For every account opened, the bank pays Rs 5 to Nandini Devi; an extra Rs 9 for every transaction of Rs 120; and for every amount over it, they get 50 paise extra. These are small amounts, but even Rs 500 earned in a village goes a long way for a BC.

Just how much a BC makes also depends on the area. In Kerala, you have remittances: blue collar Malayalees remit money within the state. Many from UP, Bihar and Haryana have migrated to Kerala cities (now they even work as farm hands in Kerala), and they remit through BCs. But the picture changes in the cow belt or the North-East where security concerns overwhelm. Says Abhishek Sinha, CEO of Eko: "In Bihar alone, Eko has over 300 agents and the average number of transactions are anywhere between 1,000 and 2,000. A BC in rural Jharkhand makes about Rs 500, but an agent in Delhi could end up making anywhere between Rs 7,000 and Rs 8,000. Social mores also play a role. Karan Singh is a BC for PNB who serves Belni village (population: 1,000) in Rajasthan and services 150 account holders. Initially, people did not allow him to deal with the ladies of the Rajput village. Over the years, with the help of the sarpanch and the bank, he has broken the barrier. He also had to win over their trust: a chit fund company had duped thousands earlier.

It Can Still Work...
"Given the increased footfalls at BC locations, an increase in their regular retailing business has been noticed," says Gandhi. He is fine if retailers and FMCG companies were to piggy-back on BCs. But it will cut in another way. Concurs Sinha: "We chose to appoint retailers as BC agents because of two reasons. Firstly, they have the advantage of an already built infrastructure, and we did not have to put any capital expenditure. Secondly, people trust the local kiranawala with their money as they usually don't settle bills in one go."

But  Fino's Khera says if income from pure BC play were to reduce, it will prove difficult for them to stay invested. More so if the bank is not smart. Sanjay Singh runs a mobile shop in Rajnota village (population:10,000) and has opened about 500-600 accounts in six months; makes more than Rs 6,000 on the back of commissions, mobile and DTH recharge. He faces technical problems of account integration with SBI. Once he opens an account at a kiosk, the bank needs to generate an account number to start transactions. He says SBI's branch managers in the tehsil are not technically sound to do the integration and thus, it takes him more time for transactions.

It is also felt that BCs are not paid enough to make for a viable business model. A majority of BC firms are reportedly making losses; some have suspended operations. It creates another headache: banks cannot substitute their BCs overnight as relationships will suffer. Banks charge BCs for temporary overdrafts, which push up their operating costs; the insurance as well as security costs for the cash-in-transit are passed on to the BCs. But banks are not allowed to pass on costs to the customer on the payout they make to the BCs. Apathy abounds. Panigrahi is blunt: "There is no officer at the branch level to monitor closely though the CEOs of banks are committed." Says Kochhar: "Everybody works in a silo." When they don't, it clicks.

In Andhra Pradesh (AP), the Rural Development Department decided to target beneficiaries through bank accounts in Warangal district. SBI, State Bank of Hyderabad, Andhra Bank, Union Bank, Axis Bank and AP Grameen Bank (BC: Zero Mass Foundation) looked at rural customers whose major source of income is Social Service Pensions and MGNREGA. In its first phase, which looked at 50,000 beneficiaries, the state government met the capex for the purchase of hand-held devices. Sources say the number of beneficiaries has crossed 6 million. The AP project is now held up a role model. But success here was also due to the AP government's move to pay 2 per cent of the funds disbursed as commission to the banks.

To know how little banks are interested in the hinterland, take a look at priority sector lending (PSL); you can use it to gauge banks' interest in social welfare in general. Seven out of 26 state-run banks defaulted on their priority sector lending (PSL) targets (40 per cent of total advances) in 2010-11? And 18 out of them couldn't meet the 18 per cent sub-target for agri-advances. Even more disturbing is the trend in agri-credit lending locations — the share of rural branches fell to 38.5 per cent in 2010 from 55.5 per cent in 1990; that of urban and metro branches went up from 14.9 to 33.7 per cent. "It indicates that credit disbursement is mainly through non-rural branches. The data raises questions about the segments to which the credit is flowing and whether it is reaching the intended beneficiaries," noted RBI deputy governor K.C. Chakrabarty at the College for Agriculture Banking in Pune in  September 2011.

"If you just see financial inclusion as something you do because you have been asked to do, well, this will be the state of affairs," says Gupta Kaul. The C. Rangarajan Committee on Financial Inclusion alluded to the same when it noted: "Merely pumping a backward region with financial capital is not going to be enough in the absence of improvements on the side of human, social and physical capital. In the absence of all this, merely insisting on financial inclusion will not work." Quips Kochhar: "Bank chairmen are happy. The bureaucrat can gloat that the BC model is wonderful and justify technology purchases, the technology suppliers get paid. Everybody gets to have their piece of cake except the rural BC." If the BC model has to work, the entire chain has to be in sync and strong — the bank, the BC firms and the sub-agent on the ground. And a chain is only as strong as its weakest link.


(This story was published in Businessworld Issue Dated 06-02-2012)