Promoting Financial Inclusion - United Nations Development ...

Challenge Faced by Banks
• Reluctance on the part of banks: Studies
show that banks are also reluctant
to open NFAs due to high account
opening costs. A cost-benefit analysis
of NFAs shows that banks are able to
recover their maintenance costs but not
their account opening costs.
5.2.2 BANKING CORRESPONDENT/
BANKING FACILITATOR MODEL
The BC model aims at developing and
strengthening the relationship between the
poor/excluded people and the organized
financial system. The BC model has become
necessary since it is not economically feasible
to establish brick and mortar branches in all
areas. Some of challenges faced by the BC
model are given below.
Challenges Faced by Banks
• Limited use by banks of the entities/
individuals eligible for BCs: The RBI has
widened the scope for appointing BCs
by allowing banks to use the services of
individual owners of fair price shops,
PCO operators, authorized functionaries
of well-run SHGs connected to
banks. Interestingly, even though RBI
permitted variety of individuals to work
as BCs, very few have actually been
engaged by banks. Indeed most of the
banks have just taken the services of
Section 25 companies promoted by
technology service providers which
make use of smart cards, biometric
measures of account openings and other
such measures.
• Operational Risks: The working group
formed for assessing the progress of
BCs identified cash handling by BCs
as the biggest issue. The handling of a
large volume of cash leads to logistical
problems and added operational risks,
particularly in the North East due to
higher security risks, vast and difficult
terrain and poor connectivity. Since
BC staff often operates in isolation,
there are high chances of fraud and
misappropriation. There have been cases
of miscommunication and failure to
account for cash observed by the banks.
• Cash settlement: The regulations
mandate BCs to complete accounting
and undertake cash settlements within
24 hours of a transaction. It becomes
difficult for BCs working in areas with
accessibility issues to adhere to this.
• Distance criteria: The distance criterion
of 5-30 km (depending on area of
operation) is often restrictive. Banks find
it difficult to get the necessary waivers
from District Consultative Committees
limiting their flexibility when operating
in certain areas.
• Reputational risks: Banks are fully
responsible for all actions of BCs and
their retail outlets/sub agents. Hence
they are required to carry out due
diligence of individuals/entities prior to
their appointment, as well as undertake
systematic internal monitoring and
control of transactions undertaken
through BCs. Partly because of this the
majority of banks have not been able
to scale up their BC model beyond
the pilot stage. Banks find it hard to
assess the integrity, reputation, and cash
handling ability of individuals acting as
BCs. It is apparent that banks consider
BC operations as fundamentally
unprofitable. They focus on opening just
no frills accounts through BCs due to a
distrust of third party agents for credit
evaluation. In other words the work of
BCs has been curtailed essentially to
that of business facilitators.
• High costs of IT enabled fi nancial inclusion:
Banks have been encouraged by the
RBI to adopt IT enabled solutions to
promote remittance systems and make
34 PROMOTING FINANCIAL INCLUSION