MICROCAPITAL BRIEF: Indian Microfinance Institutions (MFIs) May Become Business Correspondents (BCs) for Commercial Banks

Indian microfinance institutions (MFIs), which have seen a downturn in business and portfolio quality since the Andhra Pradesh crisis that began in late 2010, are considering a business model that would make them intermediaries between commercial banks and poor people in rural areas.Under the business correspondent (BC) model, MFIs would evaluate the creditworthiness of a borrower, disburse microloans, collect repayments and cross-sell other financial products on behalf of commercial bank partners [1]. Such arrangements allow the banks to reach rural parts of the country where formal banking infrastructure is scarce [2]. According to a report by Indian website Moneycontrol.com, discussions between MFIs and banks are ongoing, but the Reserve Bank of India, the country’s central bank, would still have to approve the arrangement after specifically restricting MFIs from serving as BCs in October 2010 [1].

In an example of collaboration between banks and MFIs, BASIX Group is evaluating the benefits of linking its 3.5 million customers to commercial banks, as was reported by MicroCapital on May 30, 2011 [3].

About The Reserve Bank of India (RBI):
Established in 1935, the Reserve Bank of India (RBI) undertakes consolidated supervision of the financial sector comprising commercial banks, financial institutions and non-banking finance companies (NFBCs). The current focus of RBI is to supervise financial institutions, consolidate accounting standards, resolve legal issues in cases of banking fraud, monitor non-performing assets and supervise the rating model for the banking sector. In 1979, the National Bank for Agriculture and Rural Development (NABARD) was formed at the behest of RBI to provide regulatory oversight to regional rural banks (RRBs) and to promote the development of agricultural lenders: tasks that had been the responsibility of RBI. While all microfinance institutions (MFIs) and non-banking financial companies still operate under RBI regulations, the responsibility for inspecting nonprofit MFIs, agricultural lenders, RRBs, state cooperative banks, district central cooperative banks and state cooperative agricultural and rural development banks was transferred to NABARD. RBI maintains these responsibilities for for-profit MFIs. Although RBI was originally the parent organization of NABARD and until October 2010 held a 72.5 percent stake in the outfit, RBI owns a one-percent stake in NABARD as of 2011.

By Rohan Trivedi, Research Associate

Sources and Additional Resources:

[1] Moneycontrol.com: “MFIs to turn business correspondents for banks”, http://www.moneycontrol.com/news/cnbc-tv18-comments/mfis-to-turn-business-correspondents-for-banks_562563.html

[2] MicroCapital.org story, October 16, 2010: “MICROCAPITAL BRIEF: Reserve Bank of India (RBI), in Move to Expand Rural Financial Access, Updates Guidelines to Allow Individuals, Nonprofits and Corporations – But Not Microfinance Institutions – to Serve as Business Correspondents for Banks”, https://www.microcapital.org/microcapital-brief-reserve-bank-of-india-rbi-in-move-to-expand-rural-financial-access-updates-guidelines-to-allow-individuals-nonprofits-and-corporations—but-not-microfinance-institution/

[3] MicroCapital.org story, May 30, 2011: “MICROCAPITAL BRIEF: BASIX Group of India Looks to Boost Fee-Based Income by Offering Commercial Banks Access to Its 3.5m Microfinance Customers”, https://www.microcapital.org/microcapital-brief-basix-group-of-india-looks-to-boost-fee-based-income-by-offering-commercial-banks-access-to-its-3-5m-microfinance-customers/

MicroCapital.org story, September 15, 2010: “MICROCAPITAL BRIEF: India’s Axis Bank and Microfinance Institution Janalakshmi Agree to Expand Access to Financial Services for Country’s Urban Poor”, https://www.microcapital.org/microcapital-brief-indias-axis-bank-and-microfinance-institution-janalakshmi-agree-to-expand-access-to-financial-services-for-countrys-urban-poor/

MicroCapital Universe Profile: Reserve Bank of India (RBI), https://www.microcapital.org/microfinanceuniverse/tiki-index.php?page=Reserve+Bank+of+India+%28RBI%29

Browse the MicroCapital Universe and add your entry to the wiki at https://www.microcapital.org/microfinanceuniverse/

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