MICROCAPITAL BRIEF: Reserve Bank of India (RBI) Allows Non-banking Finance Companies (NBFCs) to Work as Agents for Banks

The Reserve Bank of India (RBI), a government agency charged with overseeing the Indian financial sector, has revised its regulations to permit non-banking finance companies (NBFCs) that do not accept deposits to act as business correspondents for Indian banks, providing limited financial services to clients in unbanked areas. Banks’ business correspondents can engage in such activities as identifying potential borrowers, processing loan requests and creating awareness about savings accounts and other bank services [1][2]. According to a press release from RBI, this decision was made with the intention of “accelerating the flow of credit to those at the bottom of the pyramid… through…inclusion of new entities as [business correspondents]” [3]. According to the new regulations, banks must ensure that agents offer the services they provide on behalf of the banks to the public rather than solely to their own customers [1].

As of June 2013, RBI reported total assets of INR 12 trillion (USD 200 billion) [4].

By Benjamin Krupp, Research Associate

About 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 non-banking financial companies such as for-profit microfinance institutions operate under RBI regulations, the responsibility for inspecting 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 microfinance institutions (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 0.5-percent stake in NABARD as of March 31, 2013.

Sources and Additional Resources

[1] Financial Chronicle: RBI Allows NBFCs to Work as Business Correspondents for Banks

[2] Reserve Bank of India: Financial Inclusion by Extension of Banking Services – Use of Business Correspondents (BCs)

[3] Reserve Bank of India: Financial Inclusion by Extension of Banking Services – Use of Business Correspondents

[4] Reserve Bank of India: Balance Sheet 2013

MicroCapital, May 27, 2014: Reserve Bank of India (RBI) Gives 2-Year Extension to Share, Asmitha, Spandana Sphoorty to Meet Capital Requirements

MicroCapital, May 19, 2014: Reserve Bank of India (RBI) to Allow Minors Over Age 10 to Open Savings Accounts

MicroCapital, April 14, 2014: Reserve Bank of India (RBI) Grants Preliminary Approval to Microlender Bandhan to Receive Banking License

MicroCapital Universe Profile: Reserve Bank of India (RBI)

Do you know that MicroCapital publishes the MicroCapital Monitor newspaper each month? Find out more at https://www.microcapital.org/products-page/