More positive moves from the RBI

Posted on June 25, 2014 by Sumita Kale

Over the past few months, the RBI has been pro-actively moving to relax and refine the inclusion processEarlier this month, the KYC requirement was simplified and yesterday's notification made two important modifications in the business correspondent model:

1.Non-bank NBFCs are now allowed to become BCs for banksThis is in line with the Mor Committee recommendations.

 It has been decided that banks will be permitted to engage non-deposit taking NBFCs (NBFCs-ND) as BCs, subject to the following conditions:

a) It should be ensured that there is no comingling of bank funds and those of the NBFC-ND appointed as BC.

b) There should be a specific contractual arrangement between the bank and the NBFC-ND to ensure that all possible conflicts of interest are adequately taken care of.

c) Banks should ensure that the NBFC-ND does not adopt any restrictive practice such as offering savings or remittance functions only to its own customers and forced bundling of services offered by the NBFC-ND and the bank does not take place.

2.The requirement that a banking agent be within 30 km of a branch has been removed.

With a view to providing operational flexibility to banks and in view of the technological developments in the banking sector, it has been decided to remove the stipulation regarding distance criteriaThe banks should, however, while formulating the Board approved policy for engaging BCs, keep in mind the objectives of adequate oversight of the BCs as well as provision of services to customers while deciding how to modify extant distance criteria.

As a regulator the RBI has the challenge of balancing opening out the space to other players with the risks that can come with lax supervision and monitoringHowever, as technology and connectivity improve even in the rural areas, the focus has to be on banks to manage their own operations, with stringent reporting of transaction monitoring.

The 30 km criterion was an operational restriction, that gave an advantage to the larger banks that already had a wide branch network in placeWith the removal of this stipulation, banks will have the freedom to place their agents in line with their business strategy.

Even as these modifications have been made, the RBI is also trying to resolve the tussles between the banks and the BC agentsThe relationship, unfortunately, is not one of synergy and in some cases branch managers have reportedly worked to restrict the operations of profitable agentsIn April, the RBI stepped in to address the issue of cash management:

after opening of large number of banking outlets in the last three years in hitherto unbanked areas of the country through the BC-ICT model, the time has come to monitor the usage in terms of transactions per BC so as to ensure sustainability of the BC modelOne of the critical issues identified in this regard has been of Cash Management of BCs.

3.The insistence by banks on BCs to fully prefund their accounts even after considerably long business relationship has become a major impediment in scaling up operations of BCsSimilarly, low/delayed payment of remuneration of BCs and passing on the responsibility of insuring cash to BCs have also been proving to be irritants in increasing the usage in large number of bank accounts openedIt is, therefore, important for banks to recognize that cash handled by BCs, while doing banking business on behalf of the Bank, is Bank's CashIn view of the above and with a view to scale up the BC model it has been decided that:-

  1. The Boards of the Banks must review the operations of BCs at least once every six months with a view to ensuring that requirement of prefunding of Corporate BCs and BC Agents should progressively taper down with the passage of timeIdeally in all normal cases the prefunding should progressively come down in such a manner so as to reach around 15% of the limits fixed for each BC/CSP in case of deposits and 30% in case of Bank Guarantees, etcin say 2 years from the time a BC starts operations.
  2. The Board should also review the position of payment of remuneration of BCs and should also lay down a system of monitoring by the top management of the BankThe issue of allowing BCs to handle deposit and payment transactions of various credits, remittance, overdraft and other products of banks must also be examined by the Board from time to timeComplaints redressal system in this regard should also be laid down by the Board.
  3. As the cash handled by BCs is Bank’s cash, the responsibility for insuring this cash should rest with the banks.

It is a pity that the RBI has to step into such operational issues and mandate that the top management of banks look into such crucial problems Even as the banks may resent what they perceive as RBI interference in their operations, it is high time they realised that the health of their agents is key for sustaining a relationship with the unbankedIt is high time that this message goes through to the lowest rung of bank staff.

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