By Deepti George, IFMR Finance Foundation
Removing an earlier restriction that the Reserve Bank had placed on NBFCs, the RBI today has restored the permission for non-deposit taking NBFCs (NBFC-ND) to become Business Correspondents (BCs) to commercial banks, as recommended by the Committee on Comprehensive Financial Services for Small Businesses and Low-Income Households (CCFS). This permission is subject to banks ensuring that there is no commingling of funds between those of the bank and the BC and also ensuring that all possible conflicts of interest are taken care of through contractual arrangements between the two parties, besides taking care of any possible reputational risks envisaged. The RBI has also placed the onus on banks to make sure that the BC does not adopt any restrictive practices that favour the NBFC’s customers over non-customers, or any sort of forced bundling of NBFC-products to banking-customers.
Further easing the restrictions within the broader Business Correspondent regulations, the RBI has removed maximum distance requirements on banks in choosing their BC’s outlet locations (these were specifically upto 30 kms in rural, semi-urban and urban areas and upto 5 kms in metro locations). This implies that it would now become possible for a potential new banking entrant to set up a business comprising purely of a national level BC network supported by a few branches of its own. For such entities the challenge will therefore no longer be about how to establish a national level branch network like that of the existing national full-service banks, but to ensure that they solve specific operational issues such as cash management.
The new rules will potentially pave the way for providing banking access to the large number of NBFC-customers who can typically be characterised as not having access to savings and / or bank credit services, as well as for making it remunerative enough for NBFCs to serve locations that they could previously not have served. NBFCs originate credit on their own and are regulated with prudential capital adequacy requirements; many have specialised credit origination capabilities and those with established systems and trained personnel are better placed than others to perform the role of institutional BCs. The CCFS had recommended that commingling of funds, the worry of which has so far disallowed NBFCs from acting as BCs, can be effectively handled through technology-based solutions which will make sure that all settlements happen on an intra-day basis. There is hope that this new permission will incentivise NBFCs towards establishing better, technology-enabled ways of doing business, as a way to become effective BCs while maintaining cost structures that are lower than banks engaged in trying to reach the last mile.