In a shocking but true revelation, recently a newspaper report claimed that nearly 45 percent people in Gujarat do not have access to bank accounts. This surely is a bit surprising especially since Gujarat is one of the more prosperous states in the country. The scene is not too good nationally as well. A RBI report states that nearly 40 percent of the Indian population lack access to formal financial services. As much as the news seems de-motivating, the brighter side is that huge untapped market in the banking sector that exists in India - a scenario true for most of the emerging countries across the world. As huge opportunities are yet to be tapped, pioneers need to think out of the box and initiate new models in order to target to the rural section of the society.
‘Correspondent Banking is an interesting banking practice that could be extremely effective in emerging markets. Novel to India but successfully implemented in countries like Brazil, Mexico and Kenya, Correspondent Banking is a model in which the financial institutions work with a network of non-banking retail outlets. These outlets could be anything from post office to convenience stores. In Brazil, the correspondent banking alone serves nearly 1600 municipalities. In Mexico, more than 5,000 correspondent outlets supported by 11 banks have come-up since the government authorized correspondent banking in late 2009. Moreover, the government of Mexico has also reported to be offering half of the 23,000 state-owned Diconsa stores for correspondent banking. On the filp side, in some countries have shown poor progress due to regulatory issues & other restraints.
Corresponding Banking offers a range of benefits for all the stakeholders. It provides the poor a convenient access to financial services in their own backyard while financial institutions get access to a large new underserved customer base. According to a World Bank’s Consultative Group to Assist the Poor (CGAP) the average overall monthly cost per customer using correspondent and mobile phone banking is 19 percent lower than the traditional model. According to Mckinsey’s research all-in cost of offering savings accounts in Mexico through correspondent outlets is 25 percent lower than the traditional route.
In India, ‘Corresponding Banking’ has been in operation since 2006. However, the progress is very slow compared to other countries. Some of the main drawbacks which have led to the slow progress of corresponding banking in India are the legal framework for banking in India and ultra-conservative approach from the banks. Special measures must be taken by RBI to implement certain proactive measures like removing cap on cap on interest rates charged on small loans which in-turn would make it more lucrative for banks to offer banking services to the rural poor.
The first and the primary challenge for successful Correspondent banking is to identify a suitable partner who could act as an agent/intermediary in delivering the service to the customers. This is especially true in India’s context as mostly we find many small retailers serving local communities with little or no access to neighbouring community. Moreover, dealing with the local retail partner may get cumbersome for financial institutions which do not have any experience in non-financial retail segment and the same goes for the agent/retail partner who lacks experience in providing financial services to end customers.
Overall, correspondent banking if implemented well could prove very beneficial for emerging markets as it has the ability to bring banking to a huge percentage of unbanked population in India. In India alone more than 40 percent of the population (which comes to 480 million people) is unbanked; this represents a huge untapped market. Add to this the unbanked population in other emerging countries, surely correspondent banking seems to have bright prospects moving forward.
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