Macro Research Project ‐2008‐09, IIBF, Mumbai
Chapter 1
Introduction, Objectives, Reference
& Limitation of the Study
1. Introduction:
1.1. The Indian economy was growing for last five years at a steady rate of
8.5 percent to 9 percent or so till 2008. Most of the growth is from
industry and service sector. Agriculture was growing at a little over 2
percent. As per the latest estimates available from different sources,
the growth rate may be restricted to 6-7 percent due to the impact of
global meltdown and economic recession during the current fiscal
(2008-09). Keeping in view the present global scenario, and its impact
on the developed countries, our country has the potential to become
the fastest growing economy in the world in the coming decades and
also emerge as a leader. The economists throughout the world
accepted the fact that the potential for growth in both the Farm & Non-
Farm sectors are enormous in India. The major drivers of the growth
acceleration in India are demographic dividend, greater domestic and
international competition, sharp increase in total factor productivity,
blossoming of entrepreneurship and India’s acceptance of
globalization. This growth acceleration is accompanied by reduction in
the percentage of people below poverty line. With the current growth
momentum, almost one million of our citizens are moved above the
poverty line month after month (Kelkar, 2007).
1.2. Although the achievements mentioned above are indeed impressive,
but this is only a part of the whole story. We are still a home to over
one third of the world’s poor population and what is even more
disturbing is that we have now the world’s largest number of under-
nourished children. The growth process of our country is also
accompanied by growing inter-regional, intra–regional and inter-
Feasibility of Business Correspondent/Facilitators models for financial inclusion in the state of Uttar
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Macro Research Project ‐2008‐09, IIBF, Mumbai
personal inequalities in wealth and income. The urban–rural difference
is getting wider and according to a recent report by Arjun Sengupta,
almost 370 million people are facing some form of deprivation. In
particular, rural and tribal areas are becoming acute victim of
deprivation. So, we should not be surprised by the growth of
extremism in these areas. What is clear is that the present economic
growth process is not inclusive enough and the political economy
suggests that this is not sustainable for maintaining growth or stability
or unity of the country. Clearly we need to do something urgently. It is
heartening that the 11th Five year plan approved recently is aimed at
promoting greater inclusive growth.
1.3. Further analysis in this regard brings out the fact that poverty is being
concentrated continuously in the poor states (known as BIMARU
states). As per the NSSO (60th round) data, In terms of absolute
number, Uttar Pradesh, Bihar and Jharkhand accounted for about
27% of the country’s population but 41% of the Indian poor live in
these three states. These data further reveals that 45.9 million farmer
households in the country (51.4%), out of a total of 89.3 million
households do not have access to credit, either from institutional or
non institutional sources.
1.4. Limited access to affordable financial services such as savings, loan,
remittance and insurance services by the vast majority of the
population in the rural areas and unorganized sector is believed to be
acting as constraints to growth in these sectors. Access to affordable
financial services especially credit and insurance enlarges livelihood
opportunities and empowers the poor to take charge of their lives.
Such empowerment aids social and political stability as well. Apart
from these benefits, Financial Inclusion imparts formal identities
provides access to the payment system and to the saving safety net
like deposit insurance. So Financial Inclusion is considered to be the
most critical component for achieving Inclusive Growth; which itself is
required for ensuring sustainable growth in the country.
Feasibility of Business Correspondent/Facilitators models for financial inclusion in the state of Uttar
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Macro Research Project ‐2008‐09, IIBF, Mumbai
1.5. We have been experimenting with various alternatives to reach the
banking services, primarily credit, in rural areas through several
initiatives since last forty years to ensure equality. Early initiatives in
this regard were taken by building an institutional framework
beginning with a focus on the cooperative credit institutions followed
by nationalization of the major domestic banks and later the creation
of the Regional Rural Banks (RRBs). Simultaneously, several measures
including establishment of the Lead Bank Scheme, directed lending for
the Priority Sectors, banking sector's linkage with the Government
sponsored programmes targeted at the poor, Differential Rate of
Interest Scheme, the Service Area Approach, the SHG-Bank linkage
programme and introduction of the Kisan Credit Card (KCC) were
undertaken. Various new and innovative banking channels including
the information & communication technologies have been developed
and implemented to bring maximum number of people under the
formal banking system through the use of the vast network of rural
and semi urban bank branches. Despite this endeavour, the fact
remains that banking services are not made available to the majority of
the population residing in the rural and semi-urban areas and one
glaring example of the same is that only 27% of total farm households
are indebted to formal sources (of which one-third also borrow from
informal sources). Farm households’ not accessing credit from formal
sources as a proportion to total farm households is especially high at
95.91%, 81.26% and 77.59% in the North Eastern, Eastern and
Central Regions respectively. Thus, apart from the fact that exclusion
in general is large, it also varies widely across regions, social groups
and asset holdings. The poorer the group, the greater is the exclusion.
1.6. It is important to understand both the supply and the demand side
perspectives that lead to such a wide gap in availability of financial
services. The exclusion of large numbers of the rural population from
the formal banking sector may be for several reasons from both the
supply and demand side.
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Macro Research Project ‐2008‐09, IIBF, Mumbai
1.3.1 Some of the reasons from supply side are listed below:
(a) Persons are unbankable in the evaluation/perception of bankers,
(b) The loan amount is too small to invite attention of the bankers,
(c) The person is bankable on a credit appraisal approach but
distances are too long for servicing and supporting the accounts and
expanding branch network is not feasible and viable,
(d) High transaction costs particularly in dealing with a large number
of small accounts, (e) lack of collateral security,
(f) Inability to evaluate and monitor cash flow cycles and repayment
capacities due to information asymmetry, lack of data base and
absence of credit history of people with small means,
(g) Human resources related constraints both in terms of inadequacy
of manpower and lack of proper orientation/expertise,
(h) Adverse security situation prevailing in some parts of rural India, (i)
lack of banking habits and credit culture,
(j) Information-shadow geographical areas, and
(k) Inadequacy of extension services which is crucial to improve the
production efficiency of the farmers leading to better loan repayments.
1.3.2 From the demand side, there are several reasons for the rural poor
remaining excluded from the formal banking sector, such as:
(a) High transaction costs at the client level due to expenses such as
travel costs, wage losses, incidental expenses,
(b) Documentation,
(c) Lack of awareness,
(d) Lack of social capital,
(e) Non-availability of ideal products,
(f) Very small volumes / size of transactions which are not encouraged
by formal banking institutions,
(g) Hassles related to documentation and procedures in the formal
system,
(h) Easy availability of timely and doorstep services from money
lenders/informal sources and
(i) Prior experience of rejection by/indifference of the formal banking
system.
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Macro Research Project ‐2008‐09, IIBF, Mumbai
2. Objectives of the study
2.1 With the objective of ensuring greater financial inclusion and
increasing the outreach of the banking sector, the Reserve Bank of
India has issued guidelines in January 2006 enabling banks to use the
services of NGOs/ SHGs, Micro Finance Institutions registered
societies, trusts, section 25 companies and post offices as agents to act
as Business Facilitator and Business Correspondents and carry out
minimum banking transactions at their place of business so that
banking facilities can be offered closer to the customer at a lower
transaction cost. While a few leading public sector banks have
implemented these models as part of their operations, still a majority
of them are at the planning stage. Despite the regulatory clearance for
implementing this business model for greater outreach, majority of the
public sector banks were still of the view to increase their outreach
through the existing branch networks rather than seek out Business
Correspondents/Facilitators intermediaries.
2.2 The present study was undertaken to bring out a status report on the
initiatives and readiness of the commercial banks for implementing the
Business Correspondent/ Business Facilitator models as prescribed by
the Reserve bank of India for greater financial inclusion, the challenges
and the suggested measures to improve these models to fit into the
overall business model of the banks.
2.3 The study was conducted in the select districts of State of Uttar
Pradesh with the undernoted objectives.
a) To study the existing formal and informal delivery channels of
financial services in the unbanked areas and to explore the extent
of financial exclusion.
b) To study the effectiveness of formal financial delivery channels in
terms of cost of transaction in case of both Demand & supply side.
c) To examine the existing eligibility criteria of appointing Business
Correspondent/Business Facilitator and the scope of further
simplification in the process.
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Macro Research Project ‐2008‐09, IIBF, Mumbai
d) To list out the important challenges being faced by the commercial
banks for outsourcing the core banking activities through the
Business Correspondent model and suggest the enabling factors.
e) To study the code of conduct and business ethics of the appointed
Business Correspondent and suggests the measure for streamlining
Bank - Business Correspondent relationship.
f) To examine the capacity building and training need of the
appointed Business Correspondent/Business Facilitator to improve
the qualitative aspects.
g) To examine the systems and extent of payment of fees /
commission to the Business Correspondent/Business Facilitator by
the appointing commercial banks and its impact on the cost of
financial services to the customers.
h) To study the technological & infrastructural support available from
the banking system to the Business Correspondent/Business
Facilitator.
i) To study the level of satisfactory fulfillment of the customers’ need
and to evolve a system of continual assessment of the same both
under branch banking model & Business Correspondent/Business
Facilitator model.
j) To study the impact of recent stipulation of RBI on
restriction/limitation in the area of operation of the Business
Correspondent/Business Facilitator.
k) To suggest the effective control and monitoring mechanism by the
commercial banks to ensure effective delivery of services by the
Business Correspondent/Business Facilitator so appointed by
them.
l) Finally to document the findings of the study for future references
by the commercial banks while implementing the guidelines of the
Reserve Bank of India for utilising the services of Business
Correspondent/Business Facilitators.
3. Terms of Reference of the Study
3.1. Indian Institute of Banking & Finance, Mumbai vide their website
notification invited proposals to undertake purposeful research in five
Feasibility of Business Correspondent/Facilitators models for financial inclusion in the state of Uttar
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Macro Research Project ‐2008‐09, IIBF, Mumbai
areas of Banking & Finance in the name of Macro Research Project-
2008-09.
3.2 Out of those topics, the most concurrent topic of public agenda and of
course concern for the Indian Banking Industry – Feasibility of
Business Correspondent (BC)/ Business Facilitator (BF) for Financial
Inclusion has been identified and submitted to the Institute. The
Research proposal was submitted through proper channel and after
taking requisite permission.
3.3 The objectives of the present research proposal were selected by the
Institute to carry out detailed research with a mandate to complete the
same in about four months. The research was started in the month of
November, 2008 and the mid-term report was submitted on 31st
January, 2009.
4. Limitations of the Study:
The Business Correspondent/Facilitator (BC/BF) model to facilitate
the financial inclusion in the state of Uttar Pradesh has not yet been
accepted by the formal financial system and the Commercial Banks
are still depending on the branch banking model and the existing
delivery channels. It was also observed that even after lapse of more
than 3 years, the business model of appointing of BF/BC is very
limited and the availability of the data is also scanty. The other
problems we faced during the study was that the Banks and the
appointed Business Correspondent/Business Facilitators (BC/BF) are
not ready to divulge the number of customers they are serving and
also the commission they are paying to these intermediaries.
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