D. Tripathy
Business Correspondents (BCs) are essential to advancing financial inclusion in India, particularly in rural and semi-urban areas where they offer crucial banking services like account openings, cash withdrawals, deposits, and bill payments. They bridge the gap in regions lacking traditional banking infrastructure, ensuring access to financial services for otherwise excluded populations. As of recent data, BCs have opened nearly 45 crore of the 53.8 crore PMJDY accounts in India, facilitating a substantial portion of rural banking transactions. These correspondents handle over ₹70,000 crore in monthly transactions, making up more than 75% of India’s financial inclusion network.
Despite their critical role, BCs face several challenges, including outdated commission structures, rising operational costs, and limited earning potential. These hurdles make it difficult for BCs to sustain their operations and maintain quality service in underserved communities. Reforming these structures is crucial to ensuring their long-term viability and advancing financial inclusion across India.
A set of strategic recommendations has been proposed to address these challenges. First, the introduction of a comprehensive Financial Inclusion Plan (FIP) for BCs is essential. This plan would include guaranteed minimum earnings, infrastructure funding, and regular training to enhance BCs’ capabilities. Such support would provide financial stability, boost BC confidence, and improve service delivery, ultimately benefiting customer satisfaction.
Next, the establishment of a dedicated pricing committee to review BC commission rates annually is recommended. This would ensure the rates are aligned with economic conditions and inflation, allowing for fair compensation and greater sustainability in the banking sector.
Additionally, it is proposed to increase commission rates by at least 30 basis points to reflect rising operational and infrastructure costs. Over the past decade, the costs associated with hardware, software, and compliance have surged, while commission rates have remained stagnant. A rate increase would help BCs sustain operations, invest in technology, and improve service quality, reducing attrition and increasing customer satisfaction.
Another recommendation is to implement a 1% commission structure based on the available balance in customers’ accounts. This would incentivize BCs to encourage higher balances, thereby contributing to a stable deposit base for banks and fostering higher profitability through an increased net interest margin (NIM).
Fixed commissions for BCs in rural or challenging areas should also be introduced. These regions often see lower transaction volumes, making it harder for BCs to maintain operations. A fixed income, such as ₹4,000 for Northeast Region centers, ₹3,000 for Left-Wing Extremism-affected areas, and ₹3,000 for villages with populations under 2,500, would provide financial stability and reduce attrition, helping maintain service in underserved areas. The requirement for minimum transactions and new account openings should be relaxed in these centers due to climate challenges or saturation of the customer base.
Finally, removing commission caps is essential. Current caps limit BC earnings, even when managing high transaction volumes. Introducing tiered commission structures based on transaction sizes would encourage BCs to expand their customer base and increase transaction activity, benefiting both BCs and the broader banking ecosystem.
In conclusion, these reforms are not merely necessary but urgent. BCs are the backbone of rural banking in India, connecting underserved populations with the financial system. The outdated commission structures, rising operational costs, and limited earning potential threaten their ability to continue offering essential services in remote areas.
The government must act swiftly to revise commission structures, provide technological support, and ensure fair compensation. These reforms are critical for improving BC incomes and supporting the health of the entire banking ecosystem. BCs are pivotal to driving economic activity and expanding banking access to millions of rural Indians, and their sustainability is vital for India’s financial inclusion goals. Delaying these changes risks undermining rural banking and slowing progress toward a truly inclusive economy. Immediate collaboration between banks, regulators, and BCs will be crucial to preserving and strengthening BCs as a cornerstone of India’s financial infrastructure.
(D. Tripathy is the CEO of the Business Correspondent Resource Council (BCRC), the Association of Business Correspondents in India, based in New Delhi.)