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New Delhi, Feb. 26: In a unique move, the Reserve Bank of India has allowed banks to outsource banking and financial services to non-government organisations (NGOs), post offices and rural outlets of companies.
The RBI has informed bank chief executives about this move through a letter No DBOD No.BL.BC.58/ 22.01.001/ 2005-06 dated January 25, 2006. The letter says the central bank has decided in “public interest” to allow banks to use the services of NGOs, micro finance units and other civil society institutions, besides post offices, life insurance agents, village panchayats, units of the Khadi commission and IT-enabled rural outlets of companies to provide banking and financial services through the business facilitator and correspondent models.
The RBI has taken this step after meetings between RBI governor Y.V. Reddy and finance minister P. Chidambaram and instructions from Prime Minister Manmohan Singh to examine and replicate the business model of Bangladesh’s Gramin Bank. This is expected to give a fillip to rural credit and micro credit markets.
Sources said the move was undertaken after the Congress party chief, Sonia Gandhi, asked the government to look into ways of improving the flow of credit to rural areas. “The ruling coalition wants to showcase this as an attempt to break the stranglehold of moneylenders in rural areas,” finance ministry officials said.
The letter says that NGOs, micro-finance institutions, societies, registered NBFCs that do not take public deposits and post offices can act as business correspondents. These entities will be allowed to give loans, disburse small-value bank credit, recover principal and interest amounts, collect small-value deposits and sell micro-insurance, pension and mutual fund products, besides receiving and delivering small-value remittances and other payment instructions.
Bank chiefs have been asked by the RBI to conduct “due diligence on such entities” before taking them on board and ensure that “they are well established, enjoying good reputation and having the confidence of the local people”.
Banks have been asked to formulate a scheme on these lines and take the RBI’s permission before going ahead. Banks have been advised to study earlier reports on the issue such as the Khan Group Report, presented in July last year.
Under the business facilitator model, banks can use NGOs, post offices and companies for services such as identifying borrowers, collection and preliminary processing of loan applications, post-loan monitoring, besides recovery. According to the letter, “no approval is required from the RBI” as these services do not involve conducting banking business. Banks have been asked to work out their own fee structure for these outsource agents but cautioned that the fee structure could be reviewed periodically by the Reserve Bank.
It also cautions that the agreement should specifically prohibit these agents from charging any fees from customers directly for any services given.