A recent survey by the Reserve Bank of India points to troubling issues within the RBI’s model of financial inclusion. It found that 16 per cent of traceable business correspondents have not done a single transaction till date (47 per cent of BCs could not even be reached for the survey). The RBI permitted BCs with the objective of ensuring greater financial inclusion in the early 2000s. The findings of the survey raise difficult questions regarding the success of the approach of strict regulation and supervision towards the sector and to financial inclusion in general.
When first introduced, the BC model was primarily focused on banks as agents of financial inclusion. It did not allow for the demand for other types of financial services to be met organically through market forces. Additionally, a number of other regulatory barriers focused on safety and stability prevented the model from taking off. These included restrictions stipulating that a BC has to have a bank branch within 15 km in rural areas. Moreover, a single BC could act as a correspondent for only one bank. For-profit companies were not allowed to become BCs until 2010. BCs were, further, not allowed to charge customers (they received remuneration from the banks) or differential pricing policies (by peak hours, geographical location etc). At the same time, there was a target-driven mandate imposed on banks. All these requirements reduced the space for competition on prices or quality, and the regulatory framework effectively made the BC model a non-starter.
Many of these regulatory barriers have been undone over the years, and the BC model has been liberalised to some extent. The rate of reform, however, has been extremely slow. It is still focused on the safety and stability of the system, rather than allowing the market to develop and then intervening to prevent market failures. The paternalistic model of intervention also displays low regard for the financial viability and business models of entities involved in the BC business, and is illustrative of the tendency to restrict competition and market forces for the sake of stability. The goal of a regulator should be to allow the market to develop organically, and to step in only when the safety of the system is threatened. Inclusion need not always be mandate driven. It can also be propelled by the market.