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Under-banked willing to pay for BC services in India – MicroSave Report

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Under-banked willing to pay for BC services – MicroSave Report

Microfinance Focus, May 24, 2011: According to a recent study undertaken by MicroSave, there is a significant demand from under-banked clients for more convenient banking facilities and over 70 percent of the study respondents expressed their willingness to pay for Business Correspondent (BC) services.

Sighting various difficulties in bank transactions which includes travel cost, literacy barriers and unhelpful staff, close to 70% of study participants indicate willingness to pay for the local and more personalised convenience of business correspondents. Almost half seem to prefer a percentage model (1-2% of the transaction total), while close to 30% opt for flat fees.

MicroSave, one of the leading research and technical assistance providers for financial services conducted a study – ‘Cost and Willingness to Pay’ (CWP) in the states of Rajasthan, Tamil Nadu and Uttar Pradesh on the services business correspondents provide in rural areas and the willingness of customers to pay for such services.

The CWP study is the second in a series of research studies that are being conducted by MicroSave and funded by Omidyar Network to support financial inclusion agenda in India. The first report of the series on Dormancy in No Frill Accounts (NFA) has been published.

According to the report, many of the respondents accept the rationale behind charging a small fee for withdrawal and account opening if branch visits are eliminated. Although price sensitivity is high among customers, they are well aware of how banks make money. No one thinks fees are acceptable for savings deposits or “maintenance”, particularly for no frills accounts (NFAs) with no ATM cards and no cheques

The report claims that building customer trust in the BC, in the security of their payments and deposits, in the new system will take time. Adoption will be cautious at first and full use of the various bank services will depend on the efficacy and reliability of initial transactions.

While 27 banks have implemented the BC model and some 14 million new accounts have been opened, many with the assistance of technology service providers, the adoption has been disappointing and the overall viability of the BC model is currently under review, the report says.

A recent multinational CGAP study on the larger issue of agent networks reveals that daily net profits for Indian agents range from $0.69 to $3.99. Costs, including insurance, can be as high as $0.99.

Persuading prospective customers, particularly poor ones, that recurring deposits, insurance premiums, or even mobile loan payments make sense requires time, patience, sophisticated sales skills, and full bank support. However most BCs, have few of the above, says the report.

The report furthers highlights that close to 13 percent of the respondents claimed that they were unwilling to pay for BC services arguing that all deposits and withdrawals at the bank are free, and BC services should be as well.

Customers are of the opinion that since banks will earn some money from their deposits, there should be no charges for their personal capital investment or for new account openings.

Trusting a local business correspondent, even one authorised by a bank is a crucial concern for customers and they also worry that deposits in outstanding credit situations, with the shop owner or the BC, may prove uncomfortable and difficult to negotiate.

Since the major requirement for most rural poor is available credit to help ease difficult agricultural cycles, and to pay for education, health care, marriages, funerals, and emergencies, BCs are expected to have more tailored offerings for villagers’ needs.

The report claims that recurring deposits and the favourable terms of “commitment savings” are becoming more widely known – and appealing. BCs who can offer these and other options that fulfil their customer needs will fare better than those who have only a limited suite of services.

Despite of an unbanked population of over 400 million in India, most bank branches are reluctant in serving this clientele. A recent report by the Confederation of Indian Industry and Boston Consulting Group on efficient, low-cost distribution networks for these marginal customers does not encourage the branch model.

With an estimated cost-income ratio of 10-12, already well above any sustainable norm, Indian banks would need approximately Rs.200 billion to extend their branch networks to include all the currently excluded households. Previously, microfinance institutions (MFIs) have helped share costs and responsibilities for these customers, but their role remains uncertain moving forward.

To help address limited branch networks in rural areas, Reserve Bank of India introduced new guidelines in the year 2006 which included Business Correspondents as bank intermediaries to encourage savings and offset the heavy emphasis at the time on credit and loans. More recently, the RBI has eased restrictions for mobile network operators (MNOs) and other for-profit companies, allowing them to become more directly involved in the BC model and mobile money initiatives.

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