As we highlighted in NBFC-MFIs As Business Correspondents – Who Benefits? (Part-I) the benefits for NBFC-MFIs and banks are pretty clear – we summarise them below.
Benefits of the BC Model for Key Stakeholders (from Microfinance in India – Is Business Correspondent (BC) the Way Forward?) |
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Benefits for NBFC-MFIs | Benefits for Banks |
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Of course, there are disadvantages too, and (drawing heavily on MicroSave’s study of the potential for MFIs to acts as business correspondents (BCs)) we highlight these below.
Beyond the opportunities presented by the BC model, MFIs need to be cognizant of the adverse impacts that embracing the BC model may have on their current business. We consider below three main types of impacts, though the severity of each may vary depending on the type of MFI. In many cases, these threats are flip-sides of some of the benefits discussed above.
Impact on group meetings. The group articulates the methodology of most MFIs, so they need to be careful in assessing how the introduction of front-end technology and BC operations can support or disrupt the conduct of group meetings. This depends on how the BC channel is structured:
- Field officer or group leader acts as the front-line agent. In this case, savings operations would be conducted during the group meeting. Offering saving services along with credit will result in longer group meetings. In fact, MFIs might opt to shift savings operations to a separate meeting in order to preserve the focus of the credit meeting on repayment. Increased duration of group meeting or more frequent meetings will lead to a reduction in loan officer caseload, which will affect the business turnover and profitability for NBFCs.
- Third-party outlets acting as front-line agents. BC operations with technology enablement can help in making meetings cashless, and that can reduce meeting duration or frequency. Cashless meetings may be more attractive to business-oriented MFIs and especially NBFCs, but they may challenge the models of those with a more didactic approach to development.
Erosion in repayment discipline. MFIs also need to make sure that BC operations do not lead to loss of group liability, which is one of the core principles of group-based microcredit. This may happen if meetings are less frequent, or if the availability of individual products from banks leads people to question the usefulness of group-based products. Loan repayments using technology-enabled BC channels may also lead to a situation where clients blame non-repayment of loans on the front-line agents – or technology-related problems (“The system was down”, “I’d lost my mobile phone”, “The agent didn’t have liquidity”, “I sent money to the wrong account”, “I forgot my PIN”, etc.).
Cannibalisation of existing business. Most MFIs suspect that in the long run, banks might be potential competitors for their lending business. NBFCs and not-for-profit MFIs, which offer microcredit as their core business, suspect that banks may gain access to their clients through the BC channel and start extending credit directly to them. Or, perhaps more immediately, NBFC-MFIs may be uncomfortable with the idea of lending off-balance sheet on behalf of banks; or struggle to negotiate the right commercial arrangements with banks to do so.
The burden on institutional capacity. MFIs need to evaluate the existing management capacity–skills and bandwidth—to negotiate with the multiple stakeholders involved in BC operations. NBFCs with larger operations and used to managing relationships with funders and investors may not find it very difficult to manage the new relationships, although for regulatory reasons they will need to place a separate corporate identity and team to manage this. MFIs and NGOs with smaller operations and with little experience of managing strategic relationships may find it trying and may need to bring in dedicated people with the right caliber. Institutional capacity will also need to effect the cultural change that MFIs need to undergo in order to offer savings along with the credit.
These advantages and disadvantages will require careful research, analysis, strategic planning, and negotiation – the steps to making the transition (and indeed the initial decision on whether to do so or not) are examined in the next blog “NBFC-MFIs As Business Correspondents – What Will It Take?”
More details available in our Agent Network Management for MFIs brochure.
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