Overview of Agency Banking in India

Introduction:

Agency banking is a process in which traditional banks extend their network of branches and services through authorized agents. It is a cost-effective way of banking and helps reach out to rural areas, where setting up physical banks is not possible most of the time. Internet banking is also a form of agency banking. Agency banking is gaining popularity due to various reasons like product availability, risk management, improvement in financial inclusion, and many more.

The combination of internet and smartphone penetration has served well for the financial industry, especially the banking sector. It has empowered banks to offer their services to a person irrespective of his location. This new phenomenon is also called branchless banking for obvious reasons.

History of Digital Finance Services in India

In July 2014, the Reserve Bank of India released draft guidelines for licensing of ‘payments banks’ or ‘differentiated banks.’ In the same year, different organizations like the Business Correspondents Federation of India got launched. Pradhan Mantri Jan Dhan Yojana (PMJDY) was announced which aims to link every household with banking facilities. PAHAL (Direct Benefit Transfer) was also launched.

The next year, schemes like Atal Pension Yojana were launched to aid the elderly and retired persons. The Reserve Bank of India (RBI) issued the first “payment bank” licenses in February 2015. Payment banks are different from normal banks such that they do not give loans and are free of credit risk.

After the launch of UPI in 2016, internet transactions increased rapidly. In September 2016, RBI issued guidelines regarding new card acceptance infrastructure, and on how to enable the processing of payment transactions using Aadhaar-based biometric authentication. The demonetization of 500 and 1000-rupee notes furthered the use of such transactions and DBI delivery channels. 

After the start of Paytm Payments Bank operations in 2017, linking of Aadhar with bank accounts was made mandatory.

Payment banks have third-party agents who earn their income through commission received depending on the number of accounts opened.^[1] (Shreya Chatterjee, 2017)

Components of Agency Banking

Multiple factors are playing important roles in this process of agency banking:

1. Agent banking service providers – they are responsible for activities like operating service, marketing, cash handling, branding, 
2. The Bank or Financial Institution
3. Banking agents and sub-agents – these are the retailers that act on part of the bank and perform activities like cash transactions (cash in and out), balance inquiry, collecting documents, generating mini-statements, insurance registration, loan processing, etc.
4. Mobile operators – In the form of SMS, USSD connectivity, etc.
5. Consumers

However, Banking agents and systems have a long way to go in India, especially in rural areas due to low digital literacy, poverty, and income is below the poverty line for 70 percent of the population. For example, only nine percent of those with lower education levels are online, as compared to 38 percent for those with higher education levels.

Not only in India but other low-income countries like Africa and other Asian countries like Indonesia, Pakistan, Bangladesh, etc, cash remains an important way of how economic and monetary transactions are conducted. But they are also a global success, especially in these countries along with traditional banking systems in place. For example, In Kenya, the local government’s strategy to increase the number of banking Kenyans from 30 percent in 2013 to 70 percent in 2030 acted as a stimulant to the process. To enable this, the government amended the Finance Act 2009, as per Kenya Gazette Supplement, allowing banks to use banking agents to offer services on their behalf. Even in Latin American countries like Columbia, Brazil, and Mexico, billions of accounts were opened within the first three years after introducing agency banking.^[2] (Ho, 2017)

In 2012, a national survey was conducted by the College of Agricultural Banking nationwide. A case study of a bank agent of the State bank of India, DK Sarkar shows the reality of agency banking in India. Despite agent certification being available and 50000 rupees invested by him for building an office, the bank hasn’t made any of the accounts active yet. 

Similar to Sarkar who is a CSP, i.e., Customer service points sourced by Business Correspondents, are mostly unavailable for transactions, thereby limiting the number of clients to one CSP. Although the position of CSP elevates their recognition, connections, and respect in their respective villages and societies, the low income and lack of support, training both from the government and the banks demotivates the agents to be consistent or perform well.^[3] (Banerjee, 2012)

Agency banking is not restricted to local banks but also foreign financial institutions. A foreign bank doing business in another country on behalf of its parent bank may be known as a foreign agent bank in that country. These foreign agent banks would be subject to the regulations framed by the country’s central bank for operating in that country. They might also have access to perks given to local banks such as discounts, funding, etc.^[4] (Agent Bank, 2021)

Another research study was conducted by a consulting firm MicroSave for four years in 11 focus countries including India with funding from Bill & Melinda Gates Foundation and the United Nations Capital Development Fund (UNCDF). The report is a representative sample of 3048 agents of which half belong to rural areas.

Some of the findings include:

1. Recruitment of agents has slowed down indicating that service providers are only looking to maintain or develop existing operations instead of expanding or increasing hold. 
2. Fraud cases have been a cause of concern. Most of them relate to fake or demonetized currency notes. Also, reversal of transactions and deposition of more money from the customer’s account than the actual amount given to agents are other incidents of fraud.
3. Different policies have shaped the dynamic market and also the interoperability of payment banks shortly, which calls for the adaption of relevant strategies accordingly. 
4. The emergence of new players hasn’t altered the domination of public sector banks (SBI, as an example). Private sector banks have a more massive presence in metro cities than rural areas. 
5. The number of experienced agents has increased. Most of them have been in business for three years. They can now utilize this channel of the network to offer a wider range of financial services.
6. G2P facilitation has been a major driver in increasing transactions in rural and non-metro urban areas. At least 69 percent of the agents in the country offer government services. Linking of Aadhar along with insurance and pension registrations has the highest demand.
7. Most of the agents (over 90 percent) indicated that they are comfortable using the specific technology platforms that the providers offer. However, 30 percent experienced downtime while using the mobile banking app while 65 percent experienced downtime while using bank-specific software. Denial of service has been due to the finger authentication malfunction. 
8. In India, over four-fifths of agents travel to an external rebalancing point. This is in contrast to other Asian ANA countries like Pakistan and Bangladesh, where agents have the liquidity delivered to them. That is, Banks are still the common source for rebalancing. 
9. Refusal to comply with sitting reasons of longer processing time or difficulty in processing.^[5] (Aakash Mehrotra, 2018)

Conclusion

To boost the network system, demand-side and supply-side challenges need to be overcome. One way to do this is to allow customers to benefit from non – DFS or traditional offerings which are already very much valued, from DFS services. Governments can further fuel demand for DFS by delivering government-to-person (G2P) payments through diverse types of DFS providers. Using agent recruitment models based on gender also can act in favor of female customers who constitute most of the rural population and aid in financial independence and inclusivity. Effective marketing also aids in increasing demand and awareness of services among customers.

Supply-side challenges include lack of agents or adequate income to recover costs and operating reliable technology and infrastructure. Geospatial mapping allows monitoring of areas lacking agency banking networks and leveraging these identified gaps making agents and BCs more viable to create incentives serving a wide range of users and geographies.^[6] (Emilio Hernandez, 2021)

---

References:

[1] Shreya Chatterjee, M. S. (2017, December 18). How Successful Are Banking Agents in Bringing Digital Financial Services to New Customers in India? Retrieved from https://www.centerforfinancialinclusion.org/how-successful-are-banking-agents-in-bringing-digital-financial-services-to-new-customers-in-india

[2] Ho, J. (2017, August 10). Why agent banking is a win-win. Retrieved from https://www.businesstoday.in/opinion/columns/story/why-agent-banking-is-a-win-win-84309-2017-08-10

[3] Banerjee, S. S. (2012, June 6). Building India’s Model of Agent Banking. Retrieved from https://www.cgap.org/blog/building-indias-model-agent-banking

[4] Agent Bank. (2021, September 23). Retrieved from https://cleartax.in/g/terms/agent-bank

[5] Aakash Mehrotra, A. T. (2018, February). State of the Agent Network, India 2017. India Country Report.

[6] Emilio Hernandez, S. U. (2021, October 12). Why Do CICO Agent Networks Matter and How Do We Promote Them? Retrieved from https://www.cgap.org/blog/why-do-cico-agent-networks-matter-and-how-do-we-promote-them