RBI allows banks to appoint NBFCs as business correspondents

RBI has permitted banks to engage non-deposit taking NBFCs (NBFCs-ND) as business correspondents, subject to the condition that they ensure there is no commingling of bank funds and those of the NBFC-ND appointed as BC.

While extant rules do not allow banks to appoint non-banking finance companies (NBFCs) as business correspondents, RBI said it has reviewed the existing guidelines in order to achieve faster financial inclusion.

The Nachiket Mor Committee appointed by the RBI had also suggested the appointment of NBFCs as business correspondents in order to achieve financial inclusion faster.

RBI said for appointing an NBFC as a bank's business correspondent there should be a specific contractual arrangement between the bank and the NBFC-ND to ensure that all possible conflicts of interest are adequately taken care of.

Banks should also ensure that the NBFC-ND does not adopt any restrictive practice such as offering savings or remittance functions only to its own customers and forced bundling of services offered by the NBFC-ND and the bank does not take place.

RBI, in its first bi-monthly monetary policy statement for 2014-15, announced on 1 April 2014, had stated, ''On financial inclusion, the fourth pillar, the recommendations of the Mor Committee on accelerating the flow of credit to those at the bottom of the pyramid and enlargement of catchment area of the Business Correspondents (BCs), including through possible inclusion of new entities as BCs, are under examination''.

With a view to providing operational flexibility to banks and in view of the technological developments in the banking sector, RBI has decided to remove the stipulation regarding distance criteria. The banks should, however, while formulating the board approved policy for engaging BCs, keep in mind the objectives of adequate oversight of the BCs as well as provision of services to customers while deciding how to modify extant distance criteria, RBI said.

As per existing guidelines, for ensuring adequate supervision over the operations and activities of the retail outlet / sub-agent of BCs by banks, every retail outlet / sub-agent of BC is required to be attached to and be under the oversight of a specific bank branch designated as the base branch and the distance between the place of business of a retail outlet/sub-agent of BC and the base branch should ordinarily not exceed 30 km in rural, semi-urban and urban areas and 5 km in metropolitan centres.

In case there is a need to relax the distance criterion, the district consultative committee (DCC)/State level Bankers Committee (SLBC) could consider and approve relaxation on merits in respect of under-banked areas etc.

Banks may continue to take measures to address possible reputational risks arising out of appointment and functioning of BCs, it added.