Microfinance in India – Is Business Correspondent the Way Forward?

This paper explores the potential shape and direction of the microfinance sector in India, post the Andhra Pradesh crisis. It proposes the Business Correspondent (BC) model as a solution to this crisis.

Rapid growth of MFIs and the consequent government response, leading to drastic changes in the regulatory environment in Andhra Pradesh, are together largely responsible for the problems currently facing the Indian microfinance sector. MFIs as agents of banks operating as BCs can offer a win-win solution to both banks and MFIs in ways that include the following:

• MFIs can de-risk their operations and offer a wider range of products;
• They can gain client satisfaction and reduced default through the provision of savings, pension and remittance services;
• MFIs can achieve better and more efficient cash management and reduction in costs;
• BC model gives MFIs the opportunity to work with multiple banks to reach under banked segments;
• Banks can use the channels already built by MFIs to reach the unbanked segment;
• Banks can enhance their balance sheets by reflecting assets and liabilities in their books;
• Banks can inspire confidence in the regulator by using and monitoring MFIs as banking agents.