Are Banks and Microfinance Institutions Natural Partners in Financial Inclusion?

This paper explores how banks and MFIs in partnership can achieve financial inclusion in the long run while working on the business correspondents (BC) model. In 2006, the Reserve Bank of India (RBI) permitted banks to use services of third parties as BCs to increase its outreach beyond its branches.This paper identifies banks, BCs, agent network managers (ANMs), customer service points (CSPs) or agents, and technology service providers (TSPs) as distinct players in this model. The BC channel provides banks and their MFI partners with a plethora of opportunities. Findings of the paper include:

• Banks must go beyond no-frills account and develop alternative value propositions for customers in coordination with MFIs;
• Banks efforts in financial inclusion should focus on constructing an attractive product proposition, rather than channel building to fulfill customer acquisition mandates;
• MFIs must be careful in making commitments to banks which may entail disruption to their group operations, and investments.

The paper concludes that MFIs are potentially an excellent channel and product development partner for banks as they can leverage their existing engagement with the customers. However, the entire sector is still searching for a blueprint, and MFIs have valuable inputs to bring to that.