Outsourcing (Direct Selling Agent) v. Business Correspondent route

– Aanchal Kaur Nagpal, Manager (finserv@vinodkothari.com)

If everything’s a priority, then nothing’s a priority. Focusing on core activities while leaving non-core functions sub-contracted to specialized experts has been one of the key modus operandi to achieve efficiency. Banks and other financial institutions are increasingly outsourcing various financial activities ranging from onboarding customers to payment recovery. Since these outsourcing agents perform the activities that a Bank is originally supposed to do, they too, come with a set of regulations from RBI, with Banks being ultimately responsible for activities of their outsourcing agents.

Based on the scope of the outsourcing function and the responsibility dawned upon such agents, RBI identifies two outsourcing modes – Business Correspondence and Direct Selling/Marketing Agents (‘DSA/DMA’), with separate guidelines for each of the two.

In this article, the author has attempted to delve into the differences and commonalities between outsourcing of financial services by Banks to business correspondents and DSAs/DMAs.

Business Correspondents (BCs)

A BC acts as an extension of a bank itself, to provide banking related services in areas which does not have access to such services. The intent of the BC model is financial inclusion, in order to connect everyone to the banking system. The scope includes among other things, creating awareness about savings and other products and education and advice on managing money and debt counselling, processing and submission of applications to banks, etc.

The activities to be undertaken by the BCs would be within the normal course of the bank’s banking business, but conducted through the BCs at places other than the bank premises/ATMs.

Thus, the scope would not just be limited to marketing, sourcing and distribution of financial products, rather, it would be extended to provide banking services to the customers from the place of business of the BC.

The applicable regulations in this regard would be the BC guidelines[1] issued by RBI. No prior RBI approval is required for appointment of a BC. However, it shall be noted that Para 3 of BC Guidelines provides that, while a BC can be a BC for more than one bank, at the point of customer interface, a retail outlet or a sub-agent of a BC shall represent the bank which has appointed the BC. However, RBI vide Circular dated March 02, 2012[2]  has permitted interoperability at the retail outlets or sub-agents of BCs (i.e., at the point of customer interface), provided the technology available with the bank, which has appointed the BC, supports interoperability, subject to the following conditions:

i) The transactions and authentications at such retail outlets or sub-agents of BCs are carried out on-line;

ii) The transactions are carried out on Core Banking Solution (CBS) platform; and

iii) The banks follow the standard operating procedures to be advised by the Indian Banks’ Association (IBA).

Outsourcing [Direct Selling/Servicing Agent (DSA)]

A DSA is an agent engaged by a financial entity, such as a bank, for providing specific services including sourcing customers or    marketing and selling the products of the bank. The functionality of a DSA is limited to marketing, distribution and sale of financial products of the financial entity. A DSA would merely act as an agent of the Bank to solicit the customers for availing the financial products of the bank. The scope of services normally includes marketing of financial products, collection and processing of loan applications. The scope of services of BC is wider than DSA.

The applicable guidelines in case of appointment of DSA (outsourcing agent) by a Bank would be the ‘Guidelines on Managing Risks and Code of Conduct in Outsourcing of Financial Services by banks’[3] (‘Outsourcing Guidelines’)

The compliance requirements of a DSA:

• Enter into an agreement with the Bank for outsourcing certain functions (The contract will have to include key provisions laid down in para 5.5 of the Outsourcing Guidelines)
• The DSA would have to adhere to the Code of Conduct for DSA adopted by the bank.
• Remuneration or service fees would depend on the agreement between the Bank and the DSA.
• No prior approval of RBI is required in case of appointment of DSA.
• DSA can act as selling agent as well as servicer of the loans originated by it, there is no restriction in this respect.

If an sub-contractor intends to offer services such as marketing of loan products, collection and processing of loan applications only, and does not intend to provide banking services as banking correspondent, outsourcing route shall be more suitable.

The following are the dissimilarities and similarities –

Basis	Business Correspondent (Governed by Master Circular on Branch Authorisation)	Outsourcing Agent (Governed by Outsourcing Guidelines)
Dissimilarities
Activities that can be performed	Activities in the normal course of banking business guided by the list of activities provided under the Master Circular viz. identification of borrowers, collection and initial processing of loan applications etc. [para 8(ii)(D) of the Master Circular]	All the activities that the NBFCs can perform except core business functions and activities specifically barred by the regulator.
Physical Presence	In order to have oversight over the activities of BCs, banks are required to have sufficient physical presence through branches.	No such specific stipulation for NBFCs. NBFCs may ensure oversight even without having a physical presence at various places.
Consideration	The role of BC is to act as an extension of a bank’s branch. Hence, the consideration of the BC shall not have a direct linkage with the number of customers solicited.	A direct sourcing agent or DSA may receive a fee that is directly linked to the number of customers sourced.
Consumer Protection measures	● Bank officials are required to personally introduce the BC publicly; ● Banks are required to hold block level meetings where members of public are invited along with the BCs operating in the area, as a measure of social audit of the BC.	No such requirements are applicable in case of appointment of Outsourcing Agents.
Similarities
Nature of arrangement	Both these arrangements are in the nature of outsourcing a service of the lender and hence, outsourcing guidelines shall have to be complied with in either case.
Control and Monitoring	Banks and NBFCs both shall be required to ensure regular monitoring of the activities of BCs/Outsourcing Agents, respectively.
Consumer Protection Measures	Both banks and NBFCs are required to – ● publicly disclose the details of agents appointed by them and vice versa, ● ensure proper training of BC/Outsourcing Agents and their sub-agents as well, ● ensure that the BC/Outsourcing Agent have a business continuity plan in place, and ● ensure there is no commingling of funds or customer information.

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[1] https://www.rbi.org.in/scripts/NotificationUser.aspx?Id=6017&Mode=0

[2] https://www.rbi.org.in/scripts/NotificationUser.aspx?Id=7038&Mode=0

[3] https://www.rbi.org.in/scripts/NotificationUser.aspx?Id=3148&Mode=0