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The Reserve Bank of India today permitted non-banking finance companies to act as business correspondents (BCs) of banks, allowing them to offer limited services with the aim of spreading financial inclusion.

"It has been decided that banks will be permitted to engage non-deposit taking NBFCs (NBFCs-ND) as BCs," the RBI said in a notification.

So far, NBFCs could not be appointed as BCs, which provide limited services on behalf of banks in unbanked areas.

The RBI said there should be a contractual arrangement between a bank and an NBFC-ND to ensure that possible conflicts of interest are taken care of.

Banks must ensure the NBFC-ND does not adopt restrictive practices such as offering savings or remittance functions only to its own customers or bundling of their services, it said.

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

To provide operational flexibility to banks and in view of technological developments in the sector, the distance criteria for BCs have been removed, it said.

However, when formulating the board approved policy for engaging BCs, banks should keep in mind the objectives of adequate oversight as well as provision of services to customers while deciding how to modify extant distance criteria, it added.

The RBI said the existing guidelines on the appointment of BCs were reviewed taking into account recommendations of the Nachiket Mor Committee.

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