Targeting The Next Exclusion - The Credit Invisible Indians
Millions of creditworthy individuals and micro-enterprises are financially underserved as they do not have any kind of formal credit scores that could help them qualify for bank loans. In the US, for instance, 1 out of every 10 Americans does not have a credit score. In India, more than 65% of the households do not have credit scores.
About 3.5 billion of the world's population does not have any credit history in the records of any of the credit reporting companies and is, therefore, credit invisible. This is a problem particularly in parts of far-flung rural India where people find it difficult to borrow from formal institutions. Despite being creditworthy, lack of a credit score and lack of knowledge about financial services forces these people to borrow money from informal lending sources at exorbitant interest rates, leading to down-the-line indebtedness.
Meet Tanuara, a 28-year-old tailor from Muzaffargarh, India who works on the sewing machine that her parents gifted her as part of the dowry. She earns about Rs.7000 per month and lives in a joint family with 10 members. Her husband works in a private company and the joint household monthly income is more than Rs.60,000. She dreams of running a tailoring shop with 3-4 sewing machines with a few workers. Although she has a 1-year-old bank account which was opened at a nearby Bank Mitra point, she has been denied a loan by a commercial bank. There are millions of micro-entrepreneurs like Tanuara, who are creditworthy, have the willingness and the ability to pay but have been denied loans by banks.
The Government of India and RBI has provided the much-needed impetus and policy support needed to deepen financial inclusion in India. However,
To disrupt lending to MSMEs and generate gainful employment, it is important for the RBI to go back to the drawing board and reinvent lending with forward-thinking policies
The Government of India (GOI) and the RBI have been able to bring down the number of unbanked citizens from 800 million to less than 200 million and provide the much-needed impetus and policy support to deepen financial inclusion in India. However, it is now time for PMJDY 2.0 where the focus needs to be on increasing the availability of credit to the informal MSME segment, mainly to the credit invisible in India and disrupt the way banks lend. The first step towards this would be to relook at the existing stringent process of loan approval in commercial and development banks. A dipstick amongst suburban and rural branch managers revealed that they simply reject loan applications when the applicant does not have a CIBIL score. High NPAs, with excessive penalty, and discourage branch managers from sanctioning loans of rural masses and small savers if they do not fit rigidly within the guidelines laid down by the bank. The documentation process is also cumbersome with mandatory field visits, insistence on availability of non-perishable goods and IT returns for 3 years. A first-time borrower like Tanuara with just 1 sewing machine simply does not meet the cut.
If GoI wants to disrupt lending to MSMEs and generate gainful employment, it is important for RBI to go back to the drawing board and reinvent lending. A no-frills, end to end technology driven lending process with an alternate credit scoring system and customized products that takes into consideration the problems faced by rural India will be the first step in this direction. Leveraging the existing robust and vast Bank Mitra network for distribution of micro-loans will then ensure that India is on its way to an empowered entrepreneurial, self-reliant society.
To disrupt lending to MSMEs and generate gainful employment, it is important for the RBI to go back to the drawing board and reinvent lending with forward-thinking policies. The commercial banks could make loan documentation less rigid by allowing villagers to apply for loans using just an ID proof and past savings history. This lending process can be driven by a no-frills, end-to-end technology with an alternate credit scoring system and customized products for rural India. Lever-aging the existing robust and vast Bank Mitra network for distribution of micro-loans will then ensure that India is on its way to an empowered, entrepreneurial and self-reliant economy.