PART TWO: The need for “better” lending to poor Indian

[Continued from last week’s Part 1.]

 

By: Janaki Kibe, South Asia Associate

Loans from moneylenders are problematic for many reasons. For one, interest rates are exorbitant, which means that monthly payments are often barely scratching the principal and instead being used to pay high interest rates and stay afloat. Secondly, moneylenders rarely believe in “working” out a loan repayment schedule. The techniques used by money lenders to ensure repayment can be draconian and harsh.

 

But, with financial exclusive policies formal banking institutions provide little solace to informal, poor borrowers. The terms and conditions of formal sector loans (free and clear land title, salaried occupation) mean that a large portion of would-be clients are driven out of the formal sector. Their only option to access finance is to resort to under the table negotiations with informal moneylenders.

 

While the Reserve Bank of India has tried to pressure financial institutions to lend to poorer households—especially for home improvement—the results have been less than impressive. Most financial institutions are scared away by the myriad of paperwork and illegality that accompanies poor households. But, this is where the public sector has an advantage. It’s like one of my professors used to say “The one who has the gold makes the rules.”

 

It is up to the public sector to be the ringleader—enforce better banking regulations and ensure that financial institutions are embracing real and scalable inclusionary methods. I’ve had enough of financial institutions accepting poor household’s deposits but refusing to give them credit. In many ways, credit functions as the bridge to greater investment—investment in income-generating enterprises, investment in better housing, investment in health. It allows you to move beyond the constraints of your income frontier—even if just for a 6-month or 3-year term. In many cases, that small amount of credit is all that a poor household needs to move out of the trenches of poverty.

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