State-owned banks say the government’s call for financial inclusion and lending to people involved in traditional occupations at a lower interest rate is more of a social obligation as the idea is not financially viable. Bankers also say the idea will be difficult to implement at the ground level as few banks have a presence in rural areas. And, they fear that bad loans would increase.
Shaping future:Banks have been told to disburse loans at lower rates to unbanked workers, including potters
The bankers say though they agree with the government that it is important for them to include the lower strata of society, this kind of financial inclusion makes little business sense as the loan to be disbursed is at the interest rate of 4%, while the cost of capital is higher than that.
“It is not a profitable venture, but it is a social obligation. We cannot afford to be security-minded in this cause,” says Prakash P. Mallya, chairman and managing director of Vijaya Bank. Mallya says loans to these people involve small amounts of money and that he will set targets for loan disbursement to all his branches. He expects advances to the weaker section from his bank to grow by 20% this fiscal.
Finance minister P. Chidambaram had recently said that state-owned banks should consider disbursing small loans at low interest rates to cobblers, fishermen, shepherds, washers, barbers and potters. He had said that banks need to bring these people into the formal banking credit system, while suggesting that they could be given loans of Rs5,000 or Rs10,000 at a 4% interest rate.
According to the finance minister, 41% of the country’s population does not have a bank account and 81% of villages do not have a bank within a distance of 2km. The current requirement of credit for the poor is Rs2.4 trillion and the available credit is about Rs20,000 crore, according to SKS Microfinance Pvt. Ltd, a microfinance institution.
Banks say it will not be easy for them to lend money to these people, particularly in the absence of collateral. “Delinquency is a big issue here as 75% of defaults come from small loans. Repayment culture has to be inculcated,” says Syndicate Bank’s executive director George Joseph. A loan or an asset turns “bad” or “non-performing” when the interest or instalment of principal has remained unpaid or “past due” for more than 90 days, according to the Reserve Bank of India (RBI).
Syndicate Bank has a scheme under which small portions of loan repayments are collected by “pigmy agents” everyday. The pigmy agents are given a 2.5% share of their collection. Joseph says such expenses are a cause of concern in such endeavours.
Meanwhile, bankers say they would have to recognize people who are in genuine need, are engaged in income-generating activities and would not default. These activities would be an additional burden, pushing up their expenses. “Banks will have to do proper identification of the person they will lend to. If that is taken care of, there would not be much to fear,” says Bank of Baroda chairman M.D. Mallya. Under the differential rate of interest scheme, banks have to lend 1% of the previous years’ total advances to people with an annual family income of Rs18,000 in rural areas and Rs24,000 in urban areas.
Experts say banks can make a success out of financial inclusion by trying out new lending models as well as ways to reach out to the poor through low-cost means. “Group lending and financing through the escrow mechanism are ideal ways to go about financial inclusion,” says V. Vaidyanathan, executive director, ICICI Bank Ltd.
An escrow means holding of assets by a third party on behalf of the other two parties in a deal, until the obligations have been fulfilled.
Experts say group lending makes more sense as there are higher risks of bad loan with individual borrowers. Vaidyanathan says the 99.5% success rate of microfinance institutes in the country proves that financial inclusion can be achieved. This chunk of the population offers huge opportunities for bankers, particularly in the longer term and has to be catered to, he adds.