A chocolate nudge can serve a public purpose

Personal contact tends to work its magic on the former, perhaps by evoking guilt through the very amiability of the act.
Personal contact tends to work its magic on the former, perhaps by evoking guilt through the very amiability of the act.

Summary

SBI’s use of behavioural insights to identify likely retail defaulters and pre-empt defaults is novel and welcome. India’s economy needs corporate credit to outpace retail loans, though

In business as in daily life, how someone behaves can reveal much about what the person is thinking or planning to do. Tell-tale signs exist; what’s needed is a way to identify them. If this can be done, it could serve as a timely input for pre-emptive action that may alter an outcome favourably. The use of behavioural readings, however, isn’t all that common. So it’s interesting to see the country’s largest lender, State Bank of India (SBI), experiment with a novel idea that plumbs the human psyche. The state-run bank has started catching involuntary signals sent by retail borrowers of a weak will to make their repayments. How? In the bank’s observation, clients who did not answer reminder calls for their dues tended not to pay. The correlation was strong enough for SBI to devise remedial measures. If such an alert is triggered, an executive is sent to the debtor’s home on a surprise visit with a box of chocolates to make a polite memory knock. This soft nudge is reported to have shown positive results. It has helped reduce retail defaults.

Of course, repaying bank dues is not only about the will to do so, but also the ability. Personal contact tends to work its magic on the former, perhaps by evoking guilt through the very amiability of the act. It is also harder to evade an obligation while literally facing the one towards whom it’s due. There may be a small fraction of borrowers who never intended to repay, and no blandishments can fix mala fide intent. As for the capacity to pay, households under actual financial stress might perhaps be left squirming even more by the bank’s niceness. As floating rates of interest have been on the rise since May 2022, when India’s central bank began withdrawing its easy-money policy, payback burdens have been getting harder for many homes to bear. Delinquency rates usually rise during rate upcycles. What’s different now is the technology in use. SBI has reportedly engaged two fintech firms equipped with artificial intelligence tools to help it keep defaults down. In an industry that has seen scandals involving coercive means of loan recovery, the new approach taken by SBI is exemplary.

Clever management of retail asset quality is crucial now that such lending occupies a significant chunk of the loan books of most banks in the country. Although lending rates have risen, loan growth remains robust. For SBI, retail loans form its largest asset class. Its retail asset total was above 12 trillion at the end of the first quarter of 2023-24, up 16.5% from the same three months the previous year. All loans counted, SBI’s assets stood at a little over 33 trillion. Retail-led asset growth has been the sector’s broader story too. This has been so for many years now. At one time, people had EMIs for home and car loans. Now they have monthly instalments for everything from family holidays and wedding parties to all manner of big-ticket purchases. While banks lend money in whichever segment demand shows up, and retail lending does help the economy by supporting consumption, it is still disappointing that classic corporate credit has not yet staged a big enough comeback to signal stronger longer-term economic growth prospects. Businesses typically borrow to fulfil working-capital needs, but a business loan boom could also signal a revival in private investment of the magnitude needed for the government’s ‘crowd in’ plan to finally be called a success, allowing a sharp fiscal pull-back without endangering growth. For the economy’s sake, corporate credit must roar.

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