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Pranjal Sharma

Pranjal Sharma has been analysing, commenting and writing on economic and development policy in India for 25 years. He has worked in print, TV and digital media in leadership positions and guided teams to interpret economic change and India’s engagement with the world

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Politics Of Policy | Creating Credit Worthiness

Bringing 800 million Indians in the financial mainstream should not be just about bank accounts, it has to be about creating credit worthy borrowers

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Certain polices make sense only when you turn them around. And these policies succeed only when they are seen from every angle possible.

For the last few years, Indian institutions have been focusing on bringing financial access to about 800 million who remain on the margin. Much of the attempt has been to ensure that banks, micro-finance institutions and other related bodies reach individuals in remote parts of the country.

The effort then moved to ensuring that even the urban poor have bank accounts. The policy makers realized that distance from a bank branch was not a problem. It was the access to a bank. A migrant to a city could be a few feet away from a bank branch but was unable to open an account. Innovative methods of using banking correspondents and mobile based account management were deployed. As a result, while millions more accounts were created, most remained dormant. The account holders did not know how to manage their account. They still did not have the ability to transact.

The policy makers went back to work and chose to come up with the solution based on Aadhar identification card. This has allowed migrants and those in remote areas to be better known by the banking system. The banks now can depend on an identity that could allow them to know their new found customers better.

Even as this Aadhar based system is rolling out, a new concept is taking root in the financial ecosystem. The financial services industry is realizing that it is still not enough to enhance inclusion. Creating customers is not as important as converting them into credit worthy consumers.

Banks don’t just need depositors, they need credit worthy borrowers. A million new depositors are not necessarily credit worthy borrowers. The solution then is to create millions of new borrowers and not just account holders.

A few pioneers have embarked on this path already.

Payment and remittance company Suvidhaa Infoserve has evolved a unique process of managing remittances that allows a user to have a credit profile. Using a technology platform, Suvidhaa closely tracks the domestic remittances made by its customers. Customers deposit small sums of cash at Suvidhaa counters and have the satisfaction of the money reaching their hometown within hours. Each of these transactions adds to the credit profile of the depositor. Suvidhaa has now launched the Nano credit scheme in association with Axis Bank where its customers can borrow sums ranging from Rs 10,000 to Rs 25,000 with no extra paper work. These consumers need to quote only the customer identity used for remittances. “We run this system based on trust based on track record. And it has worked wonderfully so far,” says Paresh Rajde, Founder & Chairman of Suvidhaa Infoserve.

At the back end of the system, Suvidhaa has created a credit profile based on transaction record. This allows the company to offer loan without hesitation. As a result, the consumers get overdraft facility at 15%, much lower than what a local money lender would charge.

Suvidhaa is enhancing the population of dependable borrowers. So far it has a data base of 500,000 eligible borrowers and it hopes to scale it up to 3-4 million. Or about 10% of its 32 million unique customers.

This concept turns the financial inclusion approach on its head. Instead of looking for depositors, the system is creating borrowers. The real challenge here would be to scale it up in a manner that the entire system benefits. In some ways it complements the self-help groups and joint liability group concept. This also takes it further by placing the onus on repayment on individuals without collective pressure. Consequently, creating millions of borrowers who understand the benefits of disciplined borrowing.

The numbers may look small but they indicate a huge potential for growth. This is reflected in the valuations of companies in the electronic payments business. Great Indian Retail Group was acquired by WireCard for $254 million while Billdesk is valued at $1 billion. These valuations reflect not just the importance of electronic payment business, but its application in creating good borrowers.

If India can create higher numbers of good borrowers, it would ensure that every Indian would sooner or later be connected to the banking system and be part of the mainstream.