Rural lending post-COVID-19: How to put cash in the hands of people

COVID-19 has wreaked havoc in the global economy and India is no exception. India has paid a heavy economic price due to the much-required stringent lockdown leading to job losses, salary cuts, and spiralling unemployment. While much has been spoken about the impact of COVID-19 from a national or urban perspective, there is very little discussion on its impact on the rural sector.

The lockdown phase has had a deep impact on the lives of hundreds of millions of the rural poor. Many of them still struggle to meet their basic needs and rely on daily earnings to survive. They have witnessed their income sharply decrease or even disappear without financial buffers or other safety measures to fall back on. Migrants (around 80 million), the backbone of rural savings, have also seen their savings deplete and livelihoods disappear due to the lockdown.

Post-lockdown, there was an urgent need for economic revival and reconstruction and the monetary stimulus was a much-needed shot for the flagging economy. There are 65 lakh Self Help Groups (SHGs) in India, largely rural. With the reverse migration, these SHGs can play a significant role in the revival of the rural economy, besides providing jobs for the returning migrants.

The high touch at a higher frequency model of Self Help Groups (SHGs) will need to go through a transformation post the pandemic. The coronavirus pandemic has thrown up many challenges for the members of Self Help Groups (SHGs) about conducting physical meetings, mobilising savings (physical currency notes) of the group, rotating the money for internal lending among the members, depositing the physical cash towards repayment of loans, and maintaining  hard copy of records. Digitising the channels end to end can make their lives simpler and safer. This requires that the loan sanction process shifts to a completely automated, paperless, Aadhar-authenticated process. Digitising end to end will also help reduce fraud, save time and cut down costs significantly. This will also eliminate the subjective element in the loan sanction process and make processes more transparent and real-time. In addition to this, the Reserve Bank of India’s (RBI) approval of video KYC in January 2020 will significantly help banks transition to a fully digital mode for loan fulfilment and enable same-day loan sanction.

Besides SHGs, public sector banks (PSBs) and Gramin Banks can play a big role in revitalising the rural economy by riding on the established digital banking infrastructure of Business Correspondents. Rs 15,000-Rs 50,000 loans are the typical segment for MFIs. Most public sector banks (PSBs) are not engaged in lending to this ticket size due to the elaborate and high cost of processing. For example, any loan of Rs 50,000 requires multiple visits by the branch manager before it gets sanctioned – field inspection, referrals interview etc. Moreover, banks are expected to fulfil separate documentation requirement for lead generation, sanction and disbursement.

As these transaction processes are very paper-based, tedious and laborious, loan fulfilment can take anywhere from a week to even 3 months. There are 30+ crore PMJDY customers with commercial banks. There is enough data around their savings and cross-selling patterns available with the banks. This data-bank can be mined to define same-day end-to-end loan fulfilment processes around small-ticket loans (say Rs 15,000 to Rs 50,000) without compromising on the quality of the loans.

While the rural segment is a huge untapped opportunity for the banking correspondents and the banks, the exclusion is higher due to the large segment of credit invisible people. Mandatory and wiggle-less structural frameworks drafted by CIBIL leads to a largely excluded market. The PMJDY digital distribution network of Bank Mitras is ideally poised to transform the way small-ticket loans can be originated.

By enabling sufficient cash liquidity available to banks, they can provide faster and better credit facility to customers at the time of their need. To increase repayment of loans by customers, banks can offer exit schemes where they can repay the amount in instalments daily or weekly as per their earnings for the day. Digital collections will also help optimise the cost of servicing customers. Additionally, a strong credit disbursal in rural areas through smaller non-banking finance companies (NBFCs) can further help in the demand generation among rural people.

The urgent need of the hour as India grappled with the pandemic was to get cash into the hands of customers and the Rs 500 relief package to PMJDY women beneficiaries have helped families tide over the immediate crisis. However, such small sums will not be enough to stimulate demand. The e-monetary stimulus will help MSMEs quickly start generating economic activity. However, just focusing on the supply side will not be enough. Though demand has picked up with the easing of the lockdown, it will be a long time before it gets back to pre-pandemic days activity. Banks and the government would need to go the extra mile and play an active role in demand creation/fulfilment which will be needed to revive jobs and revitalise the economy.

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