Financial Inclusion - Speech – Duly Edited – Financial Literacy – February 2021 - Shimla.

Financial Inclusion - Speech – Duly Edited – Financial Literacy  – February 2021 - Shimla. 

By Dinesh K Kapila (Note – I retired in 2021)

 

Firstly compliments to the RBI for the theme of the meeting- Credit Discipline and Credit for Formal Institutions. Again compliments to the Central Bank of the nation for reaching out to the grassroots as also for the crisp and clear presentation. I have been associated with all the seminars of the RBI at various ROs since many years. The topic of today is most important as we need to expand the credit outreach but with recovery as required. The sub-sectors such as credit score, responsible borrowing and financial discipline are important by themselves. The outlines are well delineated but we need to keep up the sensitisation through the year. The concern of the Special Secretary (Finance) GoHP on credit dispensation plus discipline are well taken.

 

1.   The topic for me is interesting from the viewpoint that from a state-specific viewpoint, we need a higher amount of entrepreneurship and credit flow; there is a certain conservativeness in the State as regards credit which needs to be addressed. Potential entrepreneurs, however, need to be guided on credit dispensation, the mode and credit discipline. This is across the entire spectrum of banks. Incidentally, the potential credit flow for 2021-22 for the State of Rs. 27,000 crore reflects the need to scale up entrepreneurship and credit. At the same time I do acknowledge the reality that entrepreneurship needs a certain period to evolve and that a conducive environment is a facilitation but building up a mass and scale both require time.  For example, the number of contractors say in the Public Works of the scale as required would always face limitations in case a number of comparatively large contracts are floated. This has other aspects too but herein the point is to build up credit flow and entrepreneurship. With credit discipline.

 

2.   We, in NABARD, address mainly the lower end of the spectrum as regard the economic profile, the micro and small industries, the micro entrepreneurs, the small borrowers, SHGs/JLGs, small and marginal farmers etc.. However, the policies, concerns and related aspects remain the same as for MSMEs or the higher economic layers or corporate bodies, i.e. borrowing as per the requirement and repayment as per the terms and conditions.

 

3.    Credit has been, since long ago, recognized as a key driver of economic growth and poverty  alleviation across the world. Access to formal finance can boost job creation, reduce  vulnerability to economic shocks and increase investments in human capital. Without  adequate access to formal financial credit and services, individuals and firms are forced  to rely on their own limited resources or rely on costly informal sources of finance to meet  their financial needs and pursue growth opportunities. As per the NABARD All India  Financial Inclusion Survey report (NAFIS) (conducted by NABARD in 2016-17), 32% of  the households are still dependent on non-institutional sources for meeting their financial  needs. Even in the State of Himachal Pradesh with literacy at 83%, there are 36.8% of the  households who source informal credit in order to meet their needs. Informal credit as in credit from non-institutional sources like money lenders, relatives  etc. The Informal credit system has been existent in India since a long time ago, providing  credit to the people without much hassles or even collateral requirements.  In spite of this, informal credit has certain drawbacks which are as: 

 

Most of the informal lenders charge a much higher interest on loans. There are often various hidden charges entailed in the loan, about which the borrower is not well informed about. The terms and conditions of loan are not clear, often endangering valuables of the borrower at throwaway prices. 

·        Thus the cost to the borrower of the informal loans is much higher.

·         Higher cost of borrowing means a larger part of earning of the borrowers is used to repay the loan and they have less income left for themselves. 

·        The high rate of interest of borrowing can mean that the amount to be repaid is greater  than the income of the borrower and it can lead to increasing debt and debt-trap. People who might wish to start an enterprise by borrowing may not do so because of the high cost of borrowing.  There is no formal contract on the borrowing or cost of the amount borrowed.

4.  There is a growing evidence that credit as one of the key components of financial inclusion  can work as a key enabler for achieving sustainable development worldwide. Credit  offtake through formal sector can boost overall economic output, reduce poverty and  income inequality at the national level.

5.  NABARD since its inception has played a very instrumental role in bringing a large section  of underserved and unserved sections of our rural population in the folds of formal  banking sector. NABARD’s Self help group – Bank linkage programme has, today  emerged as the world’s largest microfinance movement in the world. NABARD has  successfully brought more than 1 crore households into the ambit of banking industry,  either in form of savings accounts or availing credit from formal sources.  

6.  The strength of this movement can be well gauged from the fact that even a pandemic like  COVID didn’t deter these women led SHGs from contributing in fighting the disease. They  emerged as COVID warriors through this tough year and amidst the uncertainty. More  than 19 million masks have been produced by some 20,000 SHGs across 27 Indian states,  in addition to over 100,000 litres of sanitizer and nearly 50,000 litres of hand wash. This  movement that started as a leap of faith some 25 years ago has, today, emerged as a strong  pillar of rural economy.  

7.  Here, I would like to extend gratitude to the Bankers that all these facts/efforts were  possible due to the credit that the Banking community has provided to nurture this  movement. Credit, as a multiple of SHGs’ internal savings, lent by Banks has worked  wonders for this section. To add to it, these women SHGs have also entered the Banking  sphere as Business correspondents/Bank Sakhis. NABARD has cast its footprint through  the launching of this project in HP too, where we associated with HPGB and facilitated  the mobilization and deployment of 50 Bank Sakhis. Moreover Banks have been most encouraging about the credit support  to the youth extended skill development through our varied programmes.  

8.  The present times are challenging as the impact of COVID-19 is there and moratorium has been extended to businesses. As the economy kicks back and gains momentum, we need to remind and sensitise borrowers to adhere to the terms and conditions of sanction. The Agriculture Sector in the State, however, remains a challenge as the credit flow has declined  from last year (corresponding period). The relationship of PACS and DCCBs needs to deepen and widen to promote more transparent banking and business relationships with members. Loans such as KCC need to be scaled up as also for term loans- specially for orchards. Along with the dove tailing with the GOI Programmes. .

9.           Let me address one issue here which is close to my heart. We have a cultural heritage of a ruler and his unparalleled  generosity for the needy. This would be mostly a fable. This has promoted the value in a Sarkaar (Govt.) with unlimited funds and generosity as also an ability to compensate during a crisis. This thought process of a generous ruler and the understanding needs to be duly calibrated and we need to stress upon evaluating credit as per a strictly assessed need and on timely repayment. Add this a disdain for money culturally as stated by many cultural leaders. This impacts financial decision-making. I do find it a little disconcerting that 70 years post independence we are struggling on both ends, credit deepening and credit repayment, ethics and discipline. We also need to realise supply side issues have been addressed but the demand side issues are a concern as of now. I would like to add to it the issue of Insurance, we are really under insured. Again the faith that the Government has to compensate. At least amongst a large section. 

10.                    But as they say, “with credit, comes the responsibility”. The responsibility to repay it, as  per repayment schedule, as per the terms and conditions. All this comes under the term  of credit discipline, to be observed by borrowers. Credit discipline can be defined as "strict  and regular control on promise/s to pay, within designated/ agreed terms." I believe that  though we have penetrated in the lowest rung of our sections, yet there is a growing need  to educate them about credit discipline. In times, when the entire banking system is in the process of integration, the borrowers must be made conscious/educated of regularly  tracking their credit performances so that they do not get devoid of credit opportunities  due to low credit scores. We need to educate our society especially the rural sections about the lending terminology, repayment cycles, credit score, interest levied, terms and conditions of loan sanctioned etc.  

11.          Anecdotal evidences suggest that many borrowers do not know the terms and conditions of sanction and the need to maintain a positive credit score and what it is.  This needs to be addressed. The gap issues mainly about being unaware about what credit from the formal system entails and the mode of conditionalities. That it is a formal binding contract with a certain responsibility on both parties. This needs to be explained more clearly to borrowers at camps and to stress the sources of funds and their relationship with prompt repayment. We also need to teach the difference between the indebtedness (over-leveraging) which impacts a borrower adversely and what is reasonable  or intelligent borrowing.

12.          From a banker’s perspective, credit discipline is integration of all aspects of credit admin. Banks normally have a formal loan pricing policy, an effective committee process and rating system, a strong loan review system, a conducive lending environment etc. I want to add- aware borrowers and who understand the merits of a good borrower/wise borrowing and repayment. To this I will add  and link it with financial discipline, which basically means being in control of your money. You are able to avoid impulse spending and are less likely to be careless in expenditure and would attend to your liabilities wisely. If you are financially disciplined, you would save diligently, set up sinking funds and utilize credit wisely. Financial  and credit discipline is essential for a balanced, financially healthy life- be it a company, micro entrepreneur or a salaried person.

 

13.     Borrowers need to be taught risk assessment of a borrower and credit scores, how a credit score is arrived at and how to generate it, how to maintain credit discipline and even how to maintain a bank account in order.

14.     I believe, Financial and Digital Literacy camps (FDLCs) can effectively serve as a  mechanism for delivery of such information. It would be my pleasure to highlight that  inspite of the COVID pandemic, NABARD has sanctioned an amount of Rs.2.11 crore for the  conduct of 3876 FDLCs across the State in FY 2020-21. These camps will focus on a wide  range of population including adults, farmers, school children, senior citizens,  entrepreneurs, SHGs etc. educating them about financial services they can avail of.  

15.     My suggestions for improving the impact and improving the knowledge about banking / insurance products at financial literacy camps are as follows -  

01. More time may kindly be allotted to the conduct of these FDLCs.   

02. Branch Level staff may deepen their familiarity the basic concepts of these camps, Financial  Inclusion Fund, government schemes etc. 

03. More encouragement as regards the opening of savings  bank accounts, the benefits of formal banking system, usage/benefit of lending  from formal institutions.  

04.Demonstrations about usage of ATM/microATM/PoS/internet banking/mobile  banking also need to be provided to build confidence. Plus precautions about on line frauds.

 

16.     We all are very well familiar that India has emerged as second ranker in the World Findex  Report, released by World Bank. The Banked population in India has risen from 51% in 2011 to 69% in 2017. Despite having a relatively high account ownership, we still house 190  million adults who do not have any bank account. We hold the second largest share of the  global unbanked population. There is an urgent need to address this gap by usage of  platforms like VLPs, FDLCs etc.  

17.     Further, we in NABARD, have already sanctioned 05 demonstration vans in the current  Financial Year so that the Banks deploy these vans during these camps, providing  demonstrations on the usage of new financial technology be it ATM usage, microATM  transactions, swipe at PoS devices etc. Village level programmes and Financial and Digital  Literacy Camps (FDLCs) can serve as an effective mechanism for spreading information  about varied schemes along with addressing the concerns of the rural citizens and credit discipline.

 

18.     An additional point, more and more people are getting acquainted with digital transactions but in spite of all  this, very few are acquainted with the banking terminology. Hence, from this  platform, I would like to emphasize that along with credit/loan opportunities, credit  profile, credit profile maintenance may also be emphasized upon.  

19.     Finally, we need to emphasise that Customers who are new to credit or even advise older customers that they need to be taught that maintaining a healthy credit  history shall go a long way in helping to get a loan quickly, smoothly and on attractive  terms. Consumer credit history is an indication of his / her financial reliability and  trustworthiness.  

1.  For the maintenance of a good and healthy credit score, they should be taught that  timely and regular repayment record forms up to 30% of the credit score and is,  therefore, is a major factor in maintaining a good score.  

2.  Paying credit card bills and loan EMIs on time in full and on or before the due date  is vital.  

3.   Every single missed, delayed or partial payment is reported to the credit

     bureau  and too many such incomplete payments can adversely affect credit rating. Across all socio economic segments.  

4.   Do not apply for multiple credit cards or loan products at the same time.       Every  time you apply for credit, the lender makes an enquiry regarding your  credit score  and history. Too many such enquires within a short time has a negative impact on  your credit score.  

5.   Too many applications, without corresponding approvals, causes a further decrease in your credit score. 

6.   We should also teach them that there is no Bank loan that speaks of itself as “Give me a loan and then leave me alone”. We need to teach them that “timely return of a loan makes it  easier to borrow the second time”. 

7.   Do emphasise that Bankers do understand the genuine financial difficulties of borrowers alongside.

 

Before I conclude, though I am going off on a tangent, we need to assess the number of 10+2 Schools offering Commerce as an option in rural and semi urban areas. Plus even science. This would deepen financial and credit literacy. Maybe inputs on the financial aspects of Agriculture, Animal Husbandry and the Rural Non Farm Sector activities too, if not Commerce as such. This would be important as a base to build awareness. This is common to most States. I thank the RBI and express my gratitude towards it for making such an important topic as a theme for Financial Literacy week. 

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