Second Chances: Unleashing Economic Potential And Fostering Inclusion
In India's complex and intricate economic landscape, economically underprivileged borrowers often find themselves on the fringe, unnoticed and ignored. Defaulting on loans has dire consequences for the middle income and the likes. They are banished from the formal financial system.
*Social & Economic Cost of Exclusion: High and Generational
Two-thirds of the Indian economy is consumption-led and thrives on its extensive network of middle-income consumers. Most borrow to ‘move up’ the socio-economic pyramid. They make significant contributions to the consumption ecosystem. They face punitive measures when they default, irrevocably altering their lives.
A Crux study highlights that every fourth borrower is denied a loan owing to poor credit ratings; only one in ten can avail of unsecured and collateral-free loans. Exclusion from the financial system perpetuates poverty, reverses the path to social mobility, and makes it exceedingly challenging to break free from the vicious cycle of destitution. The consequences of this exclusion ripple through the broader economy. A robust economy requires all its components to function harmoniously. It is crucial to elucidate how these loans can be instrumental in recovering from financial setbacks.
A Crux study underscores that excluding a substantial portion of borrowers sets off a domino effect that ultimately affects the nation's overall financial well-being.
*Advanced tools and data analytics are empowering
Lending institutions today have the remarkable opportunity, and responsibility to leverage advanced mechanisms, state-of-the-art tools, and data analytics to evaluate risk with unprecedented accuracy. This empowers them to move away from the outdated practice of categorically excluding individuals who have experienced past defaults.
Lenders should move beyond income and credit history to make informed decisions. Analysing various parameters, intertwining contextual and relevant aspects pivoted on income and credit history can bring in many ‘denied’ individuals into the financial fold. Financial institutions can delve deeply into borrowers' financial histories, meticulously evaluate their repayment capabilities, and provide tailor-made solutions.
*Credit score may hide more than it reveals
While the Credit Information Bureau of India Limited (CIBIL) score has played a pivotal role in assessing creditworthiness, it may not be the universal remedy for India's diverse landscape. The CIBIL and its ilk often overlook contextual factors that can significantly affect repayment capacity, including employment history, family background, and other socio-economic indicators.
The lenders must embrace and adopt a multifaceted approach that transcends conventional credit scoring that can cultivate an ecosystem that not only empowers individuals but also fortifies the economic future.
A potential, even a pragmatic solution, may be to permit family members to join the defaulter as a co-borrower. This approach takes into account the collective creditworthiness of the family, potentially enabling a defaulter to secure a loan by involving financially responsible family members. This not only offers a second chance but also nurtures financial responsibility within families.
To enhance lending inclusivity, the regulator can play a pivotal role. It should incentivise financial institutions to embrace a more comprehensive approach to credit assessment, including factors like employment history, stability, and other socio-economic indicators as crucial determinants of repayment capacity.
*Technology, regulatory framework and mindset change key to inclusion
Initiatives such as Jan Dhan Yojana, Mudra Yojana, and Pradhan Mantri Awas Yojana have been instrumental in extending access to banking services, credit, and housing for the underprivileged. Similarly, the emergence of 'Small Finance Banks' and 'Payment Banks' has expanded the horizon to the underserved and unserved and precisely those who have historically faced barriers to accessing credit.
Advancements in technology, particularly the ascendancy of digital payments and mobile banking, have made financial services more accessible to remote and underserved areas. Lenders must embrace technology to further bridge the accessibility and serve the underprivileged.
Microfinance institutions (MFIs) have emerged as formidable actors in reaching out to impoverished and marginalised sections of society. The MFIs have generated numerous success stories, illustrating how microloans have empowered individuals to establish small businesses, generate income, and free themselves from the clutches of poverty. These institutions must be encouraged, equally incentivised to expand.
Financial literacy programmes and credit counselling are vital for informed financial decision-making, debt management, and bolstering creditworthiness. Successful programmes have positively impacted communities. The Crux study highlights that financial education, community-based lending, and self-help groups (SHGs) have empowered women and marginalised communities, offering individuals agency over their economic destinies.
*Equitable and sustainable development.
The Crux study emphasises the need for regulatory bodies to strike a judicious balance between consumer protection and the promotion of financial inclusion. Supporting the underprivileged and fostering financial inclusion can contribute to the broader agenda of equitable and sustainable development, the study concludes.
The government's role in promoting financial literacy and incentivising financial institutions to adopt a more comprehensive approach to lending cannot be underscored enough. The time has come for the policymakers, particularly the regulators, to nudge, goad, and steer the lending institutions to recalibrate their strategies.
India's economic landscape stands on the threshold of a transformation that recognises the significance of offering second chances to individuals who have faltered in loan repayment. While credit scores have marked a significant stride forward, it is imperative to explore alternative mechanisms that consider a broader spectrum of factors when assessing creditworthiness.
This will ease the path for every individual, particularly those who have stumbled on their financial journey, to afford and exploit an equitable opportunity for economic success. Policymakers must recognise and appreciate that offering these individuals a second chance is not merely an act of compassion, but a pragmatic approach that can invigorate our economy.
This will also ensure that the Indian economic tapestry encompasses everyone, and in doing so, paves the way for a more equitable and prosperous India.
