The Hindu Business Line : Accredited Loan Providers

The concept of
Accredited Loan Providers will succeed only when there is back-up from banks and other financial institutions and the inherent stigma attached to money-lending disappears.

C. J. Punnathara

It is among the last and vast frontiers of economic deprivation and poverty in the country — the wasted hinterlands of Rural India. Now, in an attack on entrenched poverty, the Government has accelerated extension and expansion of micro-credit on the one hand and created a new idiom of usurer class — the Accredited Loan Providers (ALP). But, will this prove a placebo for an ailing Rural India?

SHG-bank linkage model

Financial interface, through inclusion, is no doubt the best intervention to arrest and reverse economic deprivation. But for strengthening financial inclusion and to make economic deepening a reality, the demand for financial products and services has to come from the target population. This is where the role of self-help groups and micro-credit has proved successful.

The SHGs are constituted from the target population and the demand for financial intervention, assistance and accountability is inherently built into the system —– making it an efficient and responsive tool of intervention. The SHG-bank linkage model has been quite successful inasmuch as 25.84 lakh groups have been linked to banks covering about 33 million women. The total credit cumulatively disbursed is about Rs 14,479 crore. Without doubt, in several regions these institutional arrangements have mitigated the problems of the poor. Their success in empowerment of women, especially poor women, has been remarkable. The access to savings and credit facilities provided by the SHG-bank linkage model would not have been possible by branch banking alone.

But, will the newly-postulated ALP-bank linkages be as effective? It needs to be, given the crying need for financial linkages from Rural India. Even after 60 years of Independence, the unconsummated demand for rural credit is still being satisfied by unorganised moneylenders. However, the question of transforming unorganised moneylenders charging usurious rates of interest would, no doubt, be a formidable task.

Credit disbursement

Data from the All India Debt and Investment Survey carried out by the National Sample Survey Organisation reveal that far-reaching changes have occurred in credit disbursement since independence.

In 1951, non-institutional credit accounted for 92.7 per cent of the total debt, while a paltry 7.3 per cent came from institutions.

As much as 69.7 per cent of non-institutional credit came from moneylenders. By 2002, the share of non-institutional credit plunged to 38.9 per cent while institutional credit grew to 61 per cent.

Surprisingly, between 1991 and 2002, the extension of institutional credit among rural households has suffered a setback, falling from 64 per cent to 57.1 per cent. And credit from moneylenders grew from 17.5 per cent to 29.6 per cent. The express intent behind setting up the Technical Group to Review Legislations on Money Lending by the Reserve Bank of India was to address this financial opprobrium revisiting Rural India.

At the outset, the Report of the Technical Group under the Chairmanship of Mr S. C. Gupta poses the question: “Would the commercial banks be in a position to supply funds to millions of small borrowers with comparable ease and informality, that is, give loans on the basis of personal creditworthiness rather than tangible securities?”

And it states: “The broad conclusion was that in many ways the indigenous bankers constitute an indispensable link between the organised banking system and the class of small borrowers who may not be in a position to obtain funds at the right time and in the right quantum from the organised banking system...”

Realising the inevitability of last-mile intermediaries between banks and millions of small borrowers with no tangible securities but for their personal credit-worthiness, the report suggested that these unorganised intermediaries be roped into the financial mainstream.

This was imperative because the transaction costs of lending to this group are prohibitive, as the loans they demand are so small — often servicing debt anything between Rs 10 and Rs 5 lakh.

They are the lenders of the last resort who are available “anytime, anywhere and for any amount” — while the banking industry is going the opposite way to becoming a ‘class’ or ‘mass’ banking institution.

Transforming moneylenders

The Report also suggested innovative ways to revive institutional finance to Rural India — by transforming existing moneylenders, agricultural traders, commission agents, vehicle dealers, oil/petrol dealers, retired postmen, retired teachers and educated youth into ALPs.

The carrot being accessibility to credit at the priority sector rates, which facilitate comfortable margins for disbursal. While there are several micro-economic planning hiccups, institutionalising rural credit has assumed urgency in rural India.

However, there is a big stumbling block to overcome: the traditional moneylender is often synonymous with the Shakespearian ‘pound of flesh’. White-washing the reviled profession and bringing it back into the mainstream will be a formidable task.

Not to forget the periodic news reports of moneylenders’ usury and suicides from Rural India. At a reasonable rate, the Accredited Loan Providers would not be doing anything different from that of the insurance agent, real-estate broker, mutual fund intermediary or purveyors of other financial products.

Only a strong association and back-up from banks and other financial institutions will ensure that the inherent stigma that is attached to money lending will disappear.

And then alone can the concept of ALPs prove successful.

Related Stories:
‘Accredited loan providers’ mooted
Accredited money lenders’ proposal welcomed
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