After the demonatisation, we have seen a huge cash crunch. Despite the recent gains made in overall financial inclusion, credit penetration in India still remains very low. A study by CRISIL in 2013 found that only one out of seven Indians had access to institutional credit. The government of India should actively take participation in mobilising the cash into the economy. Lending money through digital authentication & verifications can help people get loans quickly. This will also ease out the cash crunch phase which is being faced by many people, especially those who are in need of a home loan.
There is a tendency among banks to turn down loan requests of people who don’t have a credit history. Often, banks are reluctant to take pains to tighten up the underwriting process and cut turnaround time through better management.
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“One of the major reasons of low credit penetration is the banks’ tendency to reject loan applications rather than to price loans according to the customer risk profile. As a consumer lending aggregator platform, we have seen that a large proportion of genuine customers do not get loans from banks, even at higher interest rates,” says Naveen Kukreja – CEO & Co-founder, Paisabazaar.com.
Financial institutions which are unwilling to carry out rigorous underwriting process on their own shall be encouraged to invest in P2P Platforms. For that to happen, RBI must issue the guidelines for the P2P Lending sector soon. P2P platforms are lending even to those with no credit history.
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“The Budget 2017-18 should focus on incentivizing other lending institution like P2P Lending for lending to those who have never borrowed from the formal sources. The incentives may include tax breaks and/or credit guarantees up to a limit on such loans,” says Raghavendra Pratap Singh, Co-founder, i2ifunding.
Most of the customers are in urgent need of funds. Rejection of their loan applications often leads to financial crises or missed opportunities. If this is the situation of borrowers using online lending platforms, just imagine the situation of under-banked or under-privileged sections. Therefore, credit penetration with easy documentations process can be increased, it can improve the current situation and breakdowns which people had mainly faced during the demonetization phase.
A government with a vision for everyone having a house of their own by the year 2020 will have to draft some policies against credit penetration to ease out the facility of granting loans.
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Here, the government can play the role of a facilitator by using Budget 2017 to set loan acceptance targets for financial institutions, especially for under-banked and under-privileged sections. “Not stopping at just setting targets, the 2017 Budget should also announce rewards (in the form of tax sops or other budgetary innovation) for lenders achieving their loan acceptance targets. This will go a long way in increasing credit penetration in India,” says Kukreja.
Digitisation will have a major impact on granting of loan smoothly. Using Aadhaar number can ease out the process of verifications and authentication for doing paperless documentation.
“Budget 2017 should also announce some special sops for promoting digital transactions and paperless financial processes. These will be a major booster for the fintech industry, which in turn will allow them to play a greater role in government’s financial inclusion and ‘less-cash society’ objectives,” says Kukreja
The increased use of digital payments would leave sufficient digital footprints for banks to assess their customer’s risk profile and provide risk-adjusted credit products. This can be done by analysing various sorts of data gathered through financial transactions.
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“Lack of data availability is also a reason for under-penetration of formal credit. Digitalisation is a key in improving the reach of formal credit. The Budget shall offer some tax soaps to financial institutions for developing digital infrastructure. Allowing higher depreciation on newly-build digital infrastructure could be another option,” says Singh,
Further adding to “things can also improve if banks and NBFCs decide to make use of the data generated from digital payments,” says Kukreja.
