In the previous article of this series we argued that India needs an Apex Bank for Urban Development (ABUD) urgently to address many issues of complexity in urban microcredit. Concluding the series, the following points will thus help design an ABUD.
Lending to urban informal sector producers should not be seen as a social obligation. Instead, banks and financial institutions with substantial rural presence, should be made to see the urban informal sector as a profitable business proposition. Certain policy, product and procedural changes would improve the usefulness of existing banks and financial institutions and specialised new institutions focusing on this market segment:
Recognising the dispersed and small size of the credit requirements of urban informal sector enterprises, it is important to acknowledge that transaction cost in servicing them will be high. This will have to be added to the interest rate. Thus, policy makers should not only allow, but indeed encourage removal of ceilings on interest rates on small loans. In this context, the Reserve Bank of India's restriction on interest rates is regressive, for loans by commercial banks below Rs. 2,00,000 and separately for loans below Rs. 25,000. It tends to discourage commercial banks to lend to the urban informal sector. There is a presumption that politicians will oppose deregulation of interest rates. Yet, when interest rates for RRBs and cooperative banks were deregulated in 1996, there was absolutely no demur by any politician. The RBI needs to be more courageous and remove this interest rate restriction, one of the last remaining vestiges of earlier generation mindset.
As interest rates are deregulated, it is important to simultaneously promote competition among financial institutions to ensure that they do not make super-normal profits. In addition, new types of players including urban cooperative banks (UCBs), NBFCs and MFIs should be encouraged to compete with each other to serve this market. The fact that this can happen can be seen from the housing finance sector, where just ten years ago, financial institutions required a lot of push but now compete with each other for this market.
It is important to design and offer loan products specially tailor-made for the urban informal sector producers. Already SIDBI offers refinance for a product known as "composite loan". This is a combination of working capital and investment capital for fixed assets, both offered as a medium term loan. While this is a good product, usually its repayments are structured quarterly or half yearly, which is not in tune with the cash flows of urban informal sector producers. As far as possible, repayment should be monthly or fortnightly, which capture the cash flows and enables borrowers to remain in good standing with the lending agency. Of course, this frequency means that banks will have to learn to collect repayments from the borrowers' doorstep. This is being practiced by many MFIs in the country.
Apart from credit, urban informal sector producers also require saving services and insurance. They need to be provided these three core financial services as a package, preferably by the same retail channel or agent. Banks and insurance companies need to evolve methods by which they can employ such agents for retail savings and insurance.
In addition to different financial products it is also important to innovate with different distribution channels. A typical bank branch is too formal and too unfriendly for an urban informal sector producer. What they need is service at their doorstep, whether it is appraisal or disbursement of loans, collection of repayments or small savings and distribution of insurance services. Thus, banks and FIs need to learn to get out of their offices, which will be difficult for their staff. Hence they need to deploy retail agents, traders, input suppliers, artisan guilds, neighbourhood groups, associations, MFIs and a host of other non-conventional distribution channels.
The dramatic improvement in telecom connectivity should form the basis for a complete re-engineering of how financial services are delivered to urban informal producers. Wireless in local loop and cell phone networks, broad band cable networks, low cost ATMs, credit cards, mobile vans with hand-held computers, smart cards, STD PCOs and IT kiosks and other emerging technologies must be pressed into service of the urban informal sector producers, so that they can get access to capital. For example, the bank debit cards could be issued to informal sector producers and would replace a line-of-credit type of loan.
The plethora of public sector so-called financial institutions setup to lend to priority communities (SC, ST, BC, Women) should be re-engineered to become wholesale lenders to retail institutions such as MFIs. These wholesale institutions could provide bulk funds at concessional rates to retail MFIs, specifying the nature of the end user. This would reduce the need for all of them to have a network of field officers and maintain sophisticated portfolio management systems.
There are many government schemes such as SJSRY, in which the loan from a bank is matched with the subsidy from the government. Learning from the Integrated Rural Development Programme experience, in which subsidies negatively affected repayments, the Swarna Grameen Swarozgar Yojana has substantially back-ended the subsidy. This means that a borrower has to repay a major part of the loan to qualify for the subsidy, which is in the meantime kept in the bank as an earmarked deposit account. While this is a step in the right direction, the logic of providing individual subsidies is itself questionable. Instead of this, subsidies should be diverted towards skill and business training of potential borrowers, in addition to creating production and marketing infrastructure and common facilities. This has also been recommended by the 10th FYP Working Group on Poverty Alleviation.
Credit is a necessary but not sufficient condition for the success of an urban informal sector enterprise. Banks should do what they can to provide related services. In this context, the work done by Canara and Syndicate Banks to establish Rural Development and Self Employment Training Institutes (RUDSETIs), can be replicated even for urban areas. In addition, attempts should be made to identify and direct infrastructure investments and common facilities in areas where there is a possibility of servicing a large number of urban informal sector producers such as handloom and handicraft clusters and agro-processing zones.
• The case for an apex bank - IV
• The current scenario - III
The recommendations of the Nayak Committee, the Abid Hussain Committee, and the S L Kapoor Committee, pertaining to the credit needs of the small-scale sector and within that of the tiny sector, need to be implemented, as these are equally relevant for the urban informal sector. In particular, the recommendation that working capital should be extended to the extent of 20 percent of the annual turnover of the unit, must be implemented. Similarly, 70 percent of the bank credit to the SSI sector must go to tiny units, and within that, 40 percent to units having investments of Rs 500,000 and below. This recommendation cannot be micro-managed by the RBI. If instead, it deregulates the interest rates for small loans, commercial banks would price those loans at a profitable level and feel encouraged to make a business proposition out of the urban informal sector.
As can be seen from the complexity of issues in urban microcredit that need to be addressed, an Apex Bank for Urban Development is urgently required. ABUD's role could be to act as the nodal national-level agency for urban microcredit, and it would carry out these minimum tasks:
- Conduct research and be a depository of knowledge related to urban micro finance in India.
- Train banks, NGOs, urban local bodies, and self help groups
- Frame and steer national policy on urban microcredit
- Act as a refinancing agency
- Design programmes with feasible implementation structures
- Monitor and evaluate both financial and social developments of urban microcredit
- Coordinate the interests and functions of Indian and international stakeholders
An ABUD should be established as a public-private partnership, on the lines of the Industrial Development Finance Corporation, rather than the old style apex institutions like HUDCO and NABARD. Its governance, organisational culture and operating ethos must reflect 21st century values - striving to serve the unreached urban masses for their overall economic and social development in a business-like, professional and financially sustainable manner.
