Goodbye Money Lenders. Hello! Digital Credit Lines

With demonetisation, among many things, PM Narendra Modi might have dramatically change the way traditional money lenders have to operate in the future. It is important now for for financial institutions and banks to reduce the process documentation and also speed up credit disbursement.

By Bala Parthasarathy

Let us imagine scenarios where people need urgent access to cash:

1. It is 1:00 am in the morning and there is a medical emergency. Suddenly, Rs. 20,000 in cash is required and the salary has not come in yet. What do you do?
2. Your sister/brother is getting married and as a responsible adult you need to pitch in, what do you do?
3. You are getting married and want to share the expenses, what do you do?
4. It is Feb-March, you need to pay school fees for the next academic year, you have tax burden and other financial commitments but the fees need to be paid, what do you do?
5. There is death in the family. What do you do?
6. Your friend/cousin/sibling needs your help with some cash. You don’t have it but want to help, what do you do?

The list is endless. The first port of call is most often a family member, but they might not have cash handy either. And then there is always the embarrassment of borrowing which comes as a baggage. In situations when most people are unable to arrange for sudden requirement of cash, usually the neighborhood moneylender comes to the rescue. While most of us in urban cities think that going to moneylenders is something done by farmers and people from lower-income group in rural areas, you would be surprised to find how many educated, salaried people fall into this trap. The dire need of money combined with lack of credit options, forces most people to resort to unlawful means. Formal credit access remains an expensive and  time-consuming proposition for most Indians. People go at great lengths to acquire the credit, from pledging their jewellery to paying sky-high interests. Moneylenders are the unofficial “credit line” for the aam aadmi.

Moneylenders have been maligned from the time of Shylock and yes they do charge exorbitant interest rates but they are there at the time of urgent need. They keep a huge stash of cash for just this need. It’s a 100% cash business. Most often illicit. Indian states generally require that moneylenders be registered and to have a license. Rules establishing the maximum amount of interest charged vary from state to state, as do penalties for failing to provide account statements to debtors and for intimidating them. But large amounts of credit flow from unregistered moneylenders, who are the main source of funding for small businesses and individuals.

With the stroke of a pen, Modi might have dramatically change the way they have to operate in the future. Right now, they’re scrambling to safer grounds. They have to somehow convert their cash into Rs. 100 notes, losing some in the “exchange rate” process.

But then what do they do going forward? Sure, they will move to Rs. 2000 notes or buy bigger sacks for Rs. 100 notes. But with the various restrictions on cash transactions that RBI has announced along with the demonetisation move, it’s going to get harder and harder to carry out large cash transactions.

In most western countries, the normal progression is to replace cash with “plastic” which is basically credit cards. In India, there are only 2.4 crore credit cards in circulation (according to RBI) and only 1.2-1.4 crore unique credit card holders. And credit cards are not accepted in most places anyway – school fees, marriage, jewellery, house rent, sending money to a relative – the needs most people have every day – cannot be swiped on a card.

If the Prime Minister has his way, more and more money will become digital. Which means, consumers have to borrow money from Banks or other regulated institutions. And those Banks that offer flexible credit products and credit lines will see a huge jump. It is important now for for financial institutions and banks to reduce the process documentation and also speed up credit disbursement. Easy and legitimate access to credit should also be in the mandate for financial inclusion as it will put an end to illicit money-lending.

UPI is already here, which makes moving money around very, very easy and free. It is readily available on the smart phone. It can hardly be a coincidence that UPI has been launched just a few months before this major announcement. Maybe India will skip the “plastic” and move directly to Smartphone UPI. Just like we skipped telephone lines and went to mobile phones! The move prior to UPI was the launch of PMJDY. Since its launch, 25.45 crores accounts with total deposit of INR 45302.48 crores have been opened under this scheme. According to a PricewaterhouseCoopers India report released in October 2015, the unbanked population in India more than halved to 233 million in 2015 from 557 million in 2011 and PMJDY has played an important role in this area. With these zero-balance accounts, Aadhaar for identity verification and UPI for ease of transfer, offering simpler credit products to those in need should merely be a matter of time.

Bala Parthasarathy is co-founder of MoneyTap, a Bengaluru-based start-up.