Supporting small borrowers best way to stimulate economy

Bigger is beautiful or too big to fail is a euphemism for inefficiency and we have seen even the biggest of the private banks collapsing taking the entire global economy in its spin. In India, contrasting with the low NPAs that small borrowers come up with, the big corporate defaulters have seen huge write-offs (or NPAs) to the tune of Rs 10-lakh crore in past five years. In fact, there are more than 10,000 wilful defaulters, who have the capacity to pay back but don't. The bigger the defaulter, the more reluctant are the banks to initiate any action against them

Several decades ago, when economist EF Schumacher wrote his path breaking book: Small is Beautiful: A Study of Economics as if People Mattered, he in reality presented a viable alternative to the mainstream thinking that relied on treating the big as the ultimate symbol of economic growth. The collection of essay was a persuasive argument to shatter the dominant economic thinking that believed in infinite economic growth, and treating modern economics as highly unsustainable the author had strongly advocated small and efficient appropriate technologies instead to be the driving force.

When I read the news report, titled: Small is good: Mudra loan NPAs at just 3.3 per cent in 7 years (Indian Express, Nov 28, 2022), my thoughts were immediately connected with the title of the book 'Small is Beautiful'. Although this news report was not in any way an extension of the arguments that economist Schumacher had espoused, but it certainly drew attention to another missing dimension that has for years now shaped public policies treating small borrowers as unsuitable for banking.

Whether we like it or not, extending loans to small borrowers has always been considered to be a big drain on the available resources. The rationale for extending small loans to a wider section of the unemployed is often seen to be driven by political considerations rather than sane economics. Even the World Bank in the 1980s had positioned itself saying the poor are 'unbankable', but a strong global reaction changed its economic perception. It now openly bats for financial inclusion of the poor. So much so that the former World Bank Chief Robert Zoellick had at one time remarked: "providing financial services to the 2.5 billion people who are 'unbanked' could boost economic growth and opportunity for the world's poor."

Anyway, the news report about Mudra loan beneficiaries not only shatters the myth that poor are 'unbankable', but goes a step ahead by indirectly building an argument for the need to provide a larger number of poor with adequate financial support. The report states that in the past 7 years, ever since the Pradhan Mantri Mudra Yojna was launched in April 2015, the total amount of loans that have turned bad or in technical terms can be classified as Non-performing assets (NPAs) for the banks, is 3.3 per cent of the total loans advanced. Under the scheme, loans are provided to micro-entrepreneurs in three categories: Shishu, Kishore and Tarun – depending on the stage of development of the entrepreneurship. Their maximum credit needs is limited to Rs 10 lakh. Mudra provides refinance, credit guarantee and as the Prime Minister rightly says it is a programme for 'funding the unfunded'.

At the risk of reiterating what I have said earlier, financial inclusion of the poor helps families to meet the unexpected emergencies and at the same time help come out with a small business model that is economically sustainable in the long-run. This calls for re-casting the financial support system ensuring that the entire project not only becomes sustainable but also incorporates building profits in a manner that the business plan grows in size and turnover. Take for instance a woman in a village, who has no family support to bank on and therefore is keen to buy a goat for ensuring a decent livelihood. Since banks do not extend small loans, she goes to a Micro-finance institute (MFI) for credit support. The MFI gives a loan of Rs 7,000 or Rs 8,000 to buy a goat at a rate of interest exceeding 20 per cent to be returned at weekly intervals. This interest rate effectively comes to 60 per cent or so.

On the contrary, the Gujarat government gave a loan for roughly Rs 550-crores to Tata's for the proposed Nano car factory at an interest rate of 0.1 per cent to be returned in 20 years. In simple words, this amount effectively turns out to be a grant to the company. The point I am trying to make is that if the poor woman who took a small loan for goat rearing too had got the loan at an interest of 0.1 per cent she would have been drawing a Nano car at the end of the year. Instead, the loan sharks have devoured her profits, and she is left vulnerable to future livelihood shocks.

The poor are certainly bankable if they get a preferential interest rate that they can pay back in easy EMI instalments. I see no reason why macro-economic policies should consistently aim at reducing the interest at which the banks can provide credit to the big companies, but for the small borrowers keep the interest rates relatively high. This actually leads to a situation where wealth from the bottom is eventually sucked to the top. The woman who bought the goat has also seen her income being sucked up. On the other hand, the Mudra beneficiaries provides a classic illustration to show how the small borrowers make the best of the available small credit, and given adequate protection and credit guarantees, is able to chalk out a living and build entrepreneurship.

Bigger is beautiful or too big to fail is a euphemism for inefficiency and we have seen even the biggest of the private banks collapsing taking the entire global economy in its spin. In India, contrasting with the low NPAs that small borrowers come up with, the big corporate defaulters have seen huge write-offs (or NPAs) to the tune of Rs 10-lakh crore in past five years. In fact, there are more than 10,000 wilful defaulters, who have the capacity to pay back but don't. The bigger the defaulter, the more reluctant are the banks to initiate any action against them. Small is beautiful not only for the economy, but the banks too need to learn that supporting small borrowers is the biggest way to help the economy to grow. Not only with Mudra loans, which aims at developing micro-entrepreneurship in the informal sector, even loans to small farmers, who are also micro-entrepreneurs, also goes to sustain livelihoods. Five years back, in 2017, the Public Accounts Committee of Parliament had estimated that of the entire pending NPAs at that time, only 1 per cent belonged to small farmers and 70 per cent to corporate defaults. Small is certainly good was the unwritten refrain.

(The author is a noted food policy analyst and an expert on issues related to the agriculture sector. He writes on food, agriculture and hunger)