Gold backed micro-loans for India’s undocumented workers

Friday, January 24, 2020

Financial Express

 


A gold loan is like a credit card for people working in the unorganized sector, which gives them money whenever they need it.

As per the latest Periodic Labour Force Survey, the majority of Indian households operate in the informal segment. About 68 per cent of the non-crop growing workers were engaged in the informal sector. Among regular wage/salaried employees in the non-agriculture sector, 71 per cent had no written job contract, 54 per cent were not eligible for paid leave, and 50 per cent were not eligible for any social security benefit.

Most of these people would find it next to impossible to get any loan from banks, which pushes them towards informal lending channels and moneylenders. Banks and other institutional lenders are stuck with inflexible risk underwriting practices and find it challenging to deliver credit to those at the bottom of the pyramid, effectively denying them the opportunity to play their assigned role in a growing economy. Bear in mind that of the 68 per cent engaged in the non-crop growing informal sector, most (71 per cent) don’t have a written job contract. That accounts for nearly 48 per cent of the total working population!

Innovation is the key to addressing the challenges faced in extending credit to this class of borrowers. Microfinance lending is perhaps the only large scale lending mechanism which has addressed the underwriting challenges to some extent through the group lending structure. RBI too acknowledged the contributions made by MFIs in strengthening credit to those at the bottom of the economic pyramid and increased the income limit for borrowers from the earlier Rs 1 lakh per annum to Rs 1.25 lakh (for rural areas) and from Rs 1.6 lakh to Rs 2 lakh per annum for urban and semi-urban areas. Likewise, the lending cap for microfinance institutions was raised to Rs 1.25 lakh, against the earlier limit of Rs 1 lakh.

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