The Narendra Modi led government hasn't shied away from pushing banks to lend. From the MUDRA scheme to psbloansin59minutes.com and now ‘Kashi' — an idea which could lead to banks lending against direct benefit transfers due to crores of Indians.
The project dubbed as ‘Kashi' or Cash-Over-Internet is still being fleshed out. It was first discussed in March and came up again this week at a meeting organised by NITI Aayog. While still in a conceptual stage, Kashi is essentially a kind of receivable financing scheme against DBT transfers. Simply put, it could allow crores of Indians to borrow against DBT payments due to them, with loans disbursed through this existing network.
In 2019-20, the government had transferred benefits worth over Rs 2.39 lakh crore in cash across 362 schemes to 70.6 crore beneficiaries, according to data available on the government's DBT website.
Products such as Kashi & KYC Setu must act as enablers for the street vendors of India. If we are able to free them from the debt trap created through informal lending, imagine the number of people whom we can bring out of poverty: PM @narendramodi pic.twitter.com/qCvOu9tiAF
August 11, 2020What Is Kashi?
The Kashi programme, if it fructifies, could help beneficiaries of various government schemes and allow them to get loans through the existing DBT infrastructure, multiple people aware of the development told BloombergQuint. The Prime Minister's Office has tasked the NITI Aayog to lead the development of this program, in addition to other technology solutions, in the wake of the Covid-19 pandemic.
The Department of Financial Services, within the Finance Ministry, had come up with the broad idea back in March to use existing DBT infrastructure to disburse loans to account holders, a senior government official told BloombergQuint on the condition of anonymity. The idea was that DBT transfers due to a customer could be used to assess credit worthiness, this person said.
The scheme could also help in better targeting.
The Kashi scheme will deliver loans based on the government's DBT data, which would help in better targeting, a second person familiar with the discussions told BloombergQuint on condition of anonymity.
Will It Work?
In theory, the product is simple.
If a certain DBT beneficiary receives Rs 10,000 every month from the government, through various social-sector schemes, over a year they would receive Rs 1,20,000 and can apply for a small-ticket loan against this account.
Micro-ATM transactions and DBT payouts take place on point-of-sale devices today and these devices could be used as a delivery channel for such a scheme, said a payments industry executive aware of the development, while speaking on condition of anonymity.
According to Ashish Singhal, managing director at Experian Credit Information Company, discounting future cash-flows, which would come through DBTs, and deducting repayment installments for lenders is a good concept. “It is like a deduction against salary for loans, where a employer ties up with a bank to provided credit with an arrangement wherein salary post deduction of loan installment is credited to the employee's bank account,” he said.
But there are still questions. The DBT transfer is for a specified purpose. How much should you lend against the amount to minimise credit risk? What interest do you charge on these loans? Do you seek additional collateral? Do you debit repayments directly from the DBT accounts?
“For lenders, the main concern would be in terms of the use of loan, whether it is for consumption or productive purposes,” said Babu KA, senior vice president and head of loan collection and recovery, Federal Bank Ltd.“If it's used for productive purposes then the borrower can earn additional income and use it to repay their loan, or if it is used purely for consumption then there will be a challenge on repayment, in the absence of supporting alternative income source,” he said.
Babu explained that since beneficiaries under the scheme are low income households, the repayment part which is debited from the DBT account should be restricted to 15-20% of the account value, as most farmers and daily wage workers may not have an alternative steady stream of income.
“The primary objective of the social welfare benefits being sustenance, the rest of the funds after meeting the loan repayment obligation should be adequate to meet it,” he added.
A public sector banker, who spoke on condition of anonymity, said that if the loan is up to Rs 50,000, then collateral will not be required from the borrower. Also since banks can debit the repayment from the DBT account, the scheme can become a revolving credit facility, this banker said.
Both bankers said the interest costs could be subsidised to make the lending more viable.
“Through DBT data you are creating a digital footprint for these beneficiaries, which will give reliable information about their profiles to lenders. But when it comes to identifying institutions that are willing to finance this segment of the population at the last-mile, it would fall on micro finance firms and state-run banks,” said Parijat Garg, a former executive with a credit bureau and fintech consultant.
Many DBT beneficiaries may not have have taken formal credit and therefore lenders and credit bureaus may not have an understanding of their profile. “So for lenders to be comfortable lending against a receivable, which cannot be used to recover the loan since it is for specific programs, the government will need to create some support,” Garg added.
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