Indradeep Ghosh: Fresh credit decisioning ideas needed for financial inclusion

livemint.com:

This is part of a special series of articles by the country's foremost voices, ahead of Union Budget 2024, aiming to draw attention to the critical reforms that can help India in its journey to become a developed nation by 2047. For two decades, India has doubled down on the policy prescription of providing financial ‘last-mile access’ to its rural and poor citizens. Has the effort succeeded? It depends on who you ask. Financial institutions have expanded manifold their credit volumes to poor households in the last decade, and still the business remains so profitable that the sector continues to attract new entrants.

However, in the non-credit domains, such as health insurance, investment products or retirement products, the inclusion record has been far less cheerful—indeed, it has barely even started. There is a story to be told about why the discrepancy is so stark between credit and every other kind of financial product. And, even within credit, there is not always agreement between stakeholders as to whether financial inclusion has truly succeeded or not.

This latter disagreement is the subject of this piece, which also touches upon the other inclusion story—non-credit products. Data from the 2021 All India Debt and Investment Survey (Aidis) suggests that between 2013 and 2019, rural households in India increased their reliance on formal sources of credit by 10 percentage points. At the same time, informal sources continued, as of 2019, to constitute a full 34% of rural households’ outstanding debt.

There is a variety of hypotheses that these numbers might cause us to formulate. I will focus on two of them. The first is perhaps access to formal credit remains a significant issue for India’s rural poor.