From a vicious cycle to virtuous cycle

Source– The post is based on the article “From a vicious cycle to virtuous cycle” published in The Hindu on 5th December 2022.

Syllabus: GS3- Indian economy and mobilization of resources

Relevance– Informal economy

News– The article explains the new concept of returnable grant for fulfilling the credit needs of the informal sector.

What are the issues faced by informal sector workers for accessing working loans?

They face challenges in raising working capital.

They cannot get even a small personal loan because they lack the papers and collaterals required for access to formal credit.

Unable to borrow, the working poor cannot establish their credit history. They are not able to learn how to manage their debts and invest the loans in productive expenditure.

In this process, they are excluded from the formal credit economy.

What is the new financial instrument called a returnable grant?

It is developed by Samhita Social Ventures and Collective Good Foundation. It is supported by philanthropic funding.

Recipients receive a grant with ticket size tailored to their needs. Unlike conventional grants, there is an exception to repayment of grants.

Beneficiaries are told that timely return of grant will allow the foundation to support other workers like themselves. They also get additional benefits such as interest rate subsidies or access to skilling or insurance products.

The grants are disbursed in partnership with civil society organisations that have prior relationships with beneficiaries.

The foundation invested in a rigorous evaluation framework that utilised third party organisations to collect data on individual recipients.

What are the findings from analysis of data?

The most striking finding is that the repayment rate is high. This was despite the fact that there was no legal obligation to repay and since it was interest free.

The recipients also used the grants to invest in their economic future.

What are the useful insights from the RG experience?

It is critical to work with implementation partners which have long-term relationships and are deeply embedded in communities being served.

Working with partners willing to make regular calls to beneficiaries to check on their progress and provide timely reminders of their repayment obligations yields benefits.

Providing flexible and customised repayment obligations are key to maintaining high repayment rates.

How can RG experience be utilised for the benefits of informal workers?

The RG experience can help to create a pathway to a formal credit system for informal workers.

The repayment data from the RG can be used to create a pre-credit score to make a starter loan for informal sector workers. These starter loans could be supported by credit guarantees or interest subventions using philanthropic funding in order to incentivise banks to get started.