Issues with credit system in India: Credit penetration must not become a nightmare

Source: The post issues with credit system in India has been created, based on the article “Credit penetration must not become a nightmare” published in “Live mints” on 1st May 2024.

UPSC Syllabus Topic: GS Paper 3– Economy-mobilisation of resources

Conext: The article discusses the importance of credit in India’s economy. It highlights issues like low credit uptake, and harmful loan recovery practices, including a recent scandal involving abusive recovery methods by a loan company. It calls for stricter regulations to protect borrowers.

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What is the role of credit in the economy?

Economic Expansion: Credit is essential for economic growth, allowing for the utilization of bank deposits in commerce and business expansion.

Supports the Underprivileged: Credit helps improve the lives of those at the bottom of the economic ladder in India, emphasizing financial inclusion through initiatives like rural microfinance.

Expansion of Banking Services: Increasing the reach of banking services into underserved areas is crucial for improving credit availability, which echoes the objectives of bank nationalization in 1969.

What are the issues with credit system in India?

Uneven Credit Distribution: Credit availability varies significantly across regions; for example, in 56 eastern districts, the credit-to-deposit ratios range from under 11% in West Singhbhum to over 96% in Chandel.

Predatory Lending Practices: Some digital lending apps engage in harsh recovery methods. A notable incident involved the Finsara app, where employees used sexual shaming as a tactic against a borrower who failed to repay a small loan.

How are regulations being enforced?

Interest Charge Regulations: The central bank has warned lenders against calculating interest charges from the day a loan is sanctioned rather than from the day it is disbursed. This measure is designed to protect retail borrowers from unfair financial burdens.

Strengthening Capital Requirements: Last year, the regulator tightened capital backup norms for collateral-free lending. This aims to keep the burgeoning fintech boom of app-given personal loans within safe prudential limits and reduce the risk of banks’ financial buffers being depleted by defaults.

Question for practice:

Discuss the role of credit in India’s economy and the issues with the credit system.