COVID-19, Kirana Stores, Bank and NBFC Loans, NPAs and Indian Economy
The total lockdown in the country due to Covid-19 is bringing some important facts to the fore. A complete lockdown of the core sectors of the economy like manufacturing (including all the ancillary and allied units), transport and logistics, tourism and even software to some extent has put the spotlight on the informal or the unorganised sector. The National Accounts Statistics (NAS) 2012; pp 331 defines the unorganised as “ All unincorporated enterprises and households industries other than the organised ones which are not regulated by any of the acts and which do not maintain annual accounts and balance sheets”
For the purpose of this piece I will restrict myself to Kirana stores (groceries and other food items), vegetables and fruits vendors, push cart vendors, small hotels (the idli, dosa types and the corresponding ones elsewhere in the country) and not include other unorganised outfits like welding shops, garages, roadside hosiery vendors etc...Basically all the shops and establishments that are selling “essential items” during this lockdown.
Much of the data that I quote in this piece has been taken from Prof. R. Vaidyanathan’s brilliant books “India Uninc” and “Caste as Social Capital” (both published first in 2014 and 2019 respectively by Westland Ltd). The book is a must read for those who are interested to know what makes India tick beyond what the pink newspapers want us to believe. This unorganised sector contributes 45% to the country’s GDP and 85% to the total workforce.
Coming to what these unorganised establishments’ contribution is towards the society and the economy during the times of crisis needs to be recalled with gratitude. When demonetization was announced in November 2017... it is this sector which made the economy move on. They extended credit to tide over cash crunch of customers. These are vendors who live on daily income and extending credit to customers could in turn give them the severe cash crunch. But they adapted. Many
switched to digital payments almost overnight. This includes even flower vendors near temples who, at best, may be doing business of a few hundred rupees a day. This is a huge contribution to society. What makes them do such a thing is - Trust. For an economy like India’s, the oil for the economic engine is trust. Fundamentally we are a relationship based economy and not a contract based one. Yoshihiro Fukuyama, an American political economist famously said that trust has an economic value. He said “the ability to associate depends, in turn on the degree to which communities share norms and values and are able to subordinate individual interests to those of larger groups... trust results in social capital”.
These unorganised establishments have very low fixed overheads, occupy extremely small real estate (compared to supermarkets and malls) and employ very little manpower. This “smallness” gives them the flexibility and agility to adapt when the going gets tough. These are localised businesses hardly catering to 2 or 3km radius.
So, how do they survive? How do access capital to run their businesses??
With such huge contribution to employment and the GDP are they being supported by the government and the banks and other non- banking financial institutions??
The factual data can shock you.
The household sector (this is loosely the unorganised sector that we are talking about) grew by 8% between March 1990 and March 2011. Faster than the total economy during this period. However the total credit given to this sector has come down from 58.3% to 36.2% out of the total credit given to the economy. (Source: RBI. Data taken from “India Uninc” page 124).This only shows that this growth is largely “self- financed”. And even more significant is that loans issued for amounts below ₹10 crores has dropped significantly to approximately 30 odd % of total loans issued. For loans upto ₹10 lakhs the % has dropped to 21.20% from a high 31.70% (Source: “India Uninc” page 125). The bulk of the credit is being cornered by the big businesses.
Today this unorganised sector borrows money from outside the formal banking sources at an extremely high 2.5% to even 4% per month as against borrowing from banks at 6 to 8% per annum!! This puts huge pressure on the profitability of this sector. The need of the hour is to support these kirana stores and other unorganised sector units with bank credit. Apart from making economic sense, it is our moral responsibility to support their survival and growth. This is also the best defence against large modern retail formats who source their funds from Europe and the US at practically 1%.
However, the banks in India are completely geared towards lending based on assets and not so much on future cash flows. Unorganised sector with practically no assets except goodwill and experience to do business come short on this. But the banks will have to think out of the box to ensure this. There are approximately 12 million kirana shops in the country and 90% of these are in the unorganised sector (Economic times: June 9, 2019). If the banks can crack this then there is a
huge market out there. Indian banks invest 40% to 50% of their resources in government securities. This was called “lazy banking” by Dr.Rakesh Mohan a former Deputy Governor of RBI. This money can be better utilised to fuel the economy and especially the unorganised sector.
If banks have an issue with risks as they may not get hold of collaterals, they simply have to look out for customers’ track record. Lending and borrowing on trust has the greatest repayment track record in the world, not just in India. Besides most household and small establishments have some access to gold which can be used as collateral. It is interesting to recall what that sociologist Robert Putnam said regarding the trust factor in lending and repayment of loans. He said, “High levels of trust greatly reduce risks and costs and thus encourage enterprises and innovation while reducing the costs of redress” (Source: Caste as Social Capital” page 42).
It is well known that much of transactions in these kirana shops are done on cash. (Though digital transactions thru cards and wallets are picking up post demonetization). This is a serious hurdle to cross in credit appraisal because the actual turnover of the merchant is difficult to gauge. One way to overcome his would be look at the GST paid or filed and the regularity of this to compute the turnover. With close to 3 years of GST implementation the data should now be available. Agreed that this is not the best method due to cash transactions, but this is worth a try. Banks will have to change their credit appraisal policy to factor the GST payments. The CRM software and the asset management systems define these kirana merchants as non- salaried and non-professional customers and turnovers and bank statements are documents that are insisted upon besides proof ofassets etc. It will be far easier to appraise based on GST transactions. Software developers should feature this in their products.
The other innovation that banks can think of is to co-opt the non-formal sector like the money lenders to achieve the last mile lending. The National Sample Survey Office (NSSO) in its 67 th survey showed that more than 95% of non- agricultural and unincorporated enterprises were financed by family and community. Besides, 60% of credit needs of our economy overall is met through non-banking sources. It is easier and faster to get funds from money lenders, chit funds, and micro-finance than from banks. This is basically because of less paperwork and in the case of chit funds and money lenders trust plays a very important role. Prof. R. Vaidyanathan has suggested a novel and an out of the box idea of banks lending to money lenders at a slightly higher rates than banks would charge their customers. These money lenders can in turn finance their clients. A money lender is always in the best position to appraise his client of credit worthiness that goes beyond “papers”. Delinquency levels in unorganised credit market is abysmally low. And this can bring huge profits for banks besides fuelling the economy
to a higher growth path.
There is a huge market out there waiting only to be tapped. Just imagine, 12 million kirana stores and even if 10% of these (1.2 million) avail a credit of ₹100000 each, then the banks would be disbursing ₹10 billion. With a 99% chance of repayment. Are we looking at a gold mine waiting to be tapped????