India, and Indians are averse to risk. This may not be so bad, or, rare, unless financial risk in the form of credit attitude is concerned. Not very surprising, therefore, that the twin whammy’s of debit card data breach affecting 19 banks and 32 lakh cards in October 2016 and the demonetization currently under way, has again strongly brought this aspect out into the open. It is but to state the obvious here that the typical Indian spender loves cash. In fact, less than five per cent of all personal expenses are done through cards, and, of this 95 per cent are on cash withdrawals itself!
As is known widely now, the massive card-data compromise of October resulted in a loss of Rs. 1.3 crore cumulatively from the accounts of 641 card holders, as per reports from the National Payments Corporation of India (NPCI). While an urgent call went out from all quarters to prevent a recurrence, not many voices were heard trying to creatively address this issue on a pre-emptive basis.Perhaps the solution here lies in looking at areas where the problem of credit aversion spurs from. However, the tendency to use and hoard cash is at the root of the problem, and also, ironically, the solution.
A key learning form the first world markets, where card usage is more than 62 per cent, is that security breeds trust. Trust both in the banking system and in the currency economy. Of course, banks need to trust their customers too—be they current or potential. Today, in India, thankfully, the banks view of their world is based on a secure KYC-ensconced customer and a lender profile tied in neatly with spending and pay-back patterns hedged by CIBIL. However, even then, India, a country with more than 133 crore people, has just about a shade over two crore credit cards. Not too great a comment for a digitally-hopeful economy hoping to play a more effective and prominent role on the global economic and industrial stage.
The demand side dynamics lying at the heart of this credit aversion is the basic nature of the Indian spender. This construct has historical and economic dimensions what with the enduring Indian trust (obsession) in gold and the proclivity to ‘trust what you can see—and touch’. With a high saving rate (30% of GDP as of Sep 2016), India is way ahead of the developed economies like the US (3.4%), Finland (0.4%), UK (-0.4%) and of course failed economies like Greece (-9%) and Latvia (-2.4%). We are behind countries such asQatar (57%), Kuwait (55%), and Algeria (54.3%) and a few other ‘crude oil’ economies as well as emerging East Asian countries.
In a choice between stagnation and growth, we have correctly and timely chosen the latter and tempered it with stability. Which immediately brings us, therefore, to the point of financial inclusion and the real pain-point of credit aversion. A vast section of our population is un-banked and under-banked. About 20 per cent, according to the World Bank, in 2015. These 25 crore adults, and the 43 per cent dormant saving accounts, equate to a large economy devoted to cash, and to a lifetime of banishment from the connected digital economy. For any meaningful intervention in the Indian economy to be successful, one cannot ignore this milling swathe of the unrepresented.
Clearly, credit inculcation is not the immediate answer to this problem, at least in the present form and manner. With just 2 crore credit cards in a 1.3 billion strong nation, the cure has to be external and creatively disrupting. What we need is a way to provide bankable security and also at the same time good, fault-less credit when needed. The solution needs to be based on a few simple determinants of inclusion: accessibility, low-cost, replicability, clarity, and security. Add to this the indispensable state backing that is needed for any significant project to succeed and we have the core construct of the credit-leveraged inclusion solution. How this can be done and what are the various factors that we should first consider is something that we shall discuss in the next few articles.