The times are bad, very bad. Last year, with a drastic national lockdown, India chose to save lives over livelihoods. This year, the count of lives lost is growing and livelihoods are severely strained again, as the second wave with new virus variants engulfs the country. The State of Working India 2021 brought out by Azim Premji University reveals the deep impact that the pandemic is making on existing inequalities, there is increased informality as businesses fail to recover, a sharp rise in poverty, and soaring food insecurity, with women bearing a disproportionately higher burden. While the government schemes have started again ( additional foodgrains for poor households for the next two months), the damage to productivity and incomes will have long-lasting impacts. Even now, while several of the high-frequency indicators gave satisfactory growth in April, there is uncertainty about how they will pan out over this quarter, as local restrictions are imposed across the country. For instance, GST collections hit a record high in April, even as e-way bills dropped to levels of last July. The only positive news coming through is on the agricultural front – after a record Kharif harvest, the forecast for a normal monsoon should help cushion rural India to some extent.
The Reserve Bank of India Governor made an unscheduled address on the 5th of May to announce several measures to mitigate the ongoing financial stress, particularly on MSMEs. The address by the Governor gave some comfort in these dark times. However, the offtake by MSMEs of existing support schemes remains low for several reasons (See Sumita Kale and Prashant Girbane, April 2021). Also, there is a need to include a gender lens in policy measures, as women enterprises have been worse hit (See the analysis by researchers from Lead Krea University). In the latest measures announced, the RBI has allowed the classification of fresh credit extended by SFBs to registered NBFC-MFIs and other MFIs as Priority Sector Lending, with certain qualifiers, of course. This will give a boost to NBFCs and MFIs who are the most connected with entrepreneurs in small towns and villages.
Fintech does seem to have the potential to address the credit gap, at least to some part, through digital lending. However, there have several instances of malpractice over the past year. The RBI Working Group constituted in January to address the issue of regulatory balance between ensuring customer protection without stifling innovation, and its report should be out soon. Meanwhile, please read our suggestions for each stakeholder in the value chain – banks/NBFCs, Digital Lenders, Platforms and the regulator – in Indicus White Paper, Digital Lending Issues: Challenges and Proposed Solutions.
The RBI has also rationalized KYC compliance, allowing digital channels, and has instructed banks to withhold punitive action till the end of the year on any accounts with pending KYC updation. This is an excellent move, which will give relief to customers, and help ease the formalization of small businesses.