Delivering the keynote address at the ET BFSI converge summit, Acharya said the weaker public sector banks should focus on ‘sachetisation’ of lending and their business model should become similar to micro credit, microfinance or small finance banks.
“They should develop expertise in underwriting, monitoring and recovery of small-ticket loans provided to the last-mile borrowers. They should do cashflow-based lending for financial inclusion rather than asset-based lending, which has become part of their universal banking model and led to large legacy losses.” The weaker PSBs can use technology, employ public credit registry and shift to another model of business that has been shown by small finance banks to generate healthy intermediation margins.
Sachetisation of credit
Acharya advocated the sachetisation strategy, or lending smaller amounts, for reaching credit to the last-mile borrowers. FMCG companies in the seventies had popularised the strategy by selling shampoo, which was unaffordable to most people, in single-use quantity, one rupee sachets. The strategy was extended to other products such as biscuits.
“The weaker public sector banks should focus on sachetisation of lending. Their business model can be specialised to become one that is similar to micro credit, microfinance or small finance banks,” Acharya said.
He said if such a re-prioritisation of weaker PSBs was undertaken, there was no reason over a period of time their valuation, market to book ratios, won’t improve; and at the improved value their government stakes could be divested below majority and hopefully they could also be re-privatised.
He said the government should consider divesting its stake below the majority in PSBs and entirely re-privatising some of the healthier ones.
Such re-prioritisation, digitisation, democratisation of credit is an important practical tool that the government must take as a step in that direction, he said.
Public Credit Registry
Acharya said during his tenure at RBI, the central bank initiated a move towards creation of Public Credit Registry or PCR, which aims to be the comprehensive database of information on all credit relationships in the country — from the point of origination of credit to its termination, which means payments, restructuring, defaults, resolutions and even the altering terms of a contract midway during the life of a credit relationship. All of this would be registered in a single data registry, which to start with, is envisaged to develop and maintained at the RBI.
“A PCR will eventually cover all lender, borrower accounts without any size threshold, even though at the very early stage the plan is it would cover loan sizes only above a certain threshold,” he said. The primary reason for building a PCR is to provide a 360-degree view of a borrower’s liability and remove information asymmetry, which often leads to a breakdown in the credit market. The secondary reason for PCR is to provide bankers with up-to-date information about their credit process. There is no reason why the PCR can’t be linked with all cashflows that are going in and out of last-mile borrower’s transactions.
While a public credit registry will help discipline large borrowers, it will open up doors of credit for the relatively underpenetrated banking system, he said.
The second step RBI took during his tenure to complement the PCR was creation of an account aggregator, which would provide record of a borrower’s liabilities, Acharya said. The aggregator will be new financial institutions that would provide a record of a borrower’s assets. In some cases, the assets may be very small and in cashflows, yet the aggregator overtime can complement the PCR quite well. The account aggregator has to manage how other financial institutions can access the borrowers’ data.
The aggregator can gather data from all financial institutions, including banks, non-banks, mobile money wallets, mutual funds, tax agencies, GST invoices and others who are willing to provide data. The aggregator can potentially access utility bill payments, which would be the simplest cash flow. Regulations have to ensure that the business model of the account aggregators does not encourage reckless collection of the data, he said.
Together PCR and aggregator will allow financial intermediaries and borrowers to see in real-time the complex pattern of financial cashflows of individuals and businesses, the PCR providing the liability side of the information and the account aggregator the asset and the cashflow sides. With these systems kicking in, banks will be able to lend judiciously to India’s large underserved population and raise the credit to GDP ratio. By employing the power of data analytics and machine learning banks will be able to give individualised financial products. Non-bank companies, fintech companies, peer to peer lending should all be able to access this data, he said.