TOPIC : GS 3 Indian Economy and issues relating to Planning, Mobilization of Resources, Growth, Development and Employment.
Gauging household income key for microfinance clients
What is the news?
- The microfinance movement in India is set to receive another dose of impetus with the Reserve Bank of India’s (RBI) recently released Consultative Document on Regulation of Microfinance .
- Malegam Committee Report, which is a decade old now, the current document looks to reassess the priorities of the sector.
Key Changes
- Some of the key regulatory changes proposed in the document takes household income as a critical variable for loan assessment.
- The definition of microfinance itself is proposed to mean collateralÂfree loans to households with annual household incomes of up to 1,25,000 and 2,00,000 for rural and urban areas respectively.
- The document requires all Regulated Entities to have a boardÂapproved policy for household income assessment.
- It caps loan repayment (principal and interest) for all outstanding loans of the household at 50% of household income.
Significance
- The importance accorded to household income, measuring this accurately becomes critical for effective implementation of these norms.
- With a high degree of informality in our economy, income streams, especially for no salaried workers, tend to be erratic in time and volatile in volume.
- LowÂIncome Households, who typically form the customer base for Microfinance Institutions , often also have seasonal and volatile income flows.
Examples
- An agricultural worker earns the most during the sowing seasons; households with migrant workers who migrate to the city for certain months of the year see an income peak during those months; and a flower vendor near a temple sees an income increase during festivals.
- These highs are also contrasted by lows during certain lean seasons when remunerative work is unavailable drought, during growing season before harvest or general lull times.
- Since income for LIHs are seasonal and volatile, there have been attempts to understand their inflows by measuring their expenditure.
- Given the rotational debts they avail, expenditure also does not truly reflect the household’s income.
- Moreover, for most LIHs, their expenditure on income related activity is not separate from their personal expenses.
Decisive ways
- Structured survey based approach could be used by Financial Service Providers (FSPs) to assess a household’s expenses, debt position and income from various sources of occupation.
- Template based approach could be used wherein FSPs could create various templates for different categories of households as per location, occupation type, family characteristics, etc..
- Household templates could be defined based on publicly available data sets that contain State/district level information about household cash flows and occupation types.
- These templates could then be used to gauge the household income of a client matching a particular template.
- FSPs could collect and maintain household income data through a centralised database.
- This would allow for uniformity in data collection across all FSPs.
- It is worth acknowledging that the proposed suggestions to capture household income require time, energy and money on the part of FSPs.
- Therefore, finding costÂeffective yet accurate ways of capturing this information becomes crucial.
Way Forward
- Technology service providers could play a crucial role in this exercise and create customised digital architecture for FSPs depending on their specific needs.
- Creating new technology to document and analyse cash flows of LIHs would not only facilitate credit underwriting/decisioning but also innovation in the standard microcredit contracts through customised repayment schedule and riskÂbased pricing, depending on a household’s cash flows.
- Eventually, an accurate assessment of householdÂlevel incomes would avoid instances of overÂindebtedness and ensure longÂterm stability of the ecosystem
Mains question
Explain an assessment of cash inflows can avoid overÂindebtedness ?
PRELIMS PUNCHERS
- The Satpura Range
It is a range of hills in central India. The range rises in eastern Gujarat running east through the border of Maharashtra and Madhya Pradesh and ends in Chhattisgarh. The range parallels the Vindhya Range to the north, and these two east-west ranges divide Indian Subcontinent into the Indo-Gangetic plain of northern India and the Deccan Plateau of the south. The Narmada River originates from north-eastern end of Satpura in Amarkantak, and runs in the depression between the Satpura and Vindhya ranges, draining the northern slope of the Satpura range, running west towards the Arabian Sea.
The Tapti River originates in the eastern-central part of Satpura, crossing the range in the center. Multai, the place of Tapi river origin is located about, south-westerly to Amarkantak, separated across by the hill range. The Godavari River and its tributaries drain the Deccan plateau, At its eastern end, the Satpura range meets the hills of the Chotanagpur Plateau. The Satpura Range is a horst mountain and is flanked by Narmada Graben in the north and much smaller but parallel Tapi Graben in the south.
Sources : https://indianexpress.com/article/india/14-tiger-reserves-get-cats-accreditation-7429266/
- Special Mention Accounts (SMA)
Special Mention Accounts are those assets/accounts that shows symptoms of bad asset quality in the first 90 days itself or before it being identified as NPA. The classification of Special Mention Accounts (SMA) was introduced by the RBI in 2014, to identify those accounts that has the potential to become an NPA/Stressed Asset. Logic of such a classification is because some accounts may turn NPA soon.
An early identification will help to tackle the problem better. There are four types of Special Mention Accounts – SMA-NF, SMA 0, SMA1 and SMA 2. The Special Mention Accounts are usually categorized in terms of duration. For example, in the case of SMA -1, the overdue period is between 31 to 60 days. On the other hand, an overdue between 61 to 90 days will make an asset SMA -2.
But some ‘Special Mention’ assets are identified on the basis of other factors that reflect sickness/irregularities in the account (SMA -NF). In the case of SMA -NF, non-financial indications about stress of an asset is considered.
- Aadhaar Payment Bridge (APB) System
It is a unique payment system implemented by National Payments Corporation of India (NPCI), which uses Aadhaar number as a central key for electronically channelizing the Government subsidies and benefits in the Aadhaar Enabled Bank Accounts (AEBA) of the intended beneficiaries.
NPCI mapper is a repository of Aadhaar numbers maintained by the APB System and used for the purpose of routing the APB transactions to the destination banks. The NPCI mapper contains Aadhaar number along with IIN of the bank to which the customer has seeded his/her Aadhaar number. Banks need to upload Aadhaar number in NPCI mapper in a specified file format through NACH portal. Aadhaar numbers along with the IIN of the bank are required to be stored in NPCI mapper to identify the destination bank for routing the benefits and subsidies to the intended beneficiaries
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- Base Necessities Index
The Finance Ministry in its Economic Survey for 2020-21 has introduced a new metric to gauge progress on the quality of bare necessities available such as drinking water, sanitation, shelter, electricity and LPG called the Bare Necessities Index
The index has been developed as a means of assessing economic development using the “basic needs” approach. This approach sets minimum specified quantities of 26 basic necessities like food, clothing, shelter, water, and sanitation, housing, micro-environment, and other facilities. It has been defined based on data collected by the National Statistical Office on the abovementioned dimensions in 2012 and 2018. A BNI value has a range of 0 to 1, with 0 being the least desirable and 1 being the most desirable score. A map on the survey shows that BNI has tremendously improved in the country between 2012 and 201
In 2012, only Delhi and Goa had a BNI score of over 0.7 for both urban and rural households. In 2018, nine states and Union Territories — Kerala, Goa, Gujarat, Punjab, Haryana, New Delhi, Sikkim, and Mizoram — logged a score of more than 0.7.
Sources : https://pib.gov.in/PressReleasePage.aspx?PRID=1693202
PRELIMS QUESTIONS
- Consider the following statement with regard to The Satpura Range
- The range rises in eastern Madhya Pradesh running east through the border of Maharashtra
- The range parallels the Mahadeo Range to the north
Select the correct statement using code given below.
(a). 1only      (b) 2 only
(c).Both      (d). None of above
Answer : D
It is a range of hills in central India. The range rises in eastern Gujarat running east through the border of Maharashtra and Madhya Pradesh and ends in Chhattisgarh. The range parallels the Vindhya Range to the north, and these two east-west ranges divide Indian Subcontinent into the Indo-Gangetic plain of northern India and the Deccan Plateau of the south. The Narmada River originates from north-eastern end of Satpura in Amarkantak, and runs in the depression between the Satpura and Vindhya ranges, draining the northern slope of the Satpura range, running west towards the Arabian Sea.
The Tapti River originates in the eastern-central part of Satpura, crossing the range in the center. Multai, the place of Tapi river origin is located about, south-westerly to Amarkantak, separated across by the hill range. The Godavari River and its tributaries drain the Deccan plateau, At its eastern end, the Satpura range meets the hills of the Chotanagpur Plateau. The Satpura Range is a horst mountain and is flanked by Narmada Graben in the north and much smaller but parallel Tapi Graben in the south.
Qn 2 Consider the following statement with regard to Aadhaar Payment Bridge (APB) System
1.It is a unique payment system implemented by National Payments Corporation of India
- NPCI mapper is a repository of Aadhaar numbers maintained by the APB System used for routing the APB transactions
Select the correct statement using code given below.
(a). 1only      (b) 2 only
(c).Both      (d). None of above
Answer : D
It is a unique payment system implemented by National Payments Corporation of India (NPCI), which uses Aadhaar number as a central key for electronically channelizing the Government subsidies and benefits in the Aadhaar Enabled Bank Accounts (AEBA) of the intended beneficiaries.
NPCI mapper is a repository of Aadhaar numbers maintained by the APB System and used for the purpose of routing the APB transactions to the destination banks. The NPCI mapper contains Aadhaar number along with IIN of the bank to which the customer has seeded his/her Aadhaar number. Banks need to upload Aadhaar number in NPCI mapper in a specified file format through NACH portal. Aadhaar numbers along with the IIN of the bank are required to be stored in NPCI mapper to identify the destination bank for routing the benefits and subsidies to the intended beneficiaries