Expressing concern over rising defaults in education loans, Reserve Bank Governor Raghuram Rajan today said they should be devised in a flexible manner, providing options like automatic moratorium if borrowers are “under a period of unemployment”.
He also stressed on making know-your-customer (KYC) norms simplier.
There are “lots of NPAs (bad loans) in the education sector. They have been rising in the last few years. It’s a matter of concern,” he said at the 6th Delhi Economics Conclave here.
Banks, he said, are increasingly asking for collateral for education loans. “If it is above 4 lakh they have right to ask for that collateral but it is an issue.”
Education is one of the most important investments, he said, adding that more flexible loans can be created by using unique identification number or Aadhaar information.
For example, “if you go under a period of unemployment you get an automatic moratorium. Doesn’t have to be negotiated with bank, it’s written up in your contract.
“Similarly if you get really high-paying job you pay a little more. If you get low paying job or you go to public sector and work in public sector maybe you pay a little less. So, can we tailor such loans and how do we do it? There are a number of plans floating,” he said.
On KYC norms, he said it was important to make KYC simpler and easily accessible especially for the people who are moderately literate, who don’t carry lot of documents.
“If they get access to KYC which can be triggered with biometric, with Aadhaar. That will be really good.
“If they want more sophisticated product then KYC becomes more sophisticated. For basic products, basic KYC. Now we have to integrate across all the financial regulators. The FSDC has a proposal which we are working on. We are nearly there. I think we should see that very soon,” he said.
Rajan said rules on consumer protection are in the works. “At the end of the year, will roll out a set of regulations on that.”
On financial literacy, he said there is a need to teach where there is lack of information and lack of knowledge on the essentials of managing finance.
“I think we are on the verge of a paradigm shift of how we do financial inclusion. We have gone some way with enormous number of accounts which have been opened with the direct benefit transfer that you saw that is already underway.
“But there are enormous opportunities we can take advantage of, enormous profitable opportunities which will help both the consumer as well as the provider.
“That technology we already have, the institution are coming, the regulations will follow as appropriate. So what we really have to do now, implement, implement and implement,” he said.
Rajan said that instead of mandate for financial inclusion, focus is on moving towards profitable business proposition.
“Increasingly, we are trying to find bottom of the pyramid as profitable proposition so banks will go out. Institutions and other entities will go out to offer financial services without forced by mandate.
“Finally, in terms of delivery is no longer just a branch, the branch is just one vehicle but there are many other vehicles for delivery. The idea is to deliver at the doorstep or close to the doorstep,” he said.
The RBI Governor said Aadhaar is extremely useful from variety of aspects, one of the most important being the ability to build credit history. “Once you have Aadhaar number banks feel safer lending to you because they know that you will be reluctant to default.”
Banks, Rajan said, need to be paid commission on direct benefit transfer (DBT) to make them profitable.
“We are on the verge of cashless, paperless, presence less economy and that would be extremely important to the poor who have to travel large distances, don’t have lot of ability to carry paper.
“If they could have an experience which is paperless, cashless and presence less- they would have much better access to financial services,” he said.
Listing big game changers coming in the next few quarters, he said, one is a common risk-based KYC. The second is Payment Banks.
“These entities will help in traversing the last mile. Whether it is the mobile companies whether it is the post office… I think we are going to see enormous innovation,” he said.
Also, a whole new set of institutions are coming up in addition to Payments Banks, the small Finance Banks.
“The idea behind the small finance banks is let me put a person at the lending desk, who is local, who knows who the people are in village, who knows the behaviour and can go out and make appropriate loans. A number of the organisations that we have given licences to, we hope will enter areas, cities, North East, other places where there are still numerous under served and help us progress,” he said.
In addition, changes need to be brought to protect the excluded when they are brought into the system.
“Another game changer is online markets. When you visit these small areas making very fine products in small quantities their biggest problem is reaching the market and if they can reach the market via these online providers a whole new set of opportunities open up for them,” he said.