Banks can learn from shampoo sachet revolution of 1970s: Viral Acharya

India’s banks, facing a critical challenge of slowing credit off-take, need to take a leaf from the late 70s “shampoo sachet” revolution by FMCG companies, who launched affordable bite-sized packets as the average bottle of shampoo cost more than most Indians were willing or able to pay, says former RBI deputy governor Viral Acharya in his new book.

“What is the point of a one year loan repaid in monthly installments to a farmer who earns only during a harvest? The financial services providers must reduce the size of the packaging and also re-think the formula itself,” he argues in the book “Quest for Restoring Financial Stability in India”.

Acharya says India remains one of the most financially under-penetrated large economies in the world. An estimated 50% of people are employed informally in India. They may earn as much as those in formal employment but they remain invisible to the banking system. So when they want a loan the bank denies them credit unless they can offer a hard asset as collateral. The average Indian cannot do this and ends up resorting to informal finance.

This is one of the reasons why India’s credit-to-GDP ratio stands at just 55.7% compared to China’s 208.7%.

“If the formal financial system understands better the cash flow patterns of individuals then it can serve the unique needs of Indian customers,” says Acharya, who was deputy governor between January 2017 and July 2019. This way, he says, with the aid of smarter technology, there is no reason why India cannot raise its credit-to-GDP ratio to bring it in line with those of more high-income nations.

“Making cash-flow based credit available to every Indian is a small solution to India’s big problem of financial exclusion,” according to Acharya.

“As financial stability often requires enduring short-term pain for long-run growth, it is not easy to be its gatekeeper anywhere in the world, and certainly not so in India,” he says. He also recalls that as RBI’s deputy governor he did not strike compromises on what really mattered for restoring financial stability, neither with the governors nor with the government.

On his decision to quit as the central bank’s deputy governor, Acharya writes, “at times it wasn’t easy, but I continue to believe that it was worth fighting for. It was the right stance”.

His books comes at a time when the RBI and the government are struggling to put Indian banking system on a sound footing so that recovery kicks off in the Covid-ravaged economy.