What can India’s banking system learn from the shampoo sachet revolution?

Viral Acharya in this FT piece says Indian banks should learn from the FMCG companies who introduced sachets to sell shampoos to consumers based on their cash flows. BS has a shorter piece summarising the key idea.

He starts saying India may be the 5th largest economy in the world in terms of GDP but ranks 142nd on GDP/capita basis. This shows we have a long way to go.  The shampoo companies were early to understand these gaps and introduced sachets to reach to people with low incomes and irregular cashflows.

The banks should do the same. What is the point of giving loans to people based on monthly installments when income flows are during harvest and highly irregular? By figuring cashflow patters and then using technology, banks can help achieve higher financial inclusion.

He also points RBIs initiatives such as Public Credit Registry and Account aggregator which will provide detailed 360 degree information on the borrowers and help bridge these gaps.

These are interesting points but hardly new. Infact financial providers have grappled with these problems for a long time.

The moneylenders/indigenous bankers did provide such loans even before the shampoo companies. The problem here was really high interest rates and as crops failed which was mostly the case, the problems cropped up. Then we had mechanisms like chit funds. nidhis etc which evolved due to same problem of volatility in cashflows and need for an intermediary which can help tide through these problems. But again they were limited by scale and frauds. Similar story is there for cooperative banks too.

Though, there were banks which did figure out a way to work around these problems. These were the banks from South Canara region (Canara, Corporation, Syndicate, Vijaya and Karnataka) who designed both loans and deposits products to deal with these problems. One of my earlier articles on pigmy deposits was exactly based on this cashflow idea apart from the behavioral nudging bit.

These banks figured a way of merging practices of indigenous banks with scale and lower interest rates of commercial banks. One could say they had did have idea about the PCR as they operated at a fairly local level. One of m

Alas, we learnt nothing from them!

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