In the context of obtaining loans, accessibility remains a significant challenge for many individuals, especially those without a well-established financial history or steady income.
Here’s an illustration
Consider the situation of Aditya Raj and Nilesh Yadav, young adults from lower-middle-class backgrounds in rural India. Their entrepreneurial aspirations involve establishing a business selling fertilisers and insecticides in their village, aiming to provide convenience to local residents and support farming activities. However, their lack of financial history and consistent earnings poses a formidable obstacle to securing funds from traditional banks.
Traditional banks typically require earning statements for individual loans, and for business loans, a track record of past business performance is deemed essential. Unfortunately, Aditya and Nilesh lack both of these prerequisites, complicating their quest for a loan of only Rs 35,000 to kick-start their venture. Despite the relatively modest amount, banks face challenges in processing such minimal sums and navigating the complexities of legal documentation.
Microfinance Institutions (MFIs) have emerged as a crucial response to such scenarios within the Indian banking and financial sector. Recognizing the need for financial inclusion, microfinance has become an instrumental tool in providing credit and financial services to economically vulnerable segments of society. Over the years, MFIs have played a pivotal role in empowering individuals, particularly women, and fostering entrepreneurship in rural and semi-urban areas. The microfinance sector in India has witnessed substantial growth, with several prominent companies contributing significantly to its development.
The absence of the lower middle-class segment from the credit cycle carries potential repercussions for the nation. This demographic, being a considerable and expanding economic force, holds significant untapped potential. The inclusion of the lower middle class into the credit landscape offers multifaceted advantages beyond financial transactions. Granting them access to credit becomes a catalyst for unlocking economic potential, fostering growth, and contributing to overall national prosperity.
Traditional banks often perceive the lower middle class as a higher risk and under-serve this demographic. Contrary to this perception, studies indicate that the lower middle class is a reliable and creditworthy borrower group, with default rates often lower than their higher-income counterparts. This challenges preconceived notions, highlighting the importance of extending credit facilities to this demographic for a more inclusive financial landscape.
Bridging the wealth gap
Providing credit access to the lower middle class becomes a crucial tool in addressing economic inequality. Empowering individuals with credit facilitates investments in education, entrepreneurship, and homeownership, thus bridging the wealth gap. The transformative impact of credit creation is evident in scenarios such as families kick-starting small businesses, purchasing homes, financing education, and meeting unexpected expenses.
In essence, recognising the diverse ways in which credit creation can positively impact lower middle-class families underscores the importance of fostering financial inclusion for a more equitable and dynamic society.