An earlier edition of this newsletter had explained Kinship and how kin based employment works. The theory explains costly behaviour taken for kins.
In this edition we explore how kin based lending/ family loans work.
How does Kin based borrowing work?
We took two examples in which kin based borrowing is prevalent because of various reasons.
Micro, Small & Medium Enterprises.
Financially excluded poor
Micro, Small & Medium Enterprises contribute almost 8% of the country's GDP, around 45% of manufacturing production, and about 40% of exports. We were looking at data at we realised that the majority of MSME financing comes from Informal sources of which kin based lending is a big part.This is due to the following reasons-
High risk investments( specially in initial phase of the business)
Inability to back the loan with collateral
We also looked at access to capital to the financially excluded. Kin based lending forms a huge part of that. This is due to the following reasons-
Inability to furnish collateral.
Low financial awareness.
Lack of access to formal banking institutions.
Distress funding in case of health emergency etc.
Kin based lending has certain pros and cons.
What can the State do?
To ameliorate these disadvantages and optimise use of capital there are certain steps the government can take for the two categories mentioned above.
Micro, Small & Medium Enterprises.
Creating a regulatory framework which allows for registration of kin based loans.
Ease in requirement for collateral and exploration of alternative ways of risk management.
Reduction in delay in disbursement of funds.
Sensitisation of financial institutions to requirements of different type of businesses in different stages of their growth( early startup, well established business) and modelling of the requirements according to that.
Financially excluded poor
Increase of access to micro(small) collateral free loans and rationalisation of loan requirements (interestingly a lot of micro financing organisations require a close male kin to become a guarantor in case of a female applicant).
Improving financial literacy.
Easing of requirements to set up micro financing entities.
In other news, applications for Graduate Certificate Course for Public Policy( GCPP) at Takshashila Institution is now open. You can check out details here.