An innovative approach to domestic staff loans

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During my childhood, I often tagged along with my grandmother to the local market. A vivid memory lingers in my mind, where she cleverly negotiated a lower price with a vendor, then gave the initially demanded price back as a bonus. Despite our family’s limited means, she found ways to assist those less fortunate, demonstrating the universal impulse to help irrespective of economic or social status.

India’s middle class continues to harbour mistrust towards institutional approaches to charity. It prefers to give directly, and witness the impact of its actions. One prevalent method is to provide advances to domestic help, to be recouped from future salaries.

However, managing this process can be a daunting task. I recall my spouse struggling to maintain an account of such advances, while accommodating requests from some staff members to postpone deductions during financially trying months. Frustrated, she tasked me with finding a solution, considering my background as a financial solutions provider. What follows is my attempt to meet her challenge.

Consider a scenario where a Rs. 5,000 advance is to be repaid in 10 monthly instalments of Rs. 500 each. This could be formalised through an app, engaging a financial institution such as a bank or a Non-Banking Financial Company (NBFC). With the institution adding a mere Rs. 900 to the advance, the total becomes Rs. 5,900. The repayment structure remains the same, with Rs. 500 repaid each month, but extended to 12 months. The excess Rs. 100 provides a 21 per cent return to the NBFC on its loan. The institution also takes responsibility for recovery, returning the advance to the householder only upon successful collection from the staff. Given the close relationship between households and their domestic help, the default rates are expected to be low.

The proposed app should enable householders to indicate their readiness to offer interest-free advances to specified staff members. After the necessary checks are conducted, the app will reveal if a lender is ready to supplement the advance. The entire process, from transferring the advance to the lender to the  disbursal of the advance plus loan by the lender, could be completed in minutes. The staff’s repayments, deducted from their bank accounts, could be instantly returned to the householder upon receipt. The staff’s monthly salary could also be paid through the app, facilitating near-instantaneous loan recovery and ensuring low default rates. The recovery process can continue even if the staff leaves the household’s employment.

The proposed solution integrates the personalised credit appraisal knowledge prevalent in middle-class households into the formal lending system. By amalgamating this knowledge with widely accessible population scale technology infrastructure (credit bureau, Jan Dhan, Aadhaar, UPI, account aggregator and our fintech prowess) and formal lenders’ (banks and NBFCs) need for priority sector advances, this system could help low-income staff gain credit access.

Such a system holds immense potential, not just for providing microloans but also for offering optional micro-insurance products (health, critical illness, accidental disability, and life). It also opens the door for low-income staff members to access the formal credit system independently after the first repayment cycle.

Assuming a single Rs. 5,000 advance per household, around 15 crore middle-class households could provide roughly Rs. 75,000 crore in microloans to their staff. This solution could transform ordinary householders into micro social venture capitalists, introducing low-income staff, their “micro-startups”, into the formal lending system.

Truth be told, today’s India has the ability to combine its citizens’ innate generosity with its population scale technology prowess and the can-do spirit of its policymakers to bring underprivileged citizens into the formal sector, thereby improving their credit access. Personally, I will be happy if this proposition meets my spouse’s expectations.

The writer heads Fee-Only Investment Advisors LLP, a Sebi-registered investment advisor; Twitter: @harshroongta

Disclaimer: These are personal views of the writer. They do not necessarily reflect the opinion of or the Business Standard newspaper

Mandatory disclosure by SEBI

(A slightly different version of this column first appeared in the Business Standard on June 19, 2023)

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