Financial Inclusion is a topic close to my heart. Financial Inclusion means that both rich and poor have access to finance at comparable rates. However, one of the ironies of modern society is that those who need credit the most get it at higher rates, if they get it that is, while those that are well off can find credit easily and at lower rates. If you are white collared with a big salary the bank will want to give loans to you. If you are poor, the bank will not entertain you. It’s like that joke: to get credit from a bank, you need to first prove that you don’t need it. Why does the system work like that- I’ll share it in another blog.

Let me narrate the story of my cook – Sarala. Sarala is married with two kids. Like most Indian mothers, she is very aspirational and wants her children to have good education so that they can earn better and live a better life than she does. Sarala is extremely hardworking. She starts her day very early and cooks in several houses during the day, one of them being ours. My guess is she must be earning about Rs 30,000 to Rs 40,000 per month.

Her biggest liability is her husband. He is a driver by profession but he doesn’t take responsibility for the home or the children or even driving. Sarala purchased a taxi so that he could drive and earn an income and even that he doesn’t do it with sincerity.

Like most Indians, Sarala aspires to own a home someday. In Maslow’s hierarch of needs, home is among the most basic needs. Owning a home means that even if the worst were to happen, she would have a roof over her head.

Sarala recently found a property, which was at a distress sale for about Rs 9 lakhs. And she wanted to buy that. The house has tenants and Sarala figured that the rental income would help her service the loan easily.

When she approached a bank for a loan, the bank asked her for GST invoices and salary slips etc. Remember, I mentioned that those who need credit find it hard to get a loan. However a finance company came to her rescue and offered to fund her.

When she told me she had a financier, instead of feeling happy, it worried me for two reasons:

1. Does she have a margin of safety? She has primarily three sources of income – her income, rental income (if the home purchase works out) and her husband’s income. The last is not very reliable. She also has fixed outgoes like her car’s EMI, children’s education, her rent, food and clothing etc. Sarala does not have access to excel sheets to do a detailed calculation of her finances. In her enthusiasm she may think of only the happy scenario and not the other ones. So I was worried that she may be cutting it close between her income and expenses.
2. Is the property a valid one? Properties in India may not have proper titles and can have hidden liabilities etc. Financiers who are in a hurry to show growth may just gloss over such shortcomings. If she purchased a bad property she may end up losing a lot of money and such losses tend to affect the poor financially and mentally.

But it turns out that there was not one but two silver linings here.

1. She said the property would be registered under her name. If you ask any economist or statesman, they will tell you female education is the key to a nation’s progress. Even Grameen Finance used to lend to women borrowers because women tend to be better caregivers of the family as well more sincere, prudent and responsible. In short, the chances of women defaulting is lower. So when Sarala told me the property would be registered under her name (and not her husband’s name) it assured me that she will have the last word on the property. In the worst case, she can cut off her liabilities (aka husband) and protect the asset.
2. She said the property was being financed by Aavas. Suddenly both my worries shrunk. I was a shareholder of Aavas and I was a big fan of it’s philosophy and how it ran it’s operations. (You can read my previous blogs on Aavas here, here and here). Aavas is a responsible lender, in my opinion. That means it wont lend to somebody who can’t repay and it won’t lend against a property with improper documentation. In other words, Aavas will behave like a responsible adult and protect Sarala from Sarala as well as bad properties.

So, it was a happy moment to see the coming together of at least one woman’s empowerment and her inclusion into the financial mainstream. If Sarala can make her loan repayments on time her credit score will rise and in future she can get bigger loans to say, fund her children’s education at lower rates. This is just one case. But Financial Inclusion at scale is a powerful force and can transform a poor country like ours.

Cheers!