MGNREGS too can be bankrolled

Soumya Kanti Ghosh/SAdikesavan Soumya Kanti Ghosh/S Adikesavan | Updated on June 03, 2020 Published on June 02, 2020

Banks can extend livelihood loans to job-card holders without fear of default

The Atmanirbhar package has been judiciously drawn up, with cash transfers under the PM Garib Kalyan Yojana, bankrolling of the MSME, farm and NBFC sectors, and structural reforms in the strategic sectors. Yet, any opportunity to put more money in the hands of the poor and the marginalised should be explored on a continual basis.

There is an urgent need for transfer of liquidity from banks to them in a risk-mitigated way. In this context, the recently announced hike in MNREGS allocation could be tweaked for micro-financing by banks, significantly boosting demand.

There is a large economic literature on cash transfers to the poor and how they perk up consumption when households are liquidity-constrained in times of crisis, such as the current one.

For example, a study of the 2008 tax rebates after the global financial crisis (Parker, et al. 2013 and others) found a relatively large MPC (Marginal Propensity to Consume) — as high as 0.67 — for such households. In a similar vein, the MPC during the current crisis could be significantly higher as a lot of individuals have lost income and are experiencing lay-offs. Hence, a transfer of income to such people could have a material impact on consumption.

Regarding the current crisis, the migrant worker problem and the resultant surplus labour in rural areas will necessarily lead to significantly increased dependence on the MNREGA scheme this year. In this context, the Government’s move to hike the allocation by a decent ₹40,000 crore for this scheme has been welcomed all-round. In fact, sequencing the implementation transfer of cash to the MNREGS beneficiaries will be one of the most crucial aspects of the “livelihoods” component of Atmanirbhar.

The MNREGA is a statutory obligation of the Government to provide 100 days of jobs. The number of MNREGS cardholders currently stands at 11.94 crore. The “active” cardholders are lower. It is implied that all these people will have to be given employment for 100 days in 2020-21. With ₹61,500 crore having been already set aside in Budget 2020-21, the total allocation aggregates to more than ₹1 lakh crore now.

Delivery of cash

In our view, ensuring that the work and consequently the payment for the work, reaches the hands of the beneficiaries should be the top most priority of the Central and State Governments. But practical difficulties like identification of work, the onset of the monsoon which has already set in and the containment zone restrictions will severely impact the cash-flow to the beneficiaries.

An easy way by which this cash-flow can be actualised and front-loaded immediately is for commercial banks, sitting on a surfeit of liquidity, to advance at least 40 per cent of the eligible amount (based on minimum wages fixed by the State Governments multiplied by 100) to the MNREGA cardholders on the basis of a simplified application form. All of them hold bank accounts, the earlier payments having been pushed through bank channels.

What comfort can the Central Government give to the borrowers, the MNREGS cardholders? The Government can come forward to “reimburse” the interest cost on these advances. The interest on these tiny advances can be in the region of 9 per cent.

The Government’s commitment will be just about a maximum of 9 per cent of ₹40,000 crore, at the outer limit, or ₹3,600 crore. But this will push ₹40,000 crore into rural households.

Many of the migrant labourers going back may well belong to these families, who are MNREGS cardholders. The assurance of the Union Government that it will reimburse the interest cost to the beneficiaries along with the MNREGS work payment will be a great comfort to banks for ensuring recovery of the monies advanced.

As the MNREGS work and the payments are expected to come to the beneficiaries within a maximum period of one year, the principal can be expected to be recovered when the DBT for the MNREGS work happens from the Government. This ‘Micro Livelihoods Loan’ will be similar to any other salary/pension-linked loan given by banks to the organised sector.

Individual sums to be advanced could be in the region of ₹12,000-15,000. This loan can be advanced even on the basis of a consent received through an SMS (which can be given by the MNREGS beneficiaries even with a feature phone) to an offer for loan in the local language, to be sent by banks. A consent through SMS is evidence under the IT Act legally. Further, the loan amount can be credited to the SB a/cs of the borrowers to plug any wrong disbursals. The SMS consent will do away with paper-work which will be any anyway be of no use to the banks for “legal enforcement” for such tiny sums.

If this process is seen as too simplistic, then banks can also go for a simple one-page documentation. The idea is to make this loan-based cash-flow hassle-free. What if the cardholders take this money and do not take up MNREGS work? The Government can say that such individuals will be blocked and blacklisted from any further work under MNREGS. We do not see that probability to be high, given the current circumstances.

Consumption boost

Effectively, this will be a Micro Livelihood Loan for those who need it the most. It will be self-liquidated when the cardholder contributes labour and pays off debt. With a ₹40,000 crore push and assuming a marginal propensity to consume of 0.7 (this is based on our savings rate of 30 cent and empirical evidence of MPC increasing significantly during crisis for households) this should result in a consumption boost of ₹1.33 trillion.

This programme could be truly an Atmanirbhar scheme as households will feel self-fulfilled when they do work and repay the banks’ dues. The Centre should not lose time in translating this simple scheme into reality with the cooperation of the banks. It will put money in people’s hands and have a significant multiplier effect. This will be well and truly a collaboration among banks, the poor and the government in this time of troubles to rebuild livelihoods and overcome the crisis.

Ghosh is Group Chief Economic Advisor, SBI. Adikesavan is a senior bank executive. Views are personal

Published on June 02, 2020
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