Returnable grants: Reimagining credit for a better normal

Padmaja, a 26-year-old beautypreneur, lives with her parents in a rented house in Chikmagalur, Karnataka, where she runs her own beauty parlour. In March 2020, COVID-19 struck a stinging blow to her entire family. Her income fell from Rs 11,600 in March to Rs 5,000 in September 2020. Living in a rented house, and in possession of no other physical collateral, taking a loan from a bank was not a viable option. From a local NGO, she heard about a new financial product – a ‘returnable grant’ – being offered through REVIVE, a new blended finance platform launched post Covid-19. With this timely access to working capital, she was able to support her family at the height of the lockdown and restart her beauty parlour business once physical restrictions were lifted. As she paves the way to economic recovery, she is hopeful of surpassing her pre-COVID-19 income levels soon.
The returnable grant (RG) is a new type of financial instrument that aims to leverage the best of a grant and a loan. It is like a loan in that there is an expectation of repayment. It is like a grant in that there is no legal obligation to repay; the expectation is only ‘moral’, i.e., the recipient is encouraged to repay when she has achieved some intended milestones of financial recovery. And unlike a traditional loan, it does not carry any interest, and has no requirement for collateral. RG allows customization of grant amounts, repayment period, and repayment method (i.e., instalments or lump-sum) to suit the individual’s economic realities. Once the RG is repaid, it circulates back into the system to support others with similar needs. This denews24nation allows RG to benefit 5-7x the number of individuals when compared to a simple grant, therefore, making it a potentially catalytic tool to propel economic recovery for individuals like Padmaja.

RGs are denews24nationed to fill a specific gap in India’s credit ecosystem for small businesses: dealing with short term emergency situations or external shocks. The dependence of micro, small, medium enterprises (MSMEs) on high cost informal sources of credit is well documented. According to a report by Omidyar Network India & BCG, 40 per cent of MSMEs borrow from the informal sector, at at least twice the interest rate as the formal market. According to the World Bank’s Global Findex Database, only 2 per cent Indians quoted ‘a bank, employer, or private lender’ as their emergency source of funds.

This is where blended finance instruments like RGs could be particularly helpful, especially for small entrepreneurs that have robust economic prospects but are reeling under external shocks like those imposed by Covid-19. The initial group of RG recipients through the REVIVE platform include women entrepreneurs, street vendors, salt pan workers, sanitation workers, laid-off factory workers and so on. RGs are being used as working capital by women providing beauty services to buy consumables and kickstart operations, street vendors to re-stock produce from wholesalers, salt pan workers to tide over the time lag between production and sale of salt caused by Covid-19, self employed carpenters to purchase new tools and by laid-off factory workers to pay for re-skilling and find a new job.

Beyond credit, RGs can become a broader instrument for financial inclusion and economic resilience. For example, digital disbursement of RGs is opening the door to developing a ‘digital footprint’ of these small businesses that can be leveraged by them to access other tailored products and services in the future.

While RGs presents many promising hypotheses for creating social impact, they are at an early stage of roll out. A number of important questions on their suitability and viability need to be answered. These include understanding how individuals utilise such an instrument and what factors increase the ability and willingness to repay. To understand this, REVIVE will systematically analyse data on disbursement, utilisation, and repayment rates across age, gender, geographies and occupations. Further, an interesting line of learning is whether behavioural nudges and incentives can drive responsible repayment behaviour. To answer this, a series of experiments with behavioural nudges are being denews24nationed. These include ideas like labeling/’voucherising’ the RG to increase the likelihood that the funds are used for entrepreneurial activity, sending repayment reminders by SMS, emphasizing moral suasion and possible benefits of repaying at suitable intervals, etc. These ideas will be tested using quasi randomised control trial (RCT) approaches to create a body of knowledge around what works when rolling out of such instruments.

They say that necessity is the mother of invention. The pandemic and its harsh impact on small businesses inspired the creation of a flexible and innovative tool like RG. The roll out – to over tens of thousands of recipients of RG over the next 18 months – can hopefully provide a more nuanced and empathetic understanding of the credit needs, attitudes, and behaviours of this segment, eventually leading to more tailored product innovation to serve them.

(Varad Pande is partner at Omidyar Network India, an investment firm focused on social impact, Priya Naik is founder and CEO of Samhita Social Ventures)