, the lender might believe that he will find it difficult to get repaid. the third impediment is transactions costs. since the size of transactions by the poor, or by micro farmers or enterprises is small, the fixed costs in transacting are relatively high. it takes as much time helping a client fill out the forms and to provide the necessary documentation if he is applying for a loan for rs. 10000 as it takes to help another one borrow rs. 10 lakhs. a banker who is conscious of the bottom line would naturally focus on the large client in preference to the tiny one. how does the moneylender manage? one of the primary motivations for the country to push financial inclusion is to free the excluded from the clutches of the moneylender. how does the moneylender boldly lend where no banker dares to lend? because he does not suffer the same impediments! coming from the local community, the sahukar is well informed on what everyone ’ s sources of income and wealth are, and how much they can repay. he is quite capable of using ruthless bis central bankers ’ speeches methods to enforce repayment. moreover, the borrower knows that if he defaults on the sahukar, he loses his lender of last resort. so the borrower has strong incentives to pay. finally, because the sahukar lives nearby and uses minimal documentation – after all, he is not going to use the courts to force repayment – loans are easily and quickly obtained. in an emergency or if the poor need to borrow on a daily basis, there are few more readily available alternatives than the moneylender. no wonder he has so many in his clutches. how then should public policy approach this problem? i will now describe three approaches : mandates and subventions, transforming institutions, and moving away from credit. approach 1 : mandates and subventions one approach is to push formal institutions into reaching out to the excluded, even if it is unprofitable. this is why, for example, we mandate that banks allocate a certain fraction of their loans to the “ priority sector ” and that they open 25 percent of their branches in unbanked areas. there are also interest subventions that are made available for loans to particular sectors. furthermore, banks have been urged to open bank accounts for all under the pradhan mantri jan dhan yojana ( pmjdy ), while

cost structure, augmented by technology, to provide a menu of financial services to the excluded. new institutions can also help ease the flow of credit. for instance, credit information bureaus have helped tremendously in solving both the information and incentive problem in retail credit. when an individual knows that a default will spoil their credit rating and cut off future access to credit, they have strong incentives to make timely payments. in rural india, we need to expand the reach of credit bureaus, including by bringing borrowing under self help groups into their ambit. the use of aadhaar in identifying individuals will also help eliminate duplicate records, while making existing records more accurate. going forward, by the end of the year, the credit information bureau of india will start providing individuals with one free credit report a year, so that they can check their credit rating and petition if they see possible discrepancies. an important proposal by the government is to give small businesses “ udhyog aadhaar ” numbers, which are unique ids tied to both the entity as well as the promoter. such ids could allow small firms to build credit histories with credit bureaus, especially as the histories are tied to specific promoters. land is often the single most valuable source of wealth in rural areas. the digitisation of land records, accompanied by a guarantee of certificates of final ownership by the state government, as proposed in rajasthan, will ease the use of land as collateral against which funds can be borrowed. even a formal recognition of share cropping agreements, as in the pattas registered by the state government in andhra pradesh, could ease access to credit for share croppers. as a final example, msmes get squeezed all the time by their large buyers, who pay after long delays. all would be better off if the msme could sell its claim on the large buyer in the market. the msme would get its money quickly, while the market would get a claim on the better rated large buyer instead of holding a claim on the msme. all this will happen as the three trade - receivables discounting systems ( treds ) which the rbi has licensed, start later this financial year. the key is to reduce transaction costs by automating almost every aspect of the transaction so that even the smallest msmes can benefit. approach 3 : don ’ t start with credit we have been trying for decades to expand credit. we have focused much less on easing payments and remittances, on