Trump’s policy reversals will have implications for jobs and livelihoods in India

Spectacular policy reversals in the United States have seized the news. The tariff and Ukraine wars dominate headlines, but those involve selected targets, not including India so far. The more universally targeted cleanout of “illegal aliens” in the US carries a message that is abundantly clear. The US has further suggested that voices in Europe demanding a similar cleanout of their migrants are being wrongfully suppressed.

Although only a few hundred deportees so far have been of Indian origin, there are serious implications for Indian labour market entrants. Nation states across the globe are now squarely responsible for providing jobs and livelihoods for populations within their respective borders. 

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Migrants with high skills or investible capital will be invited into the US and elsewhere, leaving behind a labour pool of whom some will be skilled, but the majority not skilled suitably for absorption into jobs in the formal sector, leaving them to find their own means of survival.

The informal sector aspirant, with or without a skill, needs finance for a start. Let us presume the initial need stands no higher than a credit limit of ₹25,000. Scheduled commercial banks (SCBs) had a total of 383 million loan accounts at end- December 2024 (outstanding, not flows during the quarter), of which loans with a credit limit up to ₹25,000 accounted for 0.2 % of total credit by value. 

Loans above ₹1 crore accounted for 52.2 %, and within that, loans above ₹100 crore accounted for 27.6% of total outstanding bank credit. These figures are confined to SCBs and exclude regional rural banks, which focus largely on agriculture and related primary activities.

The small borrower can also access bank-sourced credit indirectly through non-bank finance companies (NBFCs), which borrow from banks. The Reserve Bank of India (RBI) database on banks has a table classifying bank lending by sectoral occupation of the borrower (who may be an individual or an institution). 

Loans to the finance sector, which include financial institutions of various kinds (including NBFCs), account for 11.8% of total SCB credit by value. Only a tiny part of this 11.8 % would be on-lent to small borrowers by NBFCs (exact numbers are not available), but they do provide an alternative window to banks.

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Bank credit is skewed towards large loans because they are less demanding in terms of processing time (the same reason why there are discounts on bulk purchases of goods). Collateral-free loans, which save time spent on checking collateral, were an attempt to balance out the skew towards large loans, and have been made permissible up to much higher limits than ₹25,000. 

The response was too enthusiastic. Unsecured loans, not backed by collateral, rose from 17% of total SCB credit at end-March 2013 to over 25% by end-March 2023 (including loans with credit limits well above ₹25,000).

The threat to financial stability from this rise in unsecured lending made RBI—wisely—raise the risk weight on unsecured personal loans from 100% to 125% for banks and NBFCs in November 2023. That raised the risk margin in the interest charged on unsecured loans, which in turn led to a contagious rise in defaults on small loans against collateral like two- and three-wheelers, since many individuals take both secured and unsecured loans.

These realities are a sobering reminder of the conflict between financial stability and monetary policy transmission as experienced by the small borrower, especially in an easing cycle. The monetary policy of 7 February reduced the policy repo rate by 25 basis points, to 6.25%. Transmission of this reduction is unlikely towards loans at the small end of the spectrum carrying high risk margins. 

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The more likely impact on small borrowers is through the easing of tight liquidity conditions, which had already begun before the recent monetary policy, but has since been bumpy on account of RBI currency market interventions. In another liquidity easing attempt, RBI has recently lowered the risk weight on lending to NBFCs and micro-financiers (the intermediaries, not final borrowers).

Urban cooperative banks are an alternative source of small loans, but these banks naturally tend towards giving large loans to members of the cooperative society which owns them, and have been mired in misappropriation scams. They have been directed by the regulator to reserve 50% of aggregate advances by end-March 2026 for small loans, but these are defined as loans with a credit limit below ₹25 lakh.

The overall picture is that small loans for new livelihood seekers in urban settings are mostly sourced from informal finance, an opaque world which is only remotely touched, if at all, by formal monetary policy. The challenge is to reduce the undeniable risk factor in these loans, while still encouraging access to formal finance.

The only possible route is by encouraging the formation of locality-specific self-help groups (SHGs) in urban areas, to provide a group underpinning to individual loans. So far, these have flourished only in rural areas. Municipalities could take the lead in encouraging the formation of SHGs at the ward level. These locational links will have to take the place of caste and other trust-based networks in rural areas.

The author is an economist.