Historically, sources of credit and the ability to borrow money and capital have been divided into two categories: formal and informal sources market. While formal sources consist of conventional private banks, public sector cooperatives, and other financial institutions (e.g. Regional Rural Banks, Primary Agricultural Credit Societies, etc.) the informal lending market is a vague term to use in that it encompasses a large set of lenders ranging from moneylenders, financiers, landlords, traders and shopkeepers, friends and relatives[1].
In rural areas in particular, informal or non-institutional sources are the major sources of credit – despite various initiatives by the RBI and the government to address this. This is supported by the data from the All India Debt and Investment Survey (2013) – according to which at least 19%[2] of all households in rural areas have availed loans from “non-institutional sources” – while only 17% of all households have availed loans from “institutional sources”. Almost paradoxically, the interest rates charged by these non-institutional sources in rural areas are much higher than those charged by the institutional sources. To put things in perspective, only 11% of the loans from institutional sources were availed at interest rates over 15% (annual) in rural areas – while over 69% of the loans from non-institutional sources were availed at interest rates of at least 20% or greater (annual)[3].
It is within this context that the much talked about goal of financial inclusion achieves prime importance. In a December 2013 Shri P. Vijaya Bhaskar (Executive Director, RBI) said as much: “Financial inclusion also mitigates the exploitation of vulnerable sections by the usurious money lenders by facilitating easy access to formal credit”[4]. It was with this very intention that the various Governments in power rolled out a host initiatives over the past 50 years to improve access to financial services[5].
After the government started a variety of initiatives to regulate the informal money-lending sector in India in the late 20th century, there has been only a slight decrease in the prevalence of informal lending activities. Interestingly we found that these sources of informal credit are very much present and thriving in the rural Indian context. In an assessment study of several sources of institutional credit available in 2002, Nayan Chandra Pradhan, assistant adviser in the Department of Economic and Policy Research at the RBI, concluded that, “co-operatives, commercial banks, and other formal financial sector programs have not displaced informal sources of credit altogether in rural areas”[6]. Specifically, even with the recent government efforts to “bank the un-banked” and serve bottom-of-the-pyramid segments, we still find that moneylenders and financiers continue to serve their niche markets. This observation begs the question – what factors influence this persistent presence of moneylenders and financiers in rural markets?
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With respect to external sources, ‘shopkeepers’ in rural villages are specific shops that focus exclusively on jewelry loans. They are reluctant to discuss or divulge the interest rates they charge. Though some cite rates like 1 – 1.5% monthly interest, the true interest rates appear to be as high as 4 to 6% monthly interest. Though these shopkeepers are known throughout the village and identify themselves to be lenders, they are unresponsive when faced with probing questions about the details of their lending activity.
Moneylenders are those who lend informally to fellow villagers who seek them out for immediate financial assistance. They almost always have another primary occupation, and are usually wealthier members of the community in which they operate. Often, they are wealthier farmers who hire laborers to work in their fields. Correspondingly, they are very prosperous individuals known to all the villagers. They finance their operations either through their other businesses or through loans from a financier, who is willing to make larger loans to moneylenders whom he knows rather than to regular villagers. Since moneylenders are part of the village community, they are stricter with their lending: they can ask clients for non-monetary means of repayment (eg. hire clients as manual labor on their farms) in lieu of regular cash repayments.
Financiers are individuals whose sole pro
fession is money-lending. They come to a village themselves or send a collector (an employee who works for a financier) either on a daily or a weekly basis, with periodic regularity. They collect payments for loans at seemingly very high interest rates. He does not live too far from the respective village, and prefers to reside in a nearby town instead of within the village itself. It is extremely difficult to identify financiers because people are often very reluctant to divulge any kind of information about them. Villagers often do not know any personal details about these financiers who come and go daily or weekly; therefore, they cannot enforce non-monetary methods (in kind) of repayment. Villagers are willing to share details of these financier loans, which generally follow a structured disbursement and repayment schedule. For example, financiers provide a loan of Rs. 10000 – the individual might receive only Rs.8000 as a lump sum amount and then has to repay Rs. 100 per day for 100 days.
Financiers are clearly eliminating some of the limitations and restrictions imposed on rural communities by formal money lenders, such as private, and some public banks. Formal lending institutions typically require documentation before loan disbursement; villagers often have to go physically to a branch or to meet a representative; there is a lag from the time of loan application to the actual loan disbursement; repayment structures are very rigid and unyielding; there are stricter regulations on maximum borrowing amount. These reasons have resulted in an increasing number of reports of MFI clients expressing their stress and frustrations with the current set-up of microfinance institutions in rural areas. Overall, financiers and moneylenders offer a more attractive and convenient avenue to access credit.
These factors are so powerful that even by charging much higher interest rates, financiers still manage to retain their clients and conduct profitable business year after year in the villages. They are an important player in the informal financial market. To better ‘serve the under-served’, it is essential to understand the context in which these financiers operate. They are rarely willing to identify themselves and function on very tight deadlines. Financiers of varying scales of operations often employ several ‘collectors’ who physically travel to their designated villages to collect repayment installments. It is difficult to inquire about financier operations from households because their clientele often hesitate to disclose any personally identifiable information.
In light of growing concerted efforts to better understand the informal credit market, it is imperative to research financiers and their lending practices in depth. We would like to understand the geographical extent of their operations, the terms of the loans they disburse, the various purposes for which these loans are taken, the repayment schedule issued to villagers, the scale of operations, etc. This data is of course very sensitive, and hence collecting such data presents a unique set of challenges.
Challenges from the Field
The biggest challenge is in actually identifying and targeting financiers. There are certain legal provisions according to which it should be possible to obtain a registry of some moneylenders (but not financiers); however, even after visiting panchayat offices in various districts in Tamil Nadu, we found that these lists are misleading and do not present an accurate picture of financial markets in that panchayat. We turned to respondents who answered our main Household Survey[7]; we asked if those who reported having a loan from a financier if they would share details of when and where we might find those individuals. This worked to the extent that people gave us responses, but we were disappointed by how inconsistent the responses were. We resorted to re-visiting the villages and actually having our survey team stake out the village until a financier showed up.
We found that most financiers show up in the villages very early in the morning (between 5am and 10am) or very late in the evening (between 4pm and 9pm). They come on two-wheelers, and leave as quickly as possible to proceed to the next village. Our survey team also travels on two-wheelers, and have specific instructions on how to approach and interact with the financiers. We request no personally identifiable information and, though we conduct electronic surveys, we offer the respondents the option of answering a paper survey. In one instance, the financier was so pressed for time that our surveyor had to accompany him to three different villages just to complete the 20-minute survey. Such busy schedules precludes financiers from acquiring a bias towards any one village, and also ensure that they seek out the most efficient business operations model.
At the end of the questionnaire, we give financiers an incentive to compensate them for their time. After debating among several creative options for an incentive (mobile recharge cards, helmets, rain coats, other items to facilitate their daily business activities), we finally settled on mobile recharge cards. We have since then witnessed a handful of financiers who flat-out refuse these incentives. Earlier, during an initial pilot for this survey, it was common for financiers to turn around and run away from us the moment we introduced ourselves to them. Their reactions to us range from being wary or suspicious, to being amused and entertained. They laugh at many of our questions because they believe that those details to be common knowledge.
During this pilot, we amassed a vast amount of qualitative data to supplement our understanding of rural informal financial markets. Field operations did not always proceed as smoothly as a conventional survey, and ultimately we have a sample of approximately 150 self-reported data points to analyze. To our advantage, we also have rich data from households in these same locations that report loans from financiers. This allows us to compare both sides of the story and check the consistency of responses to questions about principal amounts, interest rates, collateral, etc. between both sides of the market: the supply side (financiers) and the demand side (clients and households).
In a bid to understand the successes and failures of the informal money lending market, this financier survey has given us insights into some of the details of how social collateral and lending decisions work in rural Tamil Nadu. With growing national and state-level efforts to ‘bank the un-banked and target the “last-mile” populations’, understanding the dynamics of informal financial access is essential if policymakers and private entities serving these populations hope to expand and deepen their operations.
[2] http://mospi.nic.in/Mospi_New/upload/KI_70_18.2_19dec14.pdf
[3] ibid
[4] https://www.rbi.org.in/scripts/BS_SpeechesView.aspx?Id=862#S2
[5] Since independence, there have been numerous schemes and undertakings to extend formal sources of credit to the rural areas. A detailed discussion of these initiatives can be found here
[6]http://articles.economictimes.indiatimes.com/2013-05-15/news/39282099_1_rural-credit-total-credit-moneylenders
[7] A comprehensive questionnaire administered to rural households in 3 districts of Tamil Nadu that seeks to understand financial behavior, health indicators and social networks of these households.
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