The government's plans to bring money-lenders under the purview of a proposed micro-finance law sounds great in theory but, as everyone knows, is unworkable in practice. | |
| As is well-known, money-lenders and other similar informal fund sources meet a need that the state-owned banking system has been unable to fulfil. Minister of State for Finance Pawan Kumar Bansal said the government wanted to regulate this vast unorganised lending business principally to control the exorbitant interest rates it charges. |
| |
| Again, the intention may be excellent, not least given the tragedy of indebtedness-driven farmer suicides. But here too, implementation will be difficult""and not just because of the unwieldy nature of the business. Both urban and rural India clearly demonstrate expenditure patterns that suggest the need for a different kind of institutional lending mechanism that even the micro-finance system does not deliver efficiently yet. |
| |
| A survey of the financial vulnerability of Indian households""the first of its kind in India""conducted by the National Council of Applied Economic Research (NCAER) for life insurer Max New York Life (MNYL)*""shows that Indian households borrow mostly to cover routine household expenditure and health and medical treatment. |
| |
This holds true for rural and urban households, but rural Indians also borrow more heavily for social expenditure (births, deaths, marriages and so on). In fact, consumer durables and machinery purchase rank among the two lowest reasons for households to borrow.
MODE OF FINANCE USED FOR DIFFERENT PURPOSES
(% of households ) | Source of
Finance | Purchase
of
machinery | Social
expenditure* | Health/
medical
treatment | Education | Routine
household
expenditure | Repayment
of loan | Purchase of
consumer
durables | Borrowing
for other
purposes | | Financial institution | 47.0 | 23.1 | 13.8 | 18.8 | 8.0 | 33.6 | 50.9 | 55.1 | | Money lender | 16.9 | 27.3 | 35.0 | 20.2 | 26.5 | 19.4 | 11.4 | 14.1 | | Landlord | 0.4 | 2.6 | 4.0 | 3.0 | 8.3 | 7.6 | 1.9 | 1.7 | Friends/
relatives | 11.3 | 38.9 | 39.0 | 34.6 | 25.0 | 19.4 | 14.6 | 13.0 | | Employer | 3.2 | 2.3 | 2.7 | 4.4 | 2.4 | 1.6 | 6.1 | 1.5 | | Shopkeeper | 1.5 | 1.4 | 1.2 | 3.5 | 24.1 | 3.3 | 5.5 | 2.5 | | Chit fund | 0.6 | 0.8 | 1.2 | 7.8 | 3.1 | 7.8 | 1.1 | 0.4 | | Other source of finance | 2.6 | 1.3 | 1.5 | 0.6 | 1.1 | 1.0 | 2.6 | 7.7 | * (marriage, birth, death etc.)
Source: The MNYL-NCAER India Financial Protection Survey |
|
| |
| Not surprisingly, patterns of borrowing sources also reflect these trends. So although Indian households as a whole do access financial institutions, they do so mostly to finance machinery and consumer durable purchases""the two lowest-ranked reasons for household borrowings. (Interestingly, though, almost of a third of households in the survey approach financial institutions to repay loans, a fact that provides a useful clue to household indebtedness.) |
| |
| The point to note in the table is the dominant role of the money-lender and friends and relatives in the different borrowing categories, and this is (expectedly) more so in rural India. |
| |
| Overall, when it comes to financing social expenditure, for instance, the money-lender and friends and relatives become major sources. This is something to which anyone in the micro-finance business can attest. |
| |
| For routine household expenditure and health and medical services""the two biggest reasons households borrow""the moneylender and friends become dominant sources of borrowing. Shopkeepers also emerge as a significant borrowing source for routine household expenditure""one indication, perhaps, that small neighbourhood shops will endure despite the organised retail boom. |
| |
| Given these borrowing patterns, it is easy to see why money-lenders should dominate the Indian household-scape. Money-lenders offer a flexibility that few formal institutional lenders can match""they can lend money at a few hours' notice with the minimum of formality and collateral. Their super-premium interest rates reflect a scarcity of funds for purposes for which Indian households need them most. |
| |
| Bringing moneylenders under regulation may mark an explicit recognition of a long-established practice, but it is difficult to see how this vast informal sector can be controlled and their interest rates moderated. |
| |
| Now, the money-lender has been part of the Indian financial scene for centuries. So the question is whether he should endure in modern, globalising India. The answer may just be yes, because one of the key overall findings of the MNYL-NCAER survey is that most Indian households are indeed financially vulnerable and borrow to cover routine expenditure. |
| |
| Of course, given the rapid pace at which Indians are enriching themselves""the numbers coming into the middle class every year are huge""the problem may recede over time. But India will continue to have a large number of poor people for whom a more practical source of funds will be far more useful than the unworkable solution of money-lender regulation. |
| |
| *The MNYL-NCAER India Financial Protection Survey, an assessment of earning, saving and spending patterns in Indian households |
| |
