Even bank customers borrow from moneylenders

A third of outstanding moneylender loans to bank customers

A fifth of all those who have accounts in banks took loans from moneylenders in the last two years. In terms of the value of the loans, this represents a third of the outstanding value of loans made during this period.

This data, from IIMS Dataworks' Invest India Incomes and Savings Survey 2007, knocks a big hole in the traditional argument that the poor expansion of the banking network, particularly in rural areas, is behind the rapid growth in loans made by moneylenders. Indeed, in states like Punjab, nearly two thirds of those who have bank accounts also borrow from moneylenders. This is as high as 42 per cent in Kerala, 36 per cent in Rajasthan, 31 per cent in Uttar Pradesh and 30 per cent in Andhra Pradesh.

All told, according to the Invest India Incomes and Savings Survey, moneylenders account for 21 per cent of all outstanding loans made in the country in the last two years "" 25 per cent in rural areas and 11 per cent in urban ones "" against 43 per cent in the case of banks. Since the average value of loans from moneylenders is smaller than those from banks, moneylenders' share in terms of the number of people who borrow money is higher "" nearly 31 per cent of all those with outstanding loans owe these to moneylenders and under 20 per cent to banks. The ratios are in keeping with those given last year in the report of the RBI's technical group on moneylenders.

The Invest India Incomes and Savings Survey data shows it is not the lack of branch networks that is critical, but it is the relative lack of flexibility of the formal banking network that is responsible for the rise of moneylenders. The bulk of loans made by moneylenders are made in financial and other emergencies, and in these cases, banks are hardly forthcoming. Take the case of loans for financial emergencies, which account for 30 per cent of all loans made by moneylenders. Under 12 per cent of those who need to borrow for such emergencies get loans from banks. Over 36 per cent borrow from friends and relatives and another 34 per cent go to moneylenders. In the case of medical emergencies, over 40 per cent go to friends and relatives, and a slightly smaller number go to moneylenders "" just 6.4 per cent get loans from banks for such emergencies.

Interestingly, while many are of the view that Self Help Groups (SHGs) are a possible substitute for moneylenders, the data doesn't support this. For one, according to the RBI's technical group on moneylenders, while the SHG-bank linkage has covered more than 2.6 million SHGs (33 million women), the total credit disbursed is only Rs 14,479 crore and the amount outstanding just Rs 4,000 crore "" the IIMS data puts this at around Rs 6,200 crore. According to IIMS Dataworks, around a third of SHG members took loans in the past two years, and of these, nearly 40 per cent took loans exclusively from moneylenders and another 4 per cent also went to moneylenders in addition to borrowing from the SHG.

Around half the loans made by moneylenders are at interest rates of up to 4 per cent per month (in contrast, 55 per cent of bank loans are made at interest rates of under 1 per cent per month). 18 per cent of moneylender loans are at interest rates of below 2 per cent per month and 20 per cent at rates between 2 and 3 per cent. This, though, may not be the correct comparator since moneylender loans are typically short term "" the right comparison may be with credit card loans where interest rates vary between 2- and 3 per cent a month.