Who does the lending?

The Reserve Bank deputy governor, Rakesh Mohan, is credited with coining the phrase "lazy banking" to describe the behaviour of banks which, in the past, preferred to invest their money in government bonds in preference to lending to industry and other commercial borrowers. The country's central bank would do well to keep this in mind before taking any action to regulate a sector it, as well as the political class, regards as parasitical. Each time a farmer commits suicide, there is the obligatory reference to high interest rates charged by the usurious moneylender. Predictably, two standard courses of action follow. First, public sector banks are asked to increase their footprint (after the usual ex gratia payments are made to the bereaved families) and two, demands are made to monitor (it used to be 'regulate') moneylenders and their activities. While the first is a good thing, it is irrelevant in the current context; the second would be disastrous, given how many households in the country are dependent on moneylenders.

IIMS Dataworks' Invest India Incomes and Savings Survey 2007 throws up some interesting findings in this context. Of every 100 persons who have taken loans in the country over the last two years, 31 per cent have got loans from moneylenders, compared to 20 per cent from banks. Since the average size of loans from moneylenders is smaller than those from banks, the picture is different in terms of the loans outstanding. Of the total loans made in the last two years, 43 per cent of the outstanding was money taken from banks, compared to 21 per cent for moneylenders "" 11 per cent in urban areas and 24 per cent in rural areas. Clearly any move to register and then regulate moneylenders could have serious repercussions for more than 30 per cent of the population that is dependent upon this group for support; any steps that are to be taken must be carefully considered.

As for asking banks to increase their footprint in order to reduce dependence on moneylenders, the IIMS survey shows that a fifth of all those who have bank accounts took loans from moneylenders in the last two years. And of this intersecting set, nearly 40 per cent bank with one of the country's top five state-owned banks. So the spread of banking in itself is not likely to fix the problem. The survey asked respondents to list the groups they would go to for a loan in different situations. The results show that financial emergencies account for 30 per cent of the outstanding loan portfolios of moneylenders "" under 12 per cent of households who borrow in such emergencies, get money from banks; over 36 per cent borrow from friends/relatives and 34 per cent go to moneylenders. With similar relative orders of magnitude occurring in the case of other loans, such as for medical emergencies, it is obvious the moneylenders' flexibility is as much of an attraction as their spread across the country. Indeed, the interest rates charged by moneylenders "" about half the loans are at less than 4 per cent per month "" have to be seen in this perspective, and compared with the cost of other short-term funds access, such as through credit cards. The short point is that, until institutional mechanisms develop to meet the credit needs of people with different needs (including people who may be poor credit risks), the moneylender is meeting very real needs.