It would be ingenuous to make them a part of the banking system.
Somewhere in the fifties, the leftist economists who dominated our planning process decided that our traditional moneylenders were monsters who had to be destroyed by the socialist institutions of the state. Similar ideas got reinforced after the bank nationalisation in the late sixties and this has resulted in a distorted financial system wherein they are very much present, but are not supposed to be present.
‘The Household Indebtedness and Investment Survey’ (59th round) conducted by the National Sample Survey Organisation (NSSO) during 2003 brings out the important role played by moneylenders in our credit system. It reveals that the indebtedness was of the order of Rs 1,76,795 crore as at June-end, 2002. Rural households (73% of the total households) have 63% of the debt and urban households (27% of all households) have 37% of the debt.
The survey reveals that the incidence of indebtedness (IOI), namely, the percentage of households having debt, is nearly 27% in rural areas, 18% in urban areas and 24% overall in the country. In other words, every fourth household is indebted in our country with an average debt of nearly Rs 9,000.
The level of indebtedness by the households is both from institutional as well as non-institutional sources. Institutional sources are mainly cooperative societies/ banks and commercial banks, whereas the non-institutional agencies are mainly moneylenders and to some extent friends/relatives. The share of non-institutional category (see table) has actually increased in the rural areas between 1981 and 2002, with moneylenders accounting for nearly 45% of lending in rural areas and 25% in urban areas. The dependence of non-cultivators in rural areas on moneylenders was nearly 54% in 2002 and of the self-employed in urban areas it was 33%.
The survey also finds that the interest rates charged by non-institutional lenders are much higher compared to institutions. Moneylenders offered 40% of their lending at interest rates above 30% in rural areas during 2002 and nearly one-third of lending in urban areas at those rates. The institutional rates during the period were 10-20% in a large proportion of lending, both in rural and urban areas. This is to be expected since money lending is based more on trust than collaterals or the possibility of government write-off; hence, risk is higher.
We refuse to recognise the moneylender as a legitimate agent of economic activity and impose phenomenal restrictions on them since they are not legitimate in the eyes of our Anglo-Saxon financial system. For instance, they can lend but not borrow money from the public in carrying on their avocation.
Under the current RBI regulations, a butcher or barber or baker can borrow money and all sorts of corporate tycoons and share market operators, but not a moneylender (section 45-S of the RBI Act). A moneylender can lend but not borrow, except from relatives. In the context of safeguarding the interest of depositors, we have gone to the other extreme, which has impact on the credit markets particularly pertaining to retail trade and restaurants and petty businesses, which are dependent on moneylenders for their business activities.
We have an uncanny knack of turning our strengths into weaknesses and de-legitimising the role and contribution of significant segments of our economy. This has only pushed their activity underground, since they have extensive network and substantial credibility among their constituents — both borrowers and lenders.
They should have the flexibility to access deposits from the public like any other financial institution. Being a lender without being a borrower from the public is like asking a teacher to only teach (output) and not read anything (input). Unless an institution accesses funds using extensive network, it will not understand the magic of the lending market. A prudential lender is one who borrows efficiently. It is actually two sides of the same coin.
The global institutions are encouraged to enter into the same money-lending business with modern acronyms of micro-financing. If Washington gives a nod, it becomes the current thinking, but not our own existing strength.
Banks should treat moneylenders as channel partners and provide credit to them. They can license the regular moneylender, who has the tremendous advantage of the principle of ‘know your customer’, and integrate him into the banking sector. The tremendous contribution of moneylenders to the growth of our economy should not be underestimated just because they are dhoti-clad and English illiterate and pan-chewing.
Recognise them, legitimise them and consider them a source of strength and opportunity for credit channel to reach the remote parts of the country in a systematic and orderly fashion. Therein would lie our ingenuity in realising a more-than-10% growth rate, and an inclusive one at that.