Indians’ Informal ATMs
Existence & Perseverance of Informal Credit in India
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For decades now, activities ranging from across the primary, secondary, and tertiary sector have been demanding loans, and are continuing to aspire for some credit from reliable sources. But, unfortunately, a reliable source is not always, and perhaps seldom is, a formal source. With booms occurring in various fields, such as the green revolution in the agricultural sector, wherein, inputs have become worth their weight in gold, loan requirements have touched a seemingly incessant level. But still, as has been the case for the past years until recently, informal credit from moneylenders, landlords etc, is prevalent. This brings us down to the questions of why such n
on-institutional agencies are outperforming central banks, what impact is this situation having, and whether there is a solution. This essay, thus, aims to analyse the existence and perseverance of Informal Credit in India, its ramifications and drawbacks, and finally, the way forward, taking into consideration the plausible solutions.
What is Informal Credit?
To cut it short, informal credit refers to the loans obtained from non-institutional agencies such as landlords, moneylenders, traders, and even relatives, which are, as the name suggests, not legally binding, and often have unduly high or low interest rates and extreme or no collaterals. Formal credit, on the contrary, refers to the loans obtained from institutional agencies such as banks, which have legal terms and services. Statistically, the percentage of informal sources of credit with respect to the total amount of loans borrowed, has been substantially greater than 50% for the past few years, reducing down to around 40% recently. Despite a few ups and downs in the relative proportions of sources of informal credit, moneylenders seem to outweigh other agencies, comprising about 30% of informal loans. Recently, with central and state schemes in place, the situation is gradually improving.
Why Informal Credit?
After conducting researches, it has been found out that there are 14 reasons due to which, the poor always look upon informal agencies for loans, few of which include the following: no license and paperwork required in non-institutional agencies, thus subsequently reducing time consumption; small savings possible and more convenient; localised terms, that is, tailor made conditions of loan keeping in mind the background of the borrower. Besides the aforementioned benefits for the borrowers, there are numerous benefits when taking into consideration the lenders: exorbitant tax rates mean a greater profit; close informational links because of less and known borrowers, etc. Formal sources of credit have failed to provide the aforementioned, besides also having less rural-penetration. Even though banks provide loans at low interest rates, the intimacy and apparent safety with moneylenders, landlords, and relatives, and other written advantages outweigh the demerits.
Impact on Rural Economy
While several rural Indians thought that indulging into informal finance would be the right call, it soon turned out to be the contrary. There are several dimensions to the negative effects that have ensued, ranging from discouragement to even suicides. Firstly, the loans, together with the exorbitant rates of interest, leave the poor borrowers in a fragile state, which soon turns into a debt trap. As has been observed in several states in India, millions of farmers borrow loans for the better, but often, due to crop failure, end up being caught in debt. This situation, when spread out over a span of a few years, progressively worsens the condition of farmers, who, unable to repay, end up committing suicide.
Secondly, with a major part of their income being spent on repayment, rural residents are unable to provide even the basic services and commodities to their families, for instance education and health. Thus, parents of several rural families are unwilling to spend on girl child’s education.
Thirdly, the potential entrepreneurs, who have an idea as well as intellect, are coerced to step back because money is required, and with high interest rates, informal loans are dreadful. For instance, Anand Kumar, a renowned educator, famous for almost 100% success rate of his students into the most competitive Indian universities, was once offered acceptance into the University of Cambridge, but due to monetary crisis, stepped back.
Informal credit, thus, has a severe impact on rural economy. In a situation where the poor masses could benefit by the schemes provided by micro financing banks, all the money is going to the moneylenders, thus stagnating the level of life of the poor. With inheritance laws in place and land being continuously divided, incomes are dwindling to about the level of zero. Most of the foreign investments in the form of public funds or NGO assistance are going in the bin because of corruption by these moneylenders and large landowners. With less healthy and barely educated rural masses, vulnerability to future poverty is evident.
Everything said above boils down to the fact that informal credit impoverishes the borrowers, and poverty subsequently unfolds its multi-faceted egregious forms, which get moulded into issues ranging from suicides to gender discrimination to brain drain to rural economy crash.
Solutions and the Way Forward
Without any further elucidation, it is to be stated that the need of the hour is eradicating the cause of the issue. Solutions need to be worked out to address the drawbacks.
First and foremost, planning to remove the moneylenders completely and replace them with central authorities is a waste. Despite all measures to control or suppress or them has yielded no positive outcome. As RBI said in 1954, “… Any realistic system of rural credit should seek to incorporate him(moneylenders) in itself rather than compete with him or wishfully expect to eliminate him.”
Solutions can be divided into micro and macro ones, that is, the more concrete ones, and the more broad-based larger objective ones. For instance, RRBs(Regional rural banks)/grameen banks, credit guarantee scheme are more direct and quick ways to address the issue, while MGNREGA, Sarva Shiksha Abhiyaan, midday meal scheme, digital India, etc., are a few indirect solutions.
Regarding the former kind of solutions, predominantly government should take a stand and besides initiating economic welfare schemes, should carefully carry out the implementation process. Awareness of finance-offerings should be increased, as has been observed in a research stating, “32% of enterprises are not aware of any of Government Financing schemes such as PMMY, CGT, and UAM.” Using technology and communicating with aspiring rural entrepreneurs can help too.
Some macro initiatives can be-providing education and healthcare, digitising rural homes for people to access online banks and NGO apps.
Conclusion
Informal credit, that is, loan from non-institutional agencies, seems to be a viable option to several rural residents because of a variety of reasons, including safety and intimacy, but actually causes much more harm, not only to the individuals, leading to suicides etc, but also to the rural economy at large by barricading the paths of entrepreneurs and lessening the capacity of all workers. But, where there’s a will, there’s a way; solutions have been drawn out, which include proper implementation of micro and macro initiatives. The way forward can thus be proactively educating, spreading awareness, and giving interest-less credit to the rural strata by the government.
~Vivasvat Rastogi
10A 26/08/21
