Monday, August 07, 2006

Economic Times on banks lending to rural folks via moneylenders

Today's The Economic Times has an article titled Banks eye money lenders to give cheaper credit to farmers.

The article suggests that Banks cannot easily lend to the rural people because they do not reach the rural folks. What was unstated was also that Banks are afraid of lack of securitisation. So they are looking at village moneylenders, whose combined reach is great. So the banks are looking at somehow regulating them. Apparently a group has been constitued comprising of "six senior RBI officials and a senior bureaucrat each from of Bihar, Rajasthan and Andhra Pradesh" to take a look into using the moneylenders as conduits for reaching money to the needy farmers.

But then moneylenders are known to charge atrocious interest. "However, the money lenders have to be regulated so that they do not overcharge farmers" says one member of the group, according to ET.

I do not know whether this is a good method. Indian central bankers need not have to look at this solution at all. Grameen Bank in Bangladesh has already demonstrated over two decades, what can be achieved by direct micro and mini credit without any mortgage or security whatsoever. Grameen Bank is reaching millions of people - more than 90% are women. Grameen Bank has been successful in cutting out the local moneylenders who are basically exploitative.

How can regulation help change the moneylenders' behaviour overnight? Why should the moneylenders take money from banks and offer the same at low interest to the farmers (and others) when such a business will be entirely against their existing business where they are making substantial income, by charging 10% or more interest per month?

India has not bothered to copy a successful model such as Grameen. Instead we are offering a pale imitation in the form of Self Help Groups (SHGs) where the group is forced to save money first and then borrow from within that group fund so collected. There may be minimal topping-up over the savings at best. The banks do not care much about the SHGs. That job is left to various NGOs. The state governments step in and pay some compensation to the NGOs for starting up new groups.

From what little I have learnt about the SHGs in India, they are in no way comparable to the Grameen experiment.

I would suggest that what India needs is three or four banks in the mould of Grameen Bank, operating in various parts of the country. One each for each zone - perhaps. The Banks can simply be identical copies of Grameen Bank. Like in the case of the Grameen Bank, it is advisable to keep the Government out of the Bank so that Government does not get into one of its debt write-offs every once in a while for the sake of votes. Government, at best, should have only 20-25% equity in such a bank. The rest of the equity should be with the participating women, and other funders. There is also enough of an opportunity for private banks to start this kind of a venture.

It would be better to stay away from using the moneylenders.


  1. Very interesting post. I tend to agree with you that experiements with money lenders won't work. Infact, this approach makes moneylenders very powerful and this will result in even greater exploitation.

    However, for the alternate approach of micro / mini loans that you have suggested, I would think such a solution would work in a geographically small area with a small population. Even dividing the country into 4 zones tend not to help much. Maybe this can be done at the state level. Also using their credit history over a period of time can be used to increase the loan amount.

  2. I sometimes wonder if money lenders aren't a needlessly maligned group. The ECR stretch from the temple for a few kilometres is dotted with money-lender shops, and you usually find people from the lower-income groups, mostly women standing there. Most definitely these money lenders cater to a section that most banks don't even entertain. I was chatting with an auto-driver once - he mentioned that that his auto was his third. He was able to finance it with loans from some Sethji - the money lender keeps his RC book original till he returns the loan. I asked the driver about horror tales/uraban legends associated with money-lenders. He brushed it aside as problems faced by folks who were not regular in their parents. Another important point he mentioned was that once a relationship was established, the loans materialised (sometimes the whole amount) rather quickly. I suspect it's out English-educated middle class sensibilities that find the money-lender business repugnant, although it seems to serve a very large, but not-so-visible section of society.

  3. Oops, sorry, I actually meant "He brushed it aside as problems faced by folks who were not regular in their payments. "