structure and dynamics of informal credit market...

CHAPTER IV

STRUCTURE AND DYNAMICS OF

INFORMAL CREDIT MARKET

Informal Credit Markets play a leading role in an economy. It takes different

forms in different economic .setup and they have proved their capacity to achieve

growth in number and volume during the last some decades. Increase in economic

activities was found as a catalyst to the growth of informal credit markets in Kerala.

Of late the operations of the informal credit markets is wide spread in urban areas and

it takes various forms depending on the nature and types of its activities.

Informial credit market in Kochi City and its agglomerates constitutes many

sub -sectors. The presence of these financial intermediaries was felt in every nook and

corner of Kochi city, with the name boards hanging outside the office with

"Financiers", "Chit funds", "Gold loan", "Syndicate", "Bankers", "Finance *

Corporation" t:tc.

The trading and business activities in general are growing at a faster pace in

Kochi signifying the characteristics of a fast growing city in Kerala. Virtually

business comrnunity constitutes a major chunk of borrower category. This borrowing

community can be ranked according to the structure and pattern of business. As the

number of firm and their business activities takes an upward trend, there occurs a

corresponding increase in the participation of ICMs. The major classification in ICMs

is registered and unregistered category. (See Conceptual Framework, 3.4). Table 4.1

gives information regardir~g the type of firms.

Table 4.1 Distribution of lending firms by various categories

Source: Survey data

Figures in parenthesis show percentages

In the registered moneylender and chit funds category, most of the

entrepreneurs were full time moneylenders. This is 78.68 per cent (48 out of 61) and

86.1 1 per cent (3 1 out of 36) in the registered moneylenders and registered chit fund

respectively. But in the onregistered category most of the entrepreneurs were part

time moneylenders. It was found that employees and business people were engaged in

part-time moneylending activities.

Another important feature is that majority of the firms in the registered

moneylender category belongs to proprietorship firm followed by partnership and

private limited companie,~. And in the case of chit funds, most of the firms were

private limited companies, followed by partnership and proprietorship.

Full tirne moneylenders means those who carry out business or devote most of

their time i n moneylending business. They have another business also but

moneylending is their prirnary activity. Part time moneylenders means those who are

assigning secondary importance to moneylending business and their chief

engagements are either business or employment. In the case of partnership and private

limited companies the role played by the Managing Director or the Managing Partner

was considered.

4.1 TYPE OF BUSINESS IN ICM ACROSS VARIOUS SECTORS

Credit markets are. segmented. The main manifestation of the segmentation

according to Madhur and Nayar (1987) was wide dispersion in interest rates

between markets and limilkations on the borrowers who can get finance from particular

markets. Inadequate and asymmetric information about potential borrowers and

specilisation to achieve efficiency in particular credit market appeared to be behind

this. Virmanl (1992) asserted that credit markets were largely fragmented. He

characterised it as a competitive monopoly. To him no evidence of market leadership

was found in credit markets.

The activities of major sub-sectors of ICMs differ with respect to funds

availability, links with the society, efficiency, demand for funds etc. Each of these

sectors has its own specialised form of activities .The activities of various sub-sectors

are explained below.

4.1.1 Registered Moneylenders

The registered moneylender category is divided according to their size and

license fee paid.

Chart 4.1 Distribution of Registered Moneylenders

Volume of business

Up to 1 Lakh-

1 Lakhs - 5 L.akhs

1-5 Lakhs I

1,00,000

] m ~ a k h s l Lakhs I

1,50,000

I I J Source: The Kerala Moneylenders Act, 1958

The registered moneylenders are required to remit Rs.3000 per year as

registration fees other than the license fee, irrespective of various slabs.

Granting license to a firm does not ensure that the volume of business done by

the firm woulti fall within the permitted level. The main activity of these firms is the

disbursen~ent of Gold Loan. Gold is used as the main form of collateral. The loan

amount depellds on the market price of gold per sovereign. The type of gold

ornaments is also very important. If it is necklace, the loan amount will be around 60-

65 per cent of the market price of gold per sovereign. If it is bangles a higher

percentage i.e., 70-72 per cent of the market value of gold will be advanced. The

volume of the business done on the basis of gold backed scheme depends on the areas

at which the flrm is located. If the firm is located in the commercial segment,

quantum of rrloney lent out on gold-backed basis will be low compared to those firms

located in res~dential areas. It was found that the gold loans were availed of mostly

hy poor or middle class people.

Gold loan was not the only moneylending activity of many firms. They found

that t h ~ s b u s ~ n e ~ s was not lucrative. Along with gold loans they carried out other

forms of molney lending activity such as daily, weekly, monthly loans etc., with or

withoul collateral. It was found that moneylenders, who were registered under Kerala

Moneylender Act 1958, also had chit fund activities without licenses.

Moneylenders who have concentrated in the commercial segment in the city

were found to have diversified activities. One main reason for diverting their attention

to other lucrative business is that once the people borrowed money on the basis of

gold loan, it would be for a period and the rate of interest is paid monthly. So the

money lent out would get stuck up leading to illequidity of the lenders. Another

reason is that when the borrowers were not able to remit the rate of interest that has

accumulated, they found it difficult to redeem the gold ornaments/ jewellery. Thus the

moneylender had to wait for a long period either to sell the jewellery or to allow the

borrower to take away the ornaments.

Still another reason is that moneylenders do not like to lend to strangers and

unknown parties since they expect theft goods and booties that may be brought to be

mortgaged. lnvariably these moneylenders advance more amount of money per

sovereign ot gold than what is given by Commercial and Cooperative banks or

Societies. Other than gold ornaments or jewelleries moneylenders also accept any

collateral which are fully marketable such as documents of properties, collateral

substitutes like post dated cheques, promissory notes, stamp paper etc.

4.1.2 Registered Chit Funds

ROSCA (Rotation of Savings and Credit Association) is the international

name for ch~tties. Chit funds are one of the main forms of savings in Kerala. The

number of people who are involved in this field showed an increasing trend in recent

year5

Chit means a transaction by which one or more persons enter into an

agreement w~th number of persons that everyone of the contracting parties shall

subscribe a certain amount of money by periodical installments for a certain definite

period and thi~t each in his term as determined by lot, by auction or by both shall be

entitled to prize amount. (The Kerala Chitty Act,1975). The basic principle underlying

a chit fund is accumulatic~n of savings. The operations of chit fund business basically

involve three main stages; enrollment of members, disbursement of bid payable

amount, and rt:covery of monthly chit subscriptions. (See Annexure-III).

Before the Kerala Chitty Act, 1975 came into existence, there were mainly

two regulatory frameworks in Kerala (i) The Thiruvathancore Chitty Act, 1945

(Malayalam Year-1 120) and (ii) Cochin Kuries Law, 1932 (Malayalam Year-1107).

These two laws become ir~valid when the present Kerala Chitty Act,1975 was passed

and implemented. The objective behind the enactment was to integrate Chitty Laws in

Kerala and effectively regulate them. As per the Act, the maximum prize amount

allowed for a private chitty firm to conduct chitty is Rs.25, 000. But over the years,

the concerned authorities made no revision in this amount. This amount was found

meagre by chitty firms compared to the growing need of the borrowers, especially

business people. As a result, private chit funds started migrating to other states to get

registration where no laws connected with chitty regulation exists. But the chitties

conducted by Cooperative Societies and the State owned Kerala State Financial

Enterprises (KSFE) were e:rcluded from all regulations.

Jammu and Kashmir is one of the States where no act regulating or controlling

chitty companies is promulgated. The chit fund firms established a branch office in

this state, which is registered according to Commercial Establishment Act. These

chitty cornpallies are not allowed to start chitties from their head office situated within

the state. But these firms start chitties from their branches situated in the outside State.

But really these firms in guise of' starting chitties from their branch office, operate

chitties withiu the state. The activities of these firms are not in any way controlled by

government a~uthorities. Besides many of the chit funds operate in the pretext of

having a branch in Jammu and Kashmir.

Chit f ~ ~ n d s as a financial terminology known by different names such as

Djanggi, Arisun, Ho Esu etc. are prevalent in Malaysia, Sri Lanka, Bangladesh,

Indones~a, Thailand and the Philippines etc. Besides, the chit fund institutions there

existed community or friendly chits operated by persons working in offices and

factories, amoug housewives and self-employed entrepreneurs not for commercial

consideration but f'or helping each other. Chit funds, promoted by firms and

companies are classified as business chits and the promoters of such chit groups are

known as foremen, who undertake to organise them and assume the risk associated

with the business and reap rewards therefrom.

It was ~'outld that all the chit firms selected under study were having

registratiotls in other States. Table 4.2 gives the details.

Table 4.2 Distribution of Firms by Registration and Nature of Organisation

under Kerala 1 6 (9.09) 1 6 (9.09) 1 10 (15.15) 1 22 (33.33) 1

Proprietorship Registration

7 ( 10.60) Registration

Both outside &


It was lbund that majority of the firms had outside registration only. The

Partnership

18 (27.27)

Chitty Act

Total f: 13 (19.69)

services rendered by these chit funds are so significant that both the business people

and households are benefited, compared to cooperative societies and other

Private Ltd.

19 (28.78)

Source: Survey data

24 (36.36)

government rur~ institutions.

Total

44 (66.67)

4.1.3 Unregistered Category

This cakgory includes the following sub-groups.

4.1.3.1 Unregistered Moneylenders:- Both full time and part time moneylenders are

included in this category. These moneylenders have no permanent office. They lend

out money on daily, weekly and monthly basis. Full time unregistered moneylenders

are found to have more concentrated on chit fund business. Part time moneylenders

are employers or business people.

4.1.3.2 Unregistered Chit Funds:- The main activity of this group is chitty business.

They also have no permanent office, and they use their house or firms as the office for

their operations. 'They also lend money but that is restricted only to the members of

the chit fund.

29 (43.93) 66 (100)

4.1.3.3 'I'he Association of Traders1 Merchants:- The association of traders and

merchants have formed ' Traders Mutual Benefit Fund' to extent credit facilities to

the members They advance money on daily payment basis and they also conduct

chitties following the similar pattern of registered groups in the informal credit

markets. One of the major sources of the income is the membership fee from their

members. The ollice bearers are in charge of these activities, and to assist them they

have employed a few persons to collect the repayment and other related functions.

4.1.3.4 Jewcllcry Shops: - It was found that small jewellery shops were engaged i n

gold -backed moneylending. These firms were located in non-commercial and

residential arcas in the City.

4.1.3.5 Tamil Groups:- Discussion with the authorities in this field helped to

unders~and that a group of Tamilians were engaged in moneylending activity. They

have concent1,ated in some important pockets of the City viz, Thoppumpady, Kaloor,

Thripunithura. Ayyappankavu etc. These people are migrated from Dindigal in Tamil

Nadu and they had availed of loan facilities from nationalised and other scheduled

banks by pledging their documents of property.

They usually lend money in various localities but they live in a different place

away from their business localities. For a particular day, probably the first day of the

week, they select a specific area for moneylending operation. In the subsequent days

they lend / collect money in other areas. One of the days in a week is taken as the rest

day. The collt:cted amounts will again be lent out and the amount collected in the last

week ol'a ~ ~ l o ~ r t h woultl be used to Ineel their expenses and amortise loan, if any taken

from the bank

Tamil people lend money to households especially housewives and lend out

not rno1.e than Rs. 1,000 initially and the maximum term given for repayment is two

and half months (10 weeks). They would deduct a certain sum as interest from the

loan a~r~ourit given ro the borrower. If Rs.1, 000 is borrowed they would deduct Rs.

250 from this ;mount and lend only Rs.75O.Thousand rupees have to be given back in

ten equal inst;rllments. If the borrowers make prompt payments they will advance big

amount (up to Rs.5, 000). The rate of interest charged is approximately 12 per cent

monthly (144 per cent per annum).

4.1.3.6 Unregistered Auto finance Firms:- These firms specialise in two wheeler

finance only and the maximum term allowed for repayment of loan is two years. It is

the dealer of the vehicle who arranges this finance for the buyer of the vehicle. If the

borrowel- IS a government employee, they demand only salary certificates along with

blank cheque!,. These moneylenders send their representatives to the office or house

of the borrower to assess the financial capacity of the borrower, and check whether he

will be able to pay the money borrowed. These firms have no permanent office.

Normally they charge 18.5 per cent to 25 per cent per annum and they do not have

any other forms of moneylending.

4.1.3.7 Agents / Urokers:- The brokers I agents play a decisive role in arranging credit

to the needy. They are mostly part time moneylenders. They are either businessmen or

employees in Government or private sector. They have local area connection or

contact. The borrower approaches the agent directly or through third parties and they

arrange finance to them. 'They provide information on borrowers regarding whether he

is able to repay or the capacity to repay. They get in return a certain amount as

commis.sion.

4.1.3.8 Beggars:- It was found that some beggars, who after collecting alms, entrust

their trifle amount to a known trader (small scale) in the form of a loan. A small book

is kept with the trader to note down the amount given. This money is given back to

the beggar when he requests.

4.2 GENERAL CHARACTERISTICS

Table 4.3 shows the general characteristics of three main categories viz.,

Registered moneylenders, Registered chit funds and Unregistered category. The

important characteristics are age, educational qualification, family status, religion and

structure of business

Table 4.3 General Characteristics of ICMs

4.3.1 Age Class

4.3.2 Religion

(Continued)

I

~ e c h n i c a r I I

7 (5.46) I 7 (5.46) Professional

4.3.3 Educational Qualification Below SSLC

P D C

D C

P G 3 (2.34)

Source: Survey data Figures in parenthesis show percentages

Total t 61 (47.65) I I I

The age class of moneylenders varying from 10 to 70 years. In the case of

14 (10.93)

16 (12.5)

5 (3.90)

1 (0.78)

36 (28.12)

partnership and private limited companies age of the Managing Partner and Managing

Director has been considered. One noticing factor in the case of age class of

15 ( 1 1.72)

6 (4.86)

8 (6.25)

1 (0.78)

I (0.78)

3 1 (24.21)

moneylenders is that 35.48 per cent (1 1 out of 31 firms) of the unregistered category

15(11.72)

43 (33.59)

41 (32.03)

17 (13.28)

5 (3.90)

128 (100)

are in the prime age group. This is because they are more enthusiast young persons

and they take rounds themselves on their motorcycles and they are mostly full time

moneylenders. It is also noted that the number of unregistered moneylenders in each

age cia\\ tlecl~ne$ a\ the age group advances

ln [he case of religion, in all the categories except unregistered category,

Christians cvnstitute the majority. In the case of unregistered category, Hindus

constitute the ~riajority i.e. 54.84 per cent (17 out of 31). Involvement of Muslims is

highest in the unregistered category.

The qualification of moneylenders range from below SSLC to Professional

and Technical ~~ualificatiotls. One noticing feature is that in the unregistered category

48.38 per cent (15 entrepreneurs) were below SSLC qualified. In general most of the

moneylenders were having, SSLC or PDC qualification. Another feature is that 59.37

per cent (76 enlrepreneurs) had nuclear family setup.

4.3 DYNAMICS OF INFORMAL CREDIT MARKET

The act~vities of informal credit markets showed a dynamic character in the

sense that informal credit markets simply evade laws and carry out their activities

incornpatihle uitli thc licenses granted to them. Moreover every possible steps taken

by the authorit~es lo control or regulate the informal credit markets resulted only in

the innovation of new and better tactics to remain in the business. It is not easy to

measure the income levels of informal credit markets, since the moneylenders were

not ready to reveal the volume of business, total amount of money outstanding etc. If

such an attempt were made it would result only in either overestimation or

underestimatiori

The operation of moneylenders is different from any other business activity in

the sense that i t is done with utmost secrecy and confidentiality. So we were unable to

collect information on sensitive matters on the ICMs. And i t is done with the help of

third party references.

L)yn;i~rli~.:s 01 informal credit markets is analysed by considering various

attributes such as activities of informal credit markets, area of operations, lending rate

of interest, instruments used in lending process. intermediary role, links between

formal and informal credit markets, employment potential, occupational mobility and

migration

4.3.1 Activities of Informal Credit Market

The informal credit market is not functioning according to the licenses they

have obtained from the concerned government departmentlagencies i.e., the line of

activi~y of registered category of ICMs and the activity for which licenses have been

obtained by them were found different. For example Registered moneylenders have

obtained licenses as per Kerala Moneylenders Act, 1958. Their main activities include

according to the law, security backed lending of money, especially gold loans. They

were not allowed to do any other activities such as conducting chit funds etc. In the

similar manner those firms which have obtained chit funds license from the Registrar

of chit funds (Kerala Chitty Act, 1975) were not allowed to do any other forms of

money lending or chitties unofficially. But it is found that the registered category

mostly concentrated in other activities other than their licensed activities. Virtually all

these activities were not recorded in Official Books of Accounts. It

will be more correct to say that even the licensed activities of ICMs were not done

with transparency. Thus the operations of the informal credit markets pose a challenge

to the economy or to the regulatory bodies since the volume of business done is many

times greater than that perceived by official authorities. Moneylending licenses and

c h ~ t lund licenses are the two forms of licenses obtained by the informal credit

markets. Table 4.4 makes clear that the relation between licenses obtained and various

sub-markets in informal credit markets.

Table 4.4 Registered Firms and Types of Licenses

Moneylender

Chit funds

Total

Source: Survey data

\ Category

Licenses \, Money lender

Chit funds

Figures in parenthesis show percentages of the column total

Out of the 61 registered moneylenders 50.81 per cent (3lfirms) had

Registered

moneylenders

31 (50.81)

-

moneylending license only and rest were having both moneylending and chit funds

11censt:s. In the case of registered chit funds category, out of the 36 firms 77.7 per cent

Registered Chit

funds

. -

28 (77.7)

had only chit funds license and the rest (22.7 per cent) were having both chit funds

and moneylending licenses. Further analysis show that moneylending firms had more

Total

3 1 (3 1.96)

28 (28.86)

~nclination towards chit funds activities and chit funds firms had less inclination

towards registered moneylending activity. This is because moneylending is more

regulatory in character (KML, Act) and there was no such regulation in the chit funds

activit~es, since these firms were registered with outside state and there are no existing

laws to control their activities.

This might be the reason behind the moneylending firm to have more

1nc1in:rtion towards chit funds activities. If we consider registered moneylending and

chit fund5 activities as different markets, analysing the table 4.4 shows that there is

inter-penetration of markets between moneylenders and chit fund firms. Further

classification of the registered firms on the basis of organisational structure i.e.,

proprietorship, partnership and private limited shows the involvement of particular

organi!;ation in moneylending and chit funds. Table 4.5 reveals this information.

Table 4.5 Distribution of Firms by Type of Organisations and Type of Licenses

Proprietorship License

b e y lender I I I

Partnership

26 (26.8)

(funds I I I I

Source: Survey dat.a


5 (5.15)

and chit funds

It is clear from the above table that out of the total 39 proprietorship firms 66.6

Private Ltd.

5 (5.15)

4 (4.12) 1 19(19.58) 1 28 (28.86)

per cent had obtained moneylending License. In the case of partnership firms 68.96 per

cent of the 29 firms had obtained both moneylending and chit fund license. Coming to

Total

- 1 31 (31.95)

8 (8.24)

private lim~ted con~panies, out of 29 firms none of them were found to have obtained

moneylending license but 65.51 per cent of them had chit funds license alone.

The unofficial activities of the informal credit markets show the actual

behaviomur of them. In order to analyse the behaviour of informal credit markets we

20 (20.6 1 )

need to consider the relation between type of licenses and their activities. Table 4.6

gives the details of it.

10 (10.3) 38 (39.17)

Table 4.6 Relation between Licenses and Activities of ICM

Licenses Moneylending Moneylending Chit Funds

and chit funds

Gold loan 14 (14.43) 2 (2.06)

Chit funds 16 (16.50) 5 (5.15)

1 Total 1 11(31 95) 1 28 (28.86) 1 38 (39.17) 1 97 (100.0) I I

Total

16 (16.5)

21 (21.6)

Chit funds, gold 17(17.52) 12(12.37) 31(31.95)

loans and others

Source: Survey data

60 (61.85)


From the table 4.6 it is clear that out of the 61 firms which were registered

under K M L Act, 1958, 31 firms had obtained moneylender license only and 30 firms

had obtained chit funds and moneylending licenses. In the chit funds category out of

the total 36 firms, 28 firms had obtained chit funds licenses only and 8 firms had

obtained both chit funds and moneylending licenses. Among the 31 registered

moneylending irms, 45.161 per cent had gold loan business, and rest 53.84 per cent

had chit funds, gold loan and other forms of moneylending. In the case of 28 firms,

which had obtained chit funds licenses, 57.14 per cent had specialised in chit funds

and the rest (42.86 per cent) specialised in chit funds and other forms of

moneylending, but this does not include gold loan.

Table 4 7 shows the business activities of various categories of informal credit

markets. I t classifies the various activities of ICMs into seven, viz., gold loan, daily

loans, weekly loans, monthly loans, fifty day's loans, hundred day's loans, and chit

funds.

Table 4.7 Activities of Informal Credit Market-Individual Wise

Daily loans '(20.0) I I

4 (80.0) I 5 (100.00)

Category Registered

Moneylenders

54 (90.00)

Registered chit

funds

6 (10.00)

Weekly loans q& ( i3. l) Monthly loans

SO day's l o a n ~ 1 2 1 . 7 3 ) I I I

Unregistered

category

16 (27.6)

6 (26.08)

100 day's loi/(50.0ti) , I

Total v ( 4 7 . 6 5 ) I I I

36 (28.12) 1 31 (24.21) ( 128(100.00)

Total

(Row wise)

60 (100.00)

12(52.17) 123(100.00)

22(26.92)

Chit funds ](38.20) I I I

ource: Survey dnt;~

2 (100.0)

17 (29.3)

19 (23.17) 1 82(100.00)

36 (40.4)

Figures in parenthesis show percentage of the row total

2 (100.00)

58 (100.00)

19 (21.34) 1 89 (100.00)

Chit funds were found to be the largest single activity. Out of the 128 firms

selected 69.53r1er cent (89 firms) conducted chit funds. The second largest category

was hundred day's loans. In the monthly and 50 day's loan category, unregistered

firmslcategory holds the largest position. In the case of 100 day's loans registered

moneylenders had the highest percentage of share.

From the above analysis we conclude that moneylenders/chit funds do not act

according to the licenses ,granted to them, chit funds were found to be the largest

single category. And there is more inclination towards chit funds activities.

Proprletorsh~p firms were concentrated on moneylending, partnership on

n~o~~cylelrclllig '11111 cli~l lundh and privatc limited on chit funds.

4.3.2 Operational Area of MoneylenderIChit Funds

The operational area of various sub-markets in informal credit markets implies

the extent to which they have concentrated their operations in the city. The

operational area of ICMs is divided into three based on the distances in kilometres

from the offices/houses of the entrepreneurs- 'Local area' (the area falls within 5

square kilomelres from the office); 'Beyond local area' (the area falls within 12 sq.

kms) and a 'Large area' (more than 12 sq. kms). The demarcation of the operational

area is very ilnportant and it was calculated on the basis of a common consensus

among the moneylenders.

The area of operation is different from firm to firm depending upon their kind

of operations. The lending operations of informal credit markets are well connected to

information they have gathered from the borrowers. If the money is lent out on daily

repaymen[ basls, this has to be collected by the moneylender daily and for this

purpose he employs marketing executives, who would take rounds and collect the

repayments. So it is essential to limit the area into a small one. Moneylenders lend out

their money only after thorc~ughly assessing the performance of the borrower. Most of

the bori-owers ,were business units. Moneylenders consider the location of their

business, past relationship, if any, with him, the types of commodities they deal in,

estimate of the stock with the shop and some others before lending out money.

Moneyleilders whose main activity was gold loan restricted their operational

area into local area because they lend out money only to known persons or to those

who were intl-oduced by his friends. This was to ensure that pawned articles were not

booties or theft ones. Norm;illy chit funds had a large operational area because they

tbund it difficult to get sufficient number of clients from within the local area. But

they 11y to gel sufficient number of clients from the local area by introducing special

repayment system i.e., by introducing daily payment of monthly subscription (30

equal instalrnents). Thus more and more clients were being attracted. Still there were

number of c h ~ t funds which conducted large or big types chitties (big amounts) and

these firms may not be able to get sufficient number of clients from the local area.

Thus they filled the gap by entertaining clients from outside the local area. Table 4.8

shows operational area of three major categories of informal credit markets.

Table 4.8 Operational Area of MoneylendersIChit Funds

Registered Registered chit Unregistered Total

funds category

Beyond !


i 17 (13.28) local area

-- k--- Large area ; 7 (5.46)

Total 61 (47.65) .-

Of the total 61 registered moneylenders majority of them concentrates their

activities in the loc;il area, i.e., 60.65 per cent. In the registered chit funds category 23

23 (17.96)

Source: Survey data

6 (4.68)

36 (28.12)

out of 36 firnis (63.88 per cent) concentrated their activities in the beyond local area.

But in the unregistered category, the concentration is more or less equal in local and

15 (11.71)

31 (24.21)

t~cyoild local ;ti-( a.

55 (42.96)

13(10.15)

128 (100.0)

'fable 4.9 shows the distribution of moneylenders by licenses and their area of

Table 4.9 1)istribution of Moneylender by Licenses and Area of Operation

Our ol the 3 1 firms who had obtained only the moneylender license, 83.87per

Moneylender

Local

Beyond 3 (3.09)

local area

Large area

Total

cent of rhcnl 126) Iiad concentrated in the local area only. In the case of chit fund5

license firms, out of the total 28 firms 67.85 per cent (19) firms had concentrated on

Source: Survey data Figures in partznthesis show percentage

Chit funds

4 (4.12)

19 (19.58)

5 (5.15)

28 (28.86)

beyond local area, that means they depended on an extended area than local area. In

the case ol moneylender and chit funds licence firms almost equal number of firms

Moneylender1

chit funds

14 (14.43)

18 (18.55)

6 (6.18)

38 (39.17)

specialised in both local area and beyond local area.

Total

44 (45.36)

40 (41.23)

13 (13.4)

97 (100.0)

The table 4.10 shows the relationship between area of operation and nature of

operation

L~-- I I Source: Surve) data Figures i n parenthesis show percentages

of Operation

Full time Part Time Area

- . -

Local 43 (33.59) 17 (13.28) - -.

Beyond local area 37 (28.90) 18 (14.06) -- -- ~-

Large area 10 (7.81) 3 (2.34) ~~ ~-~ -- ~

'rota1 90 (70.3 1) 38 (29.68)

Total

60 (46.87)

55 (42.96)

13 (10.15)

128 (100.0)

Of the total 90 full time moneylenders 47.78per cent (43) firms concentrated

in local area only, followed by 4l.lper cent firms in beyond local area. In the part

time category, more or less the same number of firms had concentrated in both local

and beyond local area. This is because some part time rnoneylenders/chit funds were

employees anti they lend money to the borrowers in the distant places and sometimes

near by their offices.

We cunclude that if the moneylenders carry out different kinds of

moneylending activities the area of operation would be large, at least more than the

local area. Abl~ve all, information on borrower is very important, since most of the

[raris;ic[IoIIs involve no marketable collateral. The moneylenders want to get back the

repayment at a short notice. Daily collection is a method where moneylender collects

the payment daily by sending his representative to the borrower. More than that,

moneylenderslchit funds would be located in a place where they have many related

and closely connected clients.

4.3.3 The Lending Rate of Interest and Informal Credit Market

Informal credit markets are known to have charged exorbitant rate of interest.

They extend d~fferent types of loans and rate of interest varies from one type of loan

to another, such as daily, weekly, monthly, fifty day's and hundred day's loans, gold

loans etc. I t was also found that lending rate charged is different from person to

person depend~ng on the relationship with the borrower.

I ligll rille 0 1 inrere:;r was explained in ternis of risk of default. Gill and Singh

( 1997) assertetl that risk pervades finance because finance trades the future against the

present ant1 the present against future because future is uncertain. Ghate (1992)

argued that monopoly profit as a component of interest rate has occupied a back seat

in the ICMs nlainly due to the keen competition among the lenders on the one hand

and improved awareness of the borrowers on the other. Pischke (1991) made it clear

that finance will not flourish where interest rates and loan related fees do not

adequately reflect the cost of lending.

It is to be noted that rate of interest charged on loans in the informal credit

markets was n o t on annual basis. But in the analysis, the rate of interest charged on

various loans was calculated on an annual basis. For example, for daily loans

moneylenders advance a fixed sum say Rs.900 in the morning and the borrower has to

give back the borrowed money with 10 per cent interest of say, Rs.1000 (equal to

Rs.100) totalling Rs.1, 000 in the evening. If the rate of interest were calculated

annually i t would come around 4055 per cent per annum. It was found that most of

the daily loan:; were advanced by unregistered category. The special feature of these

loans is that lenders do not extend more than Rs.5, 000. If Rs.5, 000 is requested from

the lender, he would advance only Rs.4, 500 in the morning and the borrower has to

give Rs.5, 000 in the evening. Actually Rs.500 as rate of interest is charged on

Rs.4, 500 and not on Rs.5, 000. (For details of interest rate calculation see

Annexure-I).

Daily loans were advanced to petty shops and market based activities like fish

merchants, nreat stalls, vegetable vendors etc. Normally the maximum amount

advanced is Rs. I , 000. It was found that the above mentioned traders borrowed money

from moneylenders and conduct the business. The moneylender himself or his

representative comes in the evening to collect the money with interest.

In the case of weekly loans also unregistered category plays a major role. The

rate of intere,t v a ~ ~ e d from 208-260 per cent per annum. For Rs.1, 000 the rate of

interest to be given weekly is Rs.50-60. These loans are considered emergency loans

and the maxi~nun~ amount given is Rs.10, 000. It is also found that Tamil people lent

money for 10 weeks (75 clays) and collect interest with principal weekly.

The gold loans were extended mostly to households and moneylenders

charged different interest rates to different borrowers depending on the relation with

then]. They charged 30-36per cent rate of interest on gold loans. This rate of interest

is more than that fixed by the government authorities. The table 4.1 1 illustrates this.

Table 4.1 1 Rate of Interest on Gold Loan

1 I Registered Registered chit I Tntnl

I... .-.. \ .\- I n~nneylenders I funds I

33 per cent 4 (6.66) 16 (26.66)

36 per cent 40 (66.6)

Source: Survey data

Figures i n parenthesis show percentages

1t is ckar from the above table that 66.6per cent of the total 60 moneylenders

charged 36 per cent interest on gold loan. This rate is high compared to the one fixed

by the government authorities ( 1 8-24 per cent). The average rate of interest in the case

of Reg~slcrctl moncylender is high - 35.1 1 per cent compared to 32 per cent of the

rcgistc~c(l '1111 lurid\

Wit11 -egartl to monthly loans, credit is given on the basis of any fully

marketable collateral security. Fully marketable security means documents of house/(

plots, lndlra V i k a Patru, Life Insurance Policies and document of uninhabited plots.

So~neti~nes Icnder wants to get it registered in his name. The rate of interest is paid

monthly and it varies from 50 per cent to 144 per cent per annum. It is found that rate

of intel-est charged depends on the market value of the collateral offered by the

borrower. If the market value of collateral is high the lender is ready to lend money at

a minimum possible rate of interest. Along with the collateral, the borrower has to

give signed blank cheques and signed stamp paper and promissory notes, if necessary,

Table 4.12 gives the details regarding the rate of interest charged by informal credit

markets.

Table 4.12 IZate of Interest on Monthly Loan

Registered

Moneylenders of interest

60 - 70 per cent 3 (5.17)

70 - 80 per cent -06) I I I

Registered chit

funds

9 (15.52)

3 (5.17)

3 (5.17) I I

80 - 90 per cent 1- 5 (8.62) I

Total 16 (27.6) 17 (29.3) 58 (100.0) -- --

Arithmetic 80.6 63.13 73.23

Mean (A. M)

6 (1 0.34) 1 16 (27.6)

.

90 and above ~TR)I I I

-

Unregistered

category

5 (8.62)

1 (1.72)

2 (3.44) 1 7 (12.06)

I (1.72)

I I I Source: Survey data

Total

16 (27.6)

7 (12.06)

3 (5.17) 1 12 (20.69)

--- 1- Coefficient of

12.9 Variation (C.V)


F n m table 4.12 it is clear that 67.24 per cent of the total 58 firms charged rate

10.73

of interes~ in hstween 50-80 per cent per annum (39 firms). In the registered

14.23

moneylende~ category, most number of firms charged the rate of interest in between

70 per cent and above. And in the case of registered chit funds category the rate of

interest charged 1s in between 50-80 per cent category. But in the case of unregistered

category the number is more or less equally distributed. The Arithmetic Mean of the

rate of interest among the three categories is highest in the case of registered

moneylenders- 80.6 per cent with C. V - 12.9 per cent. The AM of other two

categorich viz., registered chit fund, and unregistered categories were 63.13 per cent

and 73.23 per cent with C. V- 10.73 per cent and 14.23 per cent respectively. Among

the three groups the rate of interest charged is more stable in the case of registered

chit funds,

I t was found that chit fund fimls advanced credit on the basis of the total

amount o l subscriptions remitted by the client, by keeping post dated cheques and

promissory notes as collateral. And they charge a moderate rate of interest on these

loans.

'l'hc next nlajor category of loans is 100 day's loan. Out of the 128 firms 82

firms were found to have this type of loans (64.05 per cent). The method of 100 day's

loans is that lender advances a fixed sum of rupees and the borrower has to give the

money back within 100 days in 100 equal instalments. The table 4.13 illustrates the

rate o f inrcrest chargecl on 100 day's loan by different sub-markets.

Table 4. 13 Rate of Interest on 100 day's Loan

Category Registered

Moneylender

Source Survey data


Registered chit

funds

\ 40 - 50 per cent

50 - 60 per cent

60 - 70 per cent

Total --

A. M

C. V

Table 4.13 makes it clear that most of the moneylenders charged a rate of

15 (18.3)

6 (7.31)

I (1.22)

22 (26.83)

38.63

2.25

22 (26.82)

16(19.5)

3 (3.65)

41 ( 50.0)

40.36

15.55

interest in between 40 and 50 per cent. In the case of registered moneylenders and chit

Unregistered

category

funds number is highest in 40-50 per cent category, but in the case of unregistered

Total

6 (7.30)

10 (12.19)

3 (3.6)

19 (23.17)

43.42

15.46

firms most of the firms charged rate of interest in between 50-60 per cent.

43 (52.43)

32 (39.02)

7 (8.53)

82 (100.0)

Unregistered category had the highest AM-43.42 per cent followed by registered

moneylender- 40.36 per cent and registered chit funds had the lowest AM- 38.63 per

cent. The rate of interest charged on hundred day's loans is more stable in the case of

registered chit funds (C. V-2.25 per cent).

If the borrower demands Rs.1, 000 from the moneylender he would give only

Rs.900 and the borrower has to repay the money equivalent to the amount Rs. 1,000

in 100 equal instalments. The calculated rate of interest annually is 40.55 per cent.

This is considered the lowest existing rate of interest. The lenders may charge a

higher i-atc of interest from the borrower depending on the need of the borrower and

the relationbli~p with the lender. If the borrower has direct contact with the lender

there :ire more chances to get credit at lowest possible rate of interest. Normally, the

lenders denland no collateral for the purpose but they demand post-dated cheques and

promissory notes if necessary, from the borrower. These collateral substitutes once

given need not be given again to avail of further credit facilities. The analysis of the

relation between collateral and rate of interest is given in a separate topic. In the case

of chit funds 100 day's loans will be advanced to the members in chit funds only,

In the case of 50 day's loans the same technique was used similar to the one

used in 100 day's loans. The amount lent has to be given back within 50 days. The

rate of interest varies from 40 per cent to more than 80 per cent depending upon the

amount lent and the relation between the borrower and lender and the type of

business. If the amount to be lent is Rs.1, 000, they give Rs.900 and Rs.1, 000 has to

be given back in SO equal instalments i.e., Rs. 20 in each day. Table 4.14 illustrates

the relation between rate of interest and number of moneylenders.

Table 4.14 Hate of Interest on 50 day's Loan

~ ~~

Soi~rce: Survey data

Figures i n parenthesis show percentages

TI is clei~r frorn the table 4.14 that 12 firms out of 23 firms were unregistered

moneylenders and most of them were charging a high rate of interest, above 70 per

CCllt.

It car1 he concluded that rate of interest varied from one type of loan to

another, depending on the duration. The lower rate of interest was found in the case of

gold loan,

(36 per cent) and households mainly availed of this loan. In the case of daily loan

(morning - evening) rate of interest charged was found high (4055 per cent per

annu~n) and this is availed of by businessmen.

4.3.4 Collateral Instruments Used in Informal Credit Market

7'11rr.e are different kinds of collateral instruments used in the ICMs. Sarap

(1987) found that there were mainly three kinds of security offered in informal credit

market namely marketable collateral, non-marketable collateral and third party

guarantees. In the first case gold, land etc. was used as collateral. In the second case

utensils, standing crops, future labour services etc. were considered. But the third one

can be considered as collateral substitute. Besides this, there was another collateral

substitute prevailing in the ICMs viz., the threat for future borrowing opportunities or

loss of social status in the case of others.

In ;I small and in~rnobile rural community, wilful default of borrowers could

be quickly spread to most of the potential lenders. Binswanger and Rosenzweig

(1986) and Kao (1980) and Binswanger et.al. (1989) also found that collateral

requirer~ients had beer1 identified as a major determinant of lender's decision to ration

loan demand. Gill and Singh (1998) argued that in rural set up tied loans had become

another collatcr;il substitute.

In the study area jewellery, documents of land, Life Insurance Policies (LIC

policies), and in the case of vehicle, Certificates of Registration etc. are used as

collateral and post dated cheques, promissory notes, stamp paper, sale letter in the

case of vehicles and third party guarantees are used as collateral substitutes. The need

and demand for collateral depends on the type and duration of the credit availed.

Different fo~.ms of collateral and collateral substitutes are demanded by the

moneylenders depending upon the type of credit 1 loan availed. In the case of daily

loans, the moneylenders do not demand any collateral but the borrower need to be

directly or indirectly known to the lender. Another important reason is that the money

lent out 1s I-edeemed on the same day itself. But as the duration of the loan increases

the need fat. collateral 1 collateral substitutes arises. This also depends on the nature of

repayment. It ' the irepayment is done daily (e.g. 100 day's loan) the lender demands

only collateral substitutes. This type of loan is advanced to business people and not to

the households because they are not able to repay the money on daily basis. But the

loan amount varies according to the type and nature of the borrower. Loans will be

advanced to then1 only after assessing the financial position of the businessman

consitlcriiig his ilrca of location and the types of goods dealt in. The same is the case

with all the loans, which are paid daily. It is found that if the gap between two

consecutive repayments is large (normally a month) the lender demands collateral

security, wli~ch 1s ful ly marketable.

So in the case of loans, whose repayments are paid monthly, the lender

demands marketable collateral irrespective of the relation with the borrower. The

amount lent out depends on the quality and marketability of the collateral. Normally

moneylender advances not more than 50 per cent of the value of the collateral. If the

lender personally knows the borrower he will advance more than 50 per cent of the

mal-ket value of the collateral. The most valuable collateral is found to be documents

of land1 propertiesf house. The land, which is unoccupied, is found to be the most

wanted collateral. Lt is found that the rate of interest charged depends on the market

value of the collateral. If t'he value of collateral is high the lender will charge

comparatively a low rate of interest. But as the market value of the collateral varies

there will be changes in the amount of money advanced. Thus we find that there is a

negative relat~on between market value of the collateral and the rate of interest. To get

loan facilities for an unknown person he has to register the documents in the name of

the lendel-. Nature of property and its location are also important factors that

determine the market value of the collateral. The rate of interest charged also differed

with the same type of collateral offered by different group of borrowers and it

depends on the relation between the lender and the borrowers. But loans for

emergency purpose entail a much higher rate because of inelasticity. In this case also

the rate of interest decreases with the rise in the status of borrowers.

Gill and Singh (1997) were of the view that superior marketable collateral had

been shown to have a negative association with high rate of interest. Sarap (1987)

found that rate of interest charged decreased as the quality of collateral rose.

Nayar ( 1987) asserted that ICMs also gave credit against promissory notes, but

land is the maln acceptable collateral. The credit institutions heavily undervalued land

as a safety device against defaults, which in turn seriously restricted borrowers'

capacity to boll-ow.

111 thc case of gold loans, jewellery is the most valuable form of collateral.

This again dtpends on the type of jewellery (bangles, necklace). The rate of interest

charged depends on the relation between the lender and the borrower. In this type of

loan the market value of the gold is a guide to give loans. In this case also the

rnoneylelider should know the borrower personally or indirectly through a friend.

Post-dated cheques, promissory notes, stamp paper signed, third party

guarantecs. R C Rook, Sale letter etc. are the other forms of collateral substitutes. R C

Books ar~d salt: letters of vehicles are used as collateral in auto financing.

In the case of monthly loans rate of interest varies from 50 per cent to 144 per

cent per annum. Out of the 128 firms 58 firms (45.31 per cent) had monthly loans. It

is impossible to give the details regarding the interest rates charged by each lender

because e ~ c h lcnder charged different rate of interest on monthly loans depending on

the relation, collateral offered and information on borrowers to different borrowers.

Chart 4.2 gives the details regarding the changes in the interest rates at different

collateral subslitutes.

Chart 4.2 Changes in the Kate of Interest at Different Collateral for Monthly

loans

TPG - Third Party Guarantee, PD - Post- Dated cheque, PN- Promissory Notes,

RC - Certificate of Registration, SLR - Sale Letter

J - Rate of interest charged when information is direct.

X - Rate of interest charged when information is indirect.

Source: Compiled from Survey data.

Fro111 chart 4.2 it is clear that in the case of documents, rate of interest charged

is not above 78 per cent when information on borrowers is direct and it goes above

this lirnit when information is indirect i.e., from 80 per cent to 96 per cent. In the case

of other collateral1 collateral substitutes, direct information and closeness of the

borrower to tllc lender, reduces the interest rate charged and in the case of indirect

informati011 rate of interest charged is higher than that of the documents as collateral.

l.o;t~ls oti rrio~lthly repaying basis are also given to households. In the case of

collntet-al subbtitutes other than marketable, the rate of interest charged varies from 85

to 144 per cent. In the case of Daily, Weekly, and short duration loans, moneylenders

demand post-dated blank cheques, pro-notes, and in some cases signed stamp paper.

4.3.5 The Relation between Formal and Informal Credit Market

I t is found that there exist relations between formal credit market and informal

credit market with regard to safe keeping of valuables, repledging of securities,

9 5 . 2 , I ! 1 , \, ,r \,. $. ,

overdraft facilities, and loan market is important

in explaining these relations. Almost all the moneylenders were found to have

ordinary banking relation with the formal credit markets. Ordinary banking relation

implies that opening a bank account, depositing money, and drawing cheques on

personal accounts. to encash outside cheques drawn on him etc. The other relations

are safekeeping of valuables and repledging of securities. Overdraft facilities and loan

facilities are not considered as a permanent source of funds for the informal credit

markets. This is because unlike in the case of deposit/resource lnobilisation to start the

lending process, the funds available from the formal credit markets do not form a part

of their capital permanently. This is true in the informal credit markets except a few

unregistered moneylenders, which had obtained loans from the formal sector markets

to start iheir- lending operations. But it was found that they paid back these loans

within no time and they continued their operations with the income earned from their

past operations and thus it becomes their own funds. Table 4.15 illustrates this. It is

clear f?onl the table that only 8 firms (6.25 per cent) took loans from their formal

counterparts. But among these firms some were taken loans for either constructing

houses, or lor household purposes and not to re-lend.

Coming to the overdraft facilities, this is only a temporary adjustment when

informal credit 1na1-kets who runlconduct chitties may fall short of funds. When they

;Ire in this difficulty they take overdraft fdcility in order to meet this exigency

situ;~tion. 14 (10.93 pcr ccnt) of thc total 128 firms availed this facility, of which 8

fir~ns were brlo~~getl to chic funds category, and it is also found that the rest 6 firms

were also having chit funds and overdraft facilities is due to this.

Jewelleries /Ornaments pledged with the informal credit markets are again

repledged by ICM with formal credit markets. This is in order to get rid of illequidity

which arose clue to shortage of working capital. Of the 29 firms who have safekeeping

and repledging facilities 26 (89.66 pel. cent) were registered moneylenders. It was also

lbund (hat moneylenders who do not have sufficient Locker facility would keep their

valuables with some nearby formal sector banks.

Table 4.15 IC'M and Relation with Formal Banks

I I I Loans - - i 3 (2.34) 1 (0.78) 4 (3.13) 8 (6.25)

L______ _L_. I I I I Source: Survey data

Registered

Moneylenders

Figures in parerlthesis show percentages

Registered

Chit funds

24 ( I 8.75)

3 (2.34)

8 (6.25)

Ordinary

Relation

Safekeeping

and Repledging A

Overdraft

facilities

From the above data it is clear that 60.16 per cent (77) of the firms had

28 (2 1.87)

26 (20.3 1)

4 (3.13)

ordinary relation with the formal banking sector. Safekeeping and repledging is

Unregistered

category

25 (19.53)

-

2 (1.56)

highest in registered moneylenders category since gold loan is their main activity. The

Total

77 (60.16)

29 (22.66)

14 (10.94)

rate of interest charged on gold loan in formal credit markets is less than that of

informal credit markets. But ICMs would give more money per sovereign than formal

banks. Further analysis of the ICMs by dividing them into urban and suburban firms

shows that safekeeping and repledging relation with formal banks is more in the case

of suburhnn lil-ms than urban firms. That is 26.8 per cent firms in suburban firms

campal-ed to 70.7 per cent firms in urban areas

Overdraft relation is high in the case of urban firms (12.64per cent) and in the

case of suburban firms it is only 7.31per cent firms. This is due to the fact that chit

fund businesses are located mostly in urban areas. Loan facility availed of by firms is

high in the case of firms in suburban areas than in urban areas. Table 4.16 shows the

details.

Table 4.16 Relation between ICM-FCM in Urban and Suburban Areas

Relation

Repledging

Source: Survey data

Urban

Overdraft

Total


Safekeeping and repledging is high in the case of suburban areas because

( 54 (42.18)

18 (14.06)

rampant gold loan business is done in suburban areas than in urban areas

Suburban

11 (8.60)

4 (3.13)

87 (67.97)

A rno1.e clear relationship between formal and informal can be gauged with

Total

23 (17.96)

I l (8.60)

regard to their type of licenses. This is shown in table 4.17

77 (60.15)

29 (22.7)

3 (2.34)

4 (3.13)

41 (32.03)

14 (10.9)

8 (6.26)

128 (100.0)

Table 4.17 lnformal and Formal Relation and Type of Licenses

Moneylender Moneylender Chit funds Total

Relation and Chit funds

Ordinary 9 (9.28) 24 (24.74) 19 (19.59) 52 (53.61)

19 (19.59) . 10 (10.30) 19 (29.89) and repledging

3 (3.09) 1 (1.03) 4 (4.12)

Total 3 1 (3 1.96) 28 (28.87) 38 (39.18) 97 (100.0)

Source: Survry data

Figure5 in patenthesis show percentages

01' the 31 firms who had obtained moneylending licenses only, 19 firms

(61.29per cent) had safekeeping and repledging relation. But in the case of chit fund

license firnis, 85.7 1 per cent of them had ordinary relationship and firms who have

obtained the ~iioneylender and chit funds licenses availed of more overdraft facilities.

The relation between formal and inforn~al credit markets can also be explained

in terms of their area of business. This is explained in table 4.18. Extent of the area

implies large volume of business

Table 4.18 Area of Operation and Relation between ICM and FCM

1 . 1 1 Beyond Local I Large I Total I I Ordinary 7 31 (24.21) / 39 (30.46)

I I

7 (5.46) 1 77 (60.15)

Soul-ce: Survey data Figures in parenthesis show percentages

Safekeeping 21 (16.4)

and repledging

Overdraft 6 (4.68) -

2 (1.56) --

Total 60 (46.87)

8 (6.25)

4 (3.13)

4(3.13)

55 (42.96)

4 (3.13)

2 (1.56)

13 (10.2)

29 (22.66)

14 (10.93)

8 (6.25)

128 (100.0)

Of the 60 firms, which had concentrated in the local area, 31 firms (51.66 per

cent) had ordinary relation with the formal credit markets. And 35 per cent of them

had safekeep~ng and repledging relation. This is because their main activity is gold

loan and these firms concentrate on 'local area' as is explained earlier. In the 'beyond

local art-a' ( an extended area than local area) 70.9 per cent of them had ordinary

relationship with the formal credit markets. And coming to the large area category,

still 53.84 per cent firms had ordinary relation with formal credit markets. But i t is

clear that in the 'large area' category, 30.76 per cent of them had obtained overdraft

from the formal hanks. This relation is not so high in both the other cases (local and

beyond local)

Table 4.19 helps to find out relationship between formal and informal banks

with regard to their pas1 occupation

Table 4.19 Past Occupation and Relation with Formal Banks

Agriculture l<elatiot~

Ordinary 19 (14.84)

.- - - -- .. -- -- 14

Overdraft . 7 (5.46) 1 (0.78) 5 (3.90) 1 (0.78) (10.9)

Safekeeping - [ / ~ ~ 6 )

and Repledging


Business

30

(23.43)

8 (6.25)

Money

lending

4 (3.12)

4 (3.11)

Employ - ment

12 (9.37)

5 (3.90)

Others

12

(9.37)

5 (3.90) j 29 (22.65)

Total

77

(60.15)

From table 4.19 i t is clear that safekeeping and repledging is highest in the

c;tse of those whose past occupation is moneylending. This is 40 per cent of the total

10 firms. In the overdraft category highest concentration is on employees. It is found

that those entl~epreneurs who were working in the banking sector had this kind of

relationship w~th forrnal credit markets.

It can he concluded that the relation between ICMs and FCMs is not so close

as is fount1 in the previous studies. It can be argued that almost all ICM segments

keep an ordinary relation with the FCMs. Other types of relations or links with FCMs

depend on the type of ICM segments. Thus it can be concluded that funds flow only

from FCM to ICM and not vice versa, or in other words ICMs depends on FCMs for

funds and thus there exists a vertical upward integration between ICM and FCM.

4.3.6 Employment Potential of Informal Credit Market

I t IS fo~tnd that registered informal credit market has permanent offices. Only

registered categories have this type of facility. But the unregistered category does not

have any permanent office. Employees work in the status of collecting

agents/executi\es and office assistants. It was found that only the moneylenders retain

the trusted en~ployees. These trusted employees collect all relevant information

regarding the borrowers. These employees are able to know the confidential and

clandest~ne acttvities of the moneylenders and they are given full authority to carryout

office work in the physical absence of the moneylenders.

111 the case of part-time moneylenderslchit funds (their full time activity is

eithet- business or employment) employees carry out the work in the office. There

were many instances where after getting sufficient expertise from the moneylending

operations employees start moneylending business of their own. Table 4.20 shows the

potentiality of moneylending firms in creating employment.

Table 4.20 Employment Potential of Registered ICM

Registered Registered Chit Total

Moneylenders funds Employees

44 (45.36) 1 1 (11.34) 55 (56.7)

13 (13.40) 23 (23.7 1)

5 and above

61 (62.8) 36 (37.1 1) 97 (100.0) I

Source: Survey data


In the registered moneylender category 72.13 per cent of them employed one

or two employees as either office assistants or representatives. In the chit funds

category most of the firms (63.88 per cent) employed 2-3 employees in their offices.

It is also noted that five and above employees are employed by both moneylenders

and chit funds. Further classification of informal credit markets according to their

activity shows the relation between employment potential and their activity. Table

4.21 shows llrc Jetailh.

Table 4.21 Employment Potential-Activity Wise

Figures in part:nthesis show percentages

Gold loan

and

Moneylending

22 (22.68)

1 (1.03)

23 (23.71)

I t is clear from the above data that those who have specialised in chit funds

and other fornis of moneylending have created more employment opportunities than

Source. Survey data

Chit funds

and

Moneylending

1 1 (11.34)

20 (20.61)

6 (6.18)

37 (38.14)

any other categories

4.3.7 Occupational Mobility

Occupational mobility is considered as a movement between occupations

during the lile of an individual. There are two important classifications of

occupatiorlal mobility viz., vertical and horizontal occupational mobilities. Vertical

occupational n~obility is defined as movement in the same or closely related

occupatio~ls by ascend or descend. Horizontal occupational mobility designated the

degree to which workers shift from job to job at the same level of skill in response to

difference In term5 of employment, wages, hours, working conditions and the like

(Davis & Ma~chett. 1959). Horizontal occupational mobility signifies a change of job

but not statlls (Pal, 1968).

Occupational mobility helps us to study the characteristics of the workers who

move voluntarily or involuntarily from onejob to another. In the context of informal

Gold loan, Chit

funds and

Moneylending

22 (22.68)

15 (15.46)

37 (38.14)

Total

55 (55.70)

36 (37. l 1)

6 (6.18)

97 (100.0)

credit markets. the occupational mobility analysis the inclination towards

moneylending is shown. This analysis considers various employment status such as

businessmen. agriculturalists, tailors, gulf returnees, agents, etc. and mobility from

one occupation to another is considered vertical occupational mobility.

The detailed analysis of the informal credit markets revealed that of the total

128 firms 90 entrepreneurs were full timers and 38 entrepreneurs were part timers.

The shift from their past occupation to the present moneylending shows the vertical

occupatio~~al mobility. This analysis does not consider separately intergenerational

and intragenrrational occupational mobility. Table 4.22 shows the distribution of

different category of ICMs (entrepreneurs) and their past occupations.

Table 4.22 Distribution of ICM and Their Past Occupation

Registered Registered Unregistered Total

Moneylenders chit funds category Occupation \

I I I I Source- Survey d;it;~

1:igul.e~ 111 parc~~tl~esis show perccntagcs

1;ronl the above li~blc: i t is clear that most of the entrepreneurs are related to business

category, I, e., 37.5 per cent. The second category is agriculture (22.65 per cent). It is

found that 10 out of 128 firms (7.81 per cent) belonged to moneylending category and

(his was iheir past occupation. The detailed analysis of the relation between present

and past occupation shows occupational mobility. Table 4.23 shows the details.

Table 4.23 I'resent Occupation and Past Occupation

Occupatio~l is mobile from one occupation to another i.e., from agriculture to

Business*

business, moneylend~ng, and employment. From business to business, moneylending

--

and employment. From moneylending to moneylending not to any others and they are

full time moneylenderslchit funds. From employment to business, moneylending and

* - I'art time moneylenders +* - Full time moneylenders Source: Survey data Figures in parenthesis show percentages

(37.50)

to other enlployment. Thus there is more vertical mobility than horizontal mobility

Further analysis shows that entrepreneurs move from their past occupation to either

1 7 . 8

full time or part time moneylendinglchit fund status. Table 4.24 shows the details

(14.84) 1 (100.0)

Table 4.24 Status and Past Occupation of Moneylenders


Number of part time moneylenderslchit funds is high in the case of business

that means those who are in the business field carry out moneylending/chit funds as a

side business, lollowed by agriculturists and employees. So it can be concluded that

entrepreneurslpersons who are engaged in other economic activities conduct

moneylending/chit fund activities as a part time business.

Status Agriculture

Full time 21(16.40)

Part time 8 (6.3)

Total 29 (22.65)

4.3.8 Migration and Informal Credit Market

Migrat~on is an important phenomenon in urban areas. Large numbers of

people tiiovr out oC rural areas in order to find out suitable employment. Some others

migrate to the urban areas in order to carry out or do business activities. In the

inforlnal credit lilarkets there are number of moneylenders who have migrated from

rural areas. Table 4.25 shows the distribution of category of firms and the place

whcrefro~n they h;~vc ir~igrared.

Source. Survey data

Business

29i22.7)

19 (14.8)

48 (37.5)

Money

Lending

lO(7.8)

10 (7.81)

Employ - ment

18

(14.06)

4 (3.13)

22

(17.18)

Others

12

(9.37)

7 (5.5)

19

(14.84)

Total

90

(70.3 1)

38

(29.7)

128

(100.0)

Table 4.25 Nature of Firm and Places of Migration

Source: Survey data


01' the total 128 firms 30 firms were found to have run by migrated

entrepreneurs. Out of this 30 entrepreneurs majority of them migrated from outside

the district. tiurther analysis shows that most of the migrated entrepreneurs located in

the urban arcas (83.3 per cent) and only 16.6 per cent in the suburban areas. Table

4.26 exhibits this.

Table 4.26 Nature of Firms and Places it is Settled

Total

I0 (33.3)

20 (66.7) -

30 (100.0)


Of the total 30 migrant entrepreneurs 55 per cent of them were full timers and

45 pet. cent were part timers that means their main occupation is not moneylending

but e~nployecs or business people. Part time moneylenders are more in the case of

unregistcrcd category i.e., 80 per cent of them are part timers. It is the presence of

Unregistered

4 (13.33)

6 (20.0)

10 (33.3)

es

Place

Within the District

Outside the District

Total

Place

Urban

Suburban

Total

Registered

6 (20.0)

14 (46.7)

20 (66.7)

Source- Survey data

Registered

16 (53.3)

4 (13.3)

20 (66.7)

Unregistered

9(30.0)

I (3.33)

10 (33.3)

Total

25 (83.3)

5 (16.6)

30 (100.0)

employees i n both private and public sector who figured in the field. Table 4.27

shows this

Table 4.27 Nature of Occupation and Nature of Organisation

Unregistered Total

9 (30.0) 8 (26.66) 17 (56.6)

30 (1 00.0)

Source Survey data


The comparison between present and past occupation of the migrated

moneylenders show that moneylenders who have migrated to the city run

~noneylending actlvlty along with their usual business activity. It was found that

retired employees who figured more in the case of migrated moneylenders/chit funds.

Table 4.28 shows the details. It shows 17 out of 30 moneylender were part timers.

Table 4.28 Relation between Past and Present Occupation

Figures 111 parenthesis show percentages

Full time

Money lending

Agriculture 3 (10.0) - .-

Business I (3.33)

Money lending 3 (10.0)

Employment 4 (13.33) ~p

Others 2 (6.66) ..

Total 13 (43.3)

Source: Survey datn

Total

10 (33.3)

3 (1 0.0)

3 (10.0)

10 (33.3)

4 (13.33)

30 (100.0)

Part time

Business

7 (23.33)

2 (6.66)

1 (3.33)

2 (6.66)

12 (40.0)

Employment

5 (16.6)

5 (16.66)

4.4 CONCLUSION

'l'he iinalysis made so far establishes the fact that ICM shows a dynamic

character. This is mainly with respect to their lending activity. It is also found that the

role played by ICM is more complex and intricate and i t has relations with other

sector5 in the economy. Virtually, they do not comply with rules and regulations

instituted by Government departments and Banking authorities. Other than

this dynamic role, there is also another role for these ICMs. The intermediary role

played by the ICM establishes the point that what is mobilised through unaccounted

means would be lend to the needy borrowers at high rate of interest with minimum or

no collateral requirements. The deposit mobilisation and the intermediary role of ICM

are explained in the coming chapter.

structure and dynamics of informal credit market...

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