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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
the
gives information regardir~g 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
And in the case of chit funds, most of the firms were
private limited companie,~.
private limited companies, followed by partnership and proprietorship.
Full tirne moneylenders means those who carry out business or devote most of
their time in 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
I
5-1 Lakhs 1,00,000
I
Lakhs
]m~akhsl 1,50,000
II 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~entof 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~dentialareas. 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 ~ sb u s ~ n e ~ s not lucrative. Along with gold loans they carried out other
was
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
Chit funds are one of the main forms of savings in Kerala. The
name for ch~tties.
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 ~ t hnumber 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~teach 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~nof 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~validwhen 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 a financial terminology known by different names such as
as
Djanggi, Arisun, Ho Esu etc. are prevalent in Malaysia, Sri Lanka, Bangladesh,
Thailand and the Philippines etc. Besides, the chit fund institutions there
Indones~a,
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
Proprietorship Partnership Private Ltd. Total
Registration
7 ( 10.60) 18 (27.27) 19 (28.78) 44 (66.67)
Registration
Both outside &
under Kerala 1 6 (9.09) 1 6 (9.09) 1 10 (15.15) 1 22 (33.33) 1
Chitty Act
Total f:
Source: Survey data
13 (19.69) 24 (36.36) 29 (43.93) 66 (100)
Figures in parenthesis show percentages
It was lbund that majority of the firms had outside registration only. The
services rendered by these chit funds are so significant that both the business people
and households are benefited, compared to cooperative societies and other
government rur~institutions.
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.
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~andthat 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
rth
week ol'a ~ ~ l o ~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
given ro the borrower. If Rs.1, 000 is borrowed they would deduct Rs.
loan a~r~ourit
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- I S 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)
4.3.3 Educational Qualification
Below SSLC 15 (1 1.72) 15(11.72)
14 (10.93) 6 (4.86) 43 (33.59)
PDC 16 (12.5) 8 (6.25) 41 (32.03)
DC 5 (3.90) 1 (0.78) 17 (13.28)
PG 3 (2.34) 1 (0.78) I (0.78) 5 (3.90)
I
I I I
~echnicar
7 (5.46)
Professional 7 (5.46)
Total t 61 (47.65)
I
36 (28.12)
I
3 1 (24.21)
I
128 (100)
Source: Survey data
Figures in parenthesis show percentages
The age class of moneylenders varying from 10 to 70 years. In the case of
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
moneylenders is that 35.48 per cent (1 1 out of 31 firms) of the unregistered category
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$ the age group advances
a\
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 ~riajorityi.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
One
and Technical ~~ualificatiotls. 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 O F INFORMAL CREDIT MARKET
The act~vitiesof 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~eslo 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 it is done with the help of
third party references.
L)yn;i~rli~.:s informal credit markets is analysed by considering various
01
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~yof 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 ~ tlund 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
\ Category Registered Registered Chit Total
\
Licenses, moneylenders funds
Money lender 31 (50.81) . - 3 1 (3 1.96)
Chit funds - 28 (77.7) 28 (28.86)
Moneylender
Chit funds
Total
Source: Survey data
Figures in parenthesis show percentages of the column total
Out of the 61 registered moneylenders 50.81 per cent (3lfirms) had
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
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
~nclinationtowards 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
since these firms were registered with outside state and there are no existing
activit~es,
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 Partnership Private Ltd. Total
License
I I I
b e y lender
I
26 (26.8)
I
5 (5.15)
I
- 1
I
31 (31.95)
(funds 5 (5.15) 4 (4.12) 1 19(19.58) 1 28 (28.86)
8 (8.24) 20 (20.6 1 ) 10 (10.3) 38 (39.17)
and chit funds
Source: Survey dat.a
Figures in parenthesis show percentages
It is clear from the above table that out of the total 39 proprietorship firms 66.6
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
private lim~ted out
con~panies, 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
need to consider the relation between type of licenses and their activities. Table 4.6
gives the details of it.
Table 4.6 Relation between Licenses and Activities of ICM
Licenses Moneylending
Moneylending Chit Funds Total
and chit funds
Gold loan 14 (14.43) 2 (2.06) 16 (16.5)
Chit funds 16 (16.50) 5 (5.15) 21 (21.6)
Chit funds, gold
17(17.52) 12(12.37) 31(31.95) 60 (61.85)
loans and others
1 Total
I
1 11(31 95) 1 28 (28.86) 1 38 (39.17) 1 97 (100.0) I
Source: Survey data
Figures in parenthesis show percentages
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, 45.161per 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. It 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
Category
Registered Registered chit Unregistered Total
Moneylenders funds category (Row wise)
54 (90.00) 6 (10.00) 60 (100.00)
I
I I
Daily loans 2)
0
('. 4 (80.0) 5 (100.00)
Weekly loans
Monthly loansq& (i3.l)
SO day's l o a n ~ 1 2 1 . 7 3 )
I
16 (27.6)
6 (26.08)
I
,
2 (100.0)
17 (29.3)
12(52.17)
I
2 (100.00)
58 (100.00)
123(100.00)
I
100 day's loi/(50.0ti)
I
22(26.92)
I
19 (23.17) 1 82(100.00)
I
Chit funds ]3 . 0
( 82 )
I
36 (40.4) 19 (21.34) 1
I
89 (100.00)
Total v ( 4 7 . 6 5 ) 36 (28.12) 1
I
31 (24.21) ( 128(100.00)
ource: Survey dnt;~
Figures in parenthesis show percentage of the row total
Chit funds were found to be the largest single activity. Out of the 128 firms
selected 69.53r1ercent (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
lundh and privatc limited on chit funds.
n~o~~cylelrclllig cli~l
'11111
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~ughlyassessing 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 11yto 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 ~ tfunds 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) 23 (17.96) 55 (42.96)
15 (11.71)
local area
-- k---
Large area ; 7 (5.46) 6 (4.68) 13(10.15)
Total 61 (47.65) 36 (28.12) 31 (24.21) 128 (100.0)
-
.
Source: Survey data
Figures in parenthesis show percentages
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
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
t~cyoildlocal ;ti-( a.
'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
Moneylender1
Moneylender Chit funds Total
chit funds
Local 4 (4.12) 14 (14.43) 44 (45.36)
Beyond
3 (3.09) 19 (19.58) 18 (18.55) 40 (41.23)
local area
Large area 5 (5.15) 6 (6.18) 13 (13.4)
Total 28 (28.86) 38 (39.17) 97 (100.0)
Source: Survey data
Figures in partznthesis show percentage
Our ol the 3 1 firms who had obtained only the moneylender license, 83.87per
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
beyond local area, that means they depended on an extended area than local area. In
the case o l moneylender and chit funds licence firms almost equal number of firms
specialised in both local area and beyond local area.
The table 4.10 shows the relationship between area of operation and nature of
operation
of Operation
Full time Part Time Total
Area
- .
-
Local 43 (33.59) 17 (13.28) 60 (46.87)
--.
Beyond local area 37 (28.90) 18 (14.06) 55 (42.96)
-- -- ~-
Large area 10 (7.81) 3 (2.34) 13 (10.15)
~~ --
~-~ ~
'rota1 90 (70.31) 38 (29.68) 128 (100.0)
-~L I I
Source: Surve) data
Figures i n parenthesis show percentages
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~veall, 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.
types of loans and rate of interest varies from one type of loan
They extend d~fferent
to another, such as daily, weekly, monthly, fifty day's and hundred day's loans, gold
loans etc. It was also found that lending rate charged is different from person to
person depend~ng the relationship with the borrower.
on
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
f
rate o intere,t v a ~ ~ e d 208-260 per cent per annum. For Rs.1, 000 the rate of
from
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
Tntnl
I
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 in 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
-
o f Reg~slcrctlmoncylender is high 35.1 1 per cent compared to 32 per cent of the
'1111 lurid\
rcgistc~c(l
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.
Icnder wants to get it registered in his name. The rate of interest is paid
So~neti~nes
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 Registered chit Unregistered
Total
Moneylenders funds category
of interest
9 (15.52) 5 (8.62) 16 (27.6)
60 - 70 per cent 3 (5.17) 3 (5.17) 1 (1.72) 7 (12.06)
I I I
70 - 80 per cent -6
0) 3 (5.17) 6 (1 0.34) 1 16 (27.6)
80 - 90 per cent 1- 5 (8.62)
I
.
I
2 (3.44)
I
1I 7 (12.06)
90 and above ~TR)I I (1.72)
I
3 (5.17) 1 12 (20.69)
Total 16 (27.6) 17 (29.3) 58 (100.0)
-- --
Arithmetic
80.6 63.13 73.23
Mean (A. M)
-
- -1-
Coefficient of
12.9 10.73 14.23
Variation (C.V)
I I I
Source: Survey data
Figures in parenthesis show percentages
F n m table 4.12 it is clear that 67.24 per cent of the total 58 firms charged rate
of interes~ in hstween 50-80 per cent per annum (39 firms). In the registered
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,
It 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 Registered chit Unregistered
Total
Moneylender funds category
\
40 - 50 per cent 22 (26.82) 15 (18.3) 6 (7.30) 43 (52.43)
50 - 60 per cent 16(19.5) 6 (7.31) 10 (12.19) 32 (39.02)
60 - 70 per cent 3 (3.65) I (1.22) 3 (3.6) 7 (8.53)
Total 41 ( 50.0) 22 (26.83) 19 (23.17) 82 (100.0)
--
A. M 40.36 38.63 43.42
C. V 15.55 2.25 15.46
Source Survey data
Figures in parenthesis show percentages
Table 4.13 makes it clear that most of the moneylenders charged a rate of
interest in between 40 and 50 per cent. In the case of registered moneylenders and chit
funds number is highest in 40-50 per cent category, but in the case of unregistered
firms most of the firms charged rate of interest in between 50-60 per cent.
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~pwith 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
~ ~~
Survey data
Soi~rce:
Figures i n parenthesis show percentages
frorn the table 4.14 that 12 firms out of 23 firms were unregistered
TI is clei~r
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
and
annu~n) 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 rural community, wilful default of borrowers could
small and in~rnobile
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
had beer1 identified as a major determinant of lender's decision to ration
requirer~ients
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 fully marketable.
1s
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. L is found that the rate of interest charged depends on the market
t
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~onbetween 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
salt: letters of vehicles are used as collateral in auto financing.
Books ar~d
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
lcnder charged different rate of interest on monthly loans depending on
because e ~ c h
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.
Fro111chart 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
informati011rate 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
It 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
, ,r
!1
,
\
\,. $. ,
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-ketswho 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
were brlo~~getl chic funds category, and it is also found that the rest 6 firms
fir~ns to
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
Registered Registered Unregistered
Total
Moneylenders Chit funds category
Ordinary
28 (2 1.87) 24 ( I 8.75) 25 (19.53) 77 (60.16)
Relation
Safekeeping
26 (20.3 1) 3 (2.34) - 29 (22.66)
and Repledging
A
Overdraft
4 (3.13) 8 (6.25) 2 (1.56) 14 (10.94)
facilities
I
Loans
- - i 3 (2.34)
I
1 (0.78)
I
4 (3.13) 8 (6.25)
L______ _L_. I I I I
Source: Survey data
Figures in parerlthesis show percentages
From the above data it is clear that 60.16 per cent (77) of the firms had
ordinary relation with the formal banking sector. Safekeeping and repledging is
highest in registered moneylenders category since gold loan is their main activity. The
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
Urban Suburban Total
Relation
( 54 (42.18) 23 (17.96) 77 (60.15)
18 (14.06) I l (8.60) 29 (22.7)
Repledging
Overdraft 11 (8.60) 3 (2.34) 14 (10.9)
4 (3.13) 4 (3.13) 8 (6.26)
Total 87 (67.97) 41 (32.03) 128 (100.0)
Source: Survey data
Figures in parenthesis show percentages
Safekeeping and repledging is high in the case of suburban areas because
rampant gold loan business is done in suburban areas than in urban areas
A rno1.e clear relationship between formal and informal can be gauged with
regard to their type of licenses. This is shown in table 4.17
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
1
0 ' 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 chit funds licenses availed of more overdraft facilities.
and
credit markets can also be explained
The relation between formal and inforn~al
in terms of their area of business. This is explained in table 4.18. Extent of the area
implies large volume of business
1I .7
1 1 I
Table 4.18 Area of Operation and Relation between ICM and FCM
Beyond Local Large I Total I
Ordinary 31 (24.21) / 39 (30.46)
I
7 (5.46)
I
1 77 (60.15)
Safekeeping
21 (16.4) 8 (6.25) 29 (22.66)
and repledging
Overdraft 6 (4.68) 4 (3.13) 4 (3.13) 14 (10.93)
-
2 (1.56) 4(3.13) 2 (1.56) 8 (6.25)
--
Total 60 (46.87) 55 (42.96) 13 (10.2) 128 (100.0)
Soul-ce:Survey data
Figures in parenthesis show percentages
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~ngand 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 it 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 a n d Relation with Formal Banks
Money Employ -
Agriculture Business Others Total
l<elatiot~ lending ment
30 12 77
Ordinary 19 (14.84) 4 (3.12) 12 (9.37)
(23.43) (9.37) (60.15)
-
Safekeeping
and Repledging
.- - - -- .
[ / ~ ~ 6 )
-- --
8 (6.25) 4 (3.11) 5 (3.90) 5 (3.90) j 29
(22.65)
14
Overdraft . 7 (5.46) 1 (0.78) 5 (3.90) 1 (0.78)
(10.9)
Figures in parenthesis show percentages
From table 4.19 it 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~epreneurswho were working in the banking sector had this kind of
forrnal credit markets.
relationship w ~ t h
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
It IS that registered informal credit market has permanent offices. Only
fo~tnd
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
acttvities of the moneylenders and they are given full authority to carryout
clandest~ne
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
Figures in parenthesis show percentages
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
Gold loan Chit funds Gold loan, Chit
and and funds and Total
Moneylending Moneylending Moneylending
22 (22.68) 1 1 (11.34) 22 (22.68) 55 (55.70)
1 (1.03) 20 (20.61) 15 (15.46) 36 (37. l 1)
6 (6.18) 6 (6.18)
23 (23.71) 37 (38.14) 37 (38.14) 97 (100.0)
Source. Survey data
Figures in part:nthesis show percentages
It 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
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~lsby 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
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
mobility. This analysis does not consider separately intergenerational
occupatio~~al
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;~
show
1:igul.e~111 parc~~tl~esis perccntagcs
1;ronl the above li~blc: is clear that most of the entrepreneurs are related to business
it
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
Business*
(37.50) 1 7 . 8 (14.84) 1 (100.0)
* - I'art time moneylenders
--
+* - Full time moneylenders
Source: Survey data
Figures in parenthesis show percentages
Occupatio~lis mobile from one occupation to another i.e., from agriculture to
and employment. From business to business, moneylending
business, moneylend~ng,
and employment. From moneylending to moneylending not to any others and they are
full time moneylenderslchit funds. From employment to business, moneylending and
to other enlployment. Thus there is more vertical mobility than horizontal mobility
Further analysis shows that entrepreneurs move from their past occupation to either
full time or part time moneylendinglchit fund status. Table 4.24 shows the details
Table 4.24 Status and Past Occupation of Moneylenders
Money Employ -
Status Agriculture Business Others Total
Lending ment
18 12 90
Full time 21(16.40) 29i22.7) lO(7.8)
(14.06) (9.37) (70.3 1)
38
Part time 8 (6.3) 19 (14.8) 4 (3.13) 7 (5.5)
(29.7)
22 19 128
Total 29 (22.65) 48 (37.5) 10 (7.81)
(17.18) (14.84) (100.0)
Source. Survey data
Figures in parenthesis show percentages
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. S o it can be concluded that
entrepreneurslpersons who are engaged in other economic activities conduct
moneylending/chit fund activities as a part time business.
4.3.8 Migration and Informal Credit Market
Migrat~on is an important phenomenon in urban areas. Large numbers of
people tiiovr out o rural areas in order to find out suitable employment. Some others
C
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
ir~igrared.
whcrefro~nthey h;~vc
Table 4.25 Nature of Firm and Places of Migration
es
Registered Unregistered Total
Place
Within the District 6 (20.0) 4 (13.33) I0 (33.3)
Outside the District 14 (46.7) 6 (20.0) 20 (66.7)
-
Total 20 (66.7) 10 (33.3) 30 (100.0)
Source: Survey data
Figures in parenthesis show percentages
0 ' the total 128 firms 30 firms were found to have run by migrated
1
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
Registered Unregistered Total
Place
Urban 16 (53.3) 9(30.0) 25 (83.3)
Suburban 4 (13.3) I (3.33) 5 (16.6)
Total 20 (66.7) 10 (33.3) 30 (100.0)
Source- Survey data
Figures in parenthesis show percentages
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
or
but e~nployecs 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
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
Figures in parenthesis show percentages
The comparison between present and past occupation of the migrated
moneylenders show that moneylenders who have migrated to the city run
~noneylendingactlvlty 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
Full time Part time Total
Money lending Business Employment
Agriculture 3 (10.0) 7 (23.33) 10 (33.3)
-.-
Business I (3.33) 2 (6.66) 3 (10.0)
Money lending 3 (10.0) 3 (10.0)
Employment 4 (13.33) 1 (3.33) 5 (16.6) 10 (33.3)
~p
Others 2 (6.66) 2 (6.66) 4 (13.33)
.
.
Total 13 (43.3) 12 (40.0) 5 (16.66) 30 (100.0)
Source: Survey datn
Figures 111 parenthesis show percentages
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 it 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.
