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Poverty Microfinance Community - 1

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              Poverty
              _____________________________
              Microfinance Community

Solution Exchange for the Microfinance Community
Consolidated Reply
Query:      Strengthening Money Lenders Act for Financial
Inclusion - Advice
Compiled by Navin Anand, Resource Person and Monika Khanna, Research Associate
Issue Date: 21 October 2011



From Toms K Thomas, Mutual Assistance Resource Group (MARG),
Trichur, Kerala
Posted 30 August 2011
I work with Mutual Assistance Resource Group (MARG) - an organization that promotes Health
Mutuals as a sustainable solution to health care financing which is a specific type of credit
services under the bigger umbrella of microfinance. Currently we have around 6000 members
from 1500 families. MARG along with few MFIs in south India is working on a pilot project
proposal wherein private money lenders could be incorporated into delivery of formal micro
finance services.

Honorable Prime Minister of India Dr. Manmohan Singh, in his address at the 2nd Agricultural
Summit, October 18, 2006 had expressed - “We need more thinking on the credit front.………....
Do we need to create new institutional structures such as SHGs, micro finance institutions, etc, to
provide improved and reliable access to credit? Or do we need to bring in Moneylenders under
some form of regulation? It is necessary that we find answers to these questions in the near
future." (Full speech is available at http://pmindia.nic.in/speech/content.asp?id=430)

The Constitution of India has conferred the power to legislate on matters relating to money
lending and money lenders to the States. Most of the states have enacted the laws related to
money lending activity. A number of states are having comprehensive legislations providing
detailed and stringent provisions for regulation and supervision of the money lending business.
These legislations contain provisions of client protection from malpractices of the moneylenders.

Realizing the importance of strengthening the Acts and its implementation, RBI had taken up the
initiative of coming out with a model legislation - Money Lenders & Accredited Loan Providers'
Bill, 2007. Subsequently RBI constituted a Technical Group under the chairmanship of Shri. S. C.
Gupta, Legal Adviser-in-Charge, Reserve Bank of India to Review Legislations on Money Lending
(The report is available at: http://rbidocs.rbi.org.in/rdocs/PublicationReport/Pdfs/78893.pdf, Size:
413 KB).

Keeping the results of the efforts made by RBI as background, I would like to request members
to share their experiences and views on the following questions:
   To what extent Money Lenders can contribute to financial inclusion efforts of Government
    and other agencies if they are considered as a part of the formal micro finance chain?
   What should be some of the mandatory provisions in the money lending Acts of different
    states that provide protection to different segments of poor?
   In context of preparing new projects what could be the arrangements of engaging Money
    lenders as a channel for delivering multifaceted Microfinance services? Can money lending
    business be linked with Business Correspondent Model?
   Are there any Microfinance Institutions working with the Money Lenders? If yes, what are the
    experiences of working with money lenders?

Your ideas will help various state governments to make suitable provisions in their Money
Lending Acts, keeping client protection as the key objective. It will also help us and other MFIs in
conceptualizing new projects with Money Lenders as part of the chain.



Responses were received, with thanks, from
1. Kedareswar Choudhury, Darabar Sahitya Sansad, Orissa
2. G K Agrawal, Rural Development and Microfinance Consultant, Mumbai
3. Resham Singh, Punjab Gramin Bank, Punjab
4. Rajesh K Verma, Daltonganj, Jharkhand
5. A.K. Garg, Agricultural Finance Corporation Limited (AFCL), Mumbai
6. Navin Anand, UNDP, New Delhi
7. PSM Rao, Independent Consultant, Hyderabad
8. Jaipal Singh, Centre for microfinance, Jaipur
9. N.Srinivasan, Consultant, Pune
10. Hemantha Kumar Pamarthy, Chennai
11. Marc Roesch, French Institute Pondicherry, Pondicherry
12. N.Jeyaseelan, Hand in Hand, Chennai

Further contributions are welcome!


Summary of Responses
Related Resources
Responses in Full


Summary of Responses
Often, money lenders are characterized as being exploitative and unscrupulous. There are
enough reasons to set aside this notion. The NSSO survey has revealed trends that show the
dominant role being played by money lenders in rural areas so it is important to recognize the
system and appreciate the money lenders who are providing microfinance services in an ethical
way. It is envisaged that money lenders can contribute to a large extent in providing financial
services especially to the economically and geographically disadvantaged people who are still
excluded and do not have access to formal financial systems.

Referring to the need of money lenders and a well defined regulatory system, members also
informed that SHG bank linkage programme has been a great success in covering poor especially
women but some segments of population are still left out. They enumerated following key
factors that trigger poor to take loans from money lenders –
   Money lenders are normally well aware of the past financial records and apply innovative
    mechanisms so they take less time to lend
   A Large number of moneylenders are now using socially-responsible lending practices
    because they make sound business sense
   Money lenders give liberty for more informal and flexible repayment schedule depending
    upon the capacity of borrowers
   Money lenders are like rural ATMs (Any Time Money) assuring 24 x 7 services whereas Banks
    and MFIs work during specific hours

Money lenders and their role

Members consider that money lenders are like any other businessmen as they charge different
rates of interest from different customers depending upon the repaying capacity of the poor and
other factors. It is true that all moneylenders will never be forced to come under any form of
regulation. Moreover, once they will start functioning under a regulatory environment it is also
possible that the rate of interest charged by money lender will increase due to enhancement of
expenses due to imposition of regulation. Members felt that a small percentage of money lenders
are having money lending as a sole business. There are references of rural areas wherein school
teachers, government employees, shop keepers, big farmers etc. are also providing credit.

Members informed that money lenders in the villages are providing only credit services today and
not other financial services. They also stressed that it is the duty of State to see that all of the
inhabitants get necessary services.

Some of the suggested provisions on money lenders Acts

   Interest ceiling prescribed by state government needs to be relaxed and should be fixed at a
    reasonable level ( Example - Tamil Nadu Money Lending Act - 12% per annum for unsecured
    loans and 9% per annum for secured loans)
   Money lenders share their data to Credit bureau so that analysis of actual indebtedness of
    the individual borrowers can be done
   Registration with an appropriate state level authority is to be made mandatory for all the
    Money Lenders. However, the system of registration should not be cumbersome so that new
    entrepreneurs can also undertake lending activity without any hassles
   Banks, NBFCs and other MFIs that are registered under RBI as MFIs will be out of the
    preview of Money Lenders Acts
   Differential incentive system needs to be introduced by the state governments wherein
    incentives for the money Lenders are articulated well in the Act.
   Money lenders must keep simple and standardized books of accounts prescribed by the
    registering authority so that they can report based on the books of account
   A separate desk in the state government can monitor and report on the activities of the
    money lenders. This is important to keep an eye on the lending undertaken by money
    lenders and also streamlining rules and regulations keeping the focus on client protection.

Members stressed on the need of innovation in the sector for widening reach and minimizing cost
including alternative delivery models where existing channels like money lenders for financial
delivery are utilized.

Linking with formal systems: Citing examples of bank-moneylender linkage in rural financial
market across Asia, Africa and Latin America, members informed that these linkages are
increasingly used by formal financial institutions to target rural clients. Members suggested that it
is important to acknowledge moneylenders as legitimate constituents of financial system and
Banks can establish linkages with them in order to serve the poor. Respondents also quoted
example of a bank’s initiative in Paramakudi (Ramanathapuram District of Tamil Nadu) in context
of bringing money lenders into the mainstream, members mentioned that the scheme did not
take off due to following reasons-

   Registered money lenders felt the documentation suggested by bank is cumbersome. As
    they follow a very simple system in their routine transactions
   The spread allowed by the bank @ 3% was not enough and not attractive to them
   Jewels cannot be redeemed back from the bank by the moneylender after office hours, for
    the clients who pay their liability at odd hours and demand the jewels back immediately

Money lenders have been focusing on providing mainly credit services however the role can be
broadened if they take up a combination of microfinance services - savings, credit, insurance and
money transfer services so as to serve poor in a better way. In such case using a suitable
terminology such as - ‘Independent Financial Service Providers’ (IFSPs) will more appropriate.

Linkage with BC/BF Model: Similar to the arrangements made for BCs/BFs in terms of linking
it with formal systems it will be good to have money Lenders a part of the formal value chain of
MF services. On the issue of linking it with BC/BF model, members showed apprehensions about
its feasibility as they think it will be like converting a businessman into an agent. While members
feel importance of regulating Money Lenders, they also realize that it is unlikely to recourse to a
legal action due to various factors including costs on litigation, ignorance of law and the fear of
losing the source of credit they have for future needs.

Customer protection and resolving the disputes: Members find importance of establishing
a quasi judicial system by having a ‘local level ombudsman’ to protect the poor clients from
exploitation. They also felt usefulness of conducting customer survey time to time. Additionally, a
separate special Court/Tribunal with the membership of legal and other experts empowered to
quickly dispose of the cases and settle the claims will also help in the whole process.

Transparency issues: It is very difficult to generate information adequate for regulating money
lending as it is mostly informal. The State Money lending Acts attempt to regulate the symptoms
rather than the causes. By doing so money lending is driven underground and the increased
risks of doing business increases the rates of interest for borrowers. A policy response to
exploitative practices in money lending should be to provide a viable alternative that can be
regulated. Unless the spread of formal financial services is ensured, the undesirable part of
money lending cannot be controlled.

Interest rates charged by the money lenders: Wherever SHG and MFI lending had turned
intensive, interest rates of money lenders had declined according to several studies. In AP after
the credit flow declined after October 2010, high interest loans from informal and semi-formal
sources had increased. It is envisaged that the money lenders will continue to function as source
for emergency loans, borrowings without collateral and high risk loans that are not possible to be
provided from banks and formal financial institutions.

Members informed that there exist different type of moneylenders and also different type of
relations between moneylenders and the borrowers. Due to such a scenario, implementing
regulations on such a diversity of moneylender becomes tricky. Hence, we need to think of how
best they can be regulated so as to ensure that they provide credit at reasonable rates with more
transparency.

Way forward for strengthening regulations on money lenders: Members expressed that
rural poor find the banks unattractive because of their inflexibility, high transaction costs and a
time-consuming process. For a poor person the transaction costs associated with numerous visits
to bank, long wait of time, mistrust born out of bad experience, and payment of extra-legal
money for the approval of loan all add up to costs which are more or less equal to the costs of
obtaining loan from moneylenders with comparative efficiency. Finally members suggested the
following to strengthen money lending activity in favor of poor-

   FLCC (Financial Literacy and Counseling Centers) developed under the NABARD’s scheme can
    be used to train Money Lenders so that they deliver services effectively
   State can put their own norms to declare selected money lenders to function as ‘accredited
    loan providers’ proposed in the report of the technical group formed by RBI
   Streamlining money lenders Acts of different states and communicating about the
    recommendations of the RBI’s technical group report through a workshop/roundtable
   Policy Advocacy initiatives at different levels so that states adopt relevant provisions
    recommended by the technical group

In the nutshell, members critically analyzed the role of money lenders and their regulation in
context of providing MF services to the poor especially those who are economically and
geographically disadvantaged. They have also shown their concern about client protection and
therefore stressed on the need of streamlining money lenders Act of different states based on the
report of the technical group formed by RBI.


Related Resources
Recommended Documentation

Making Money Work for the Poor in India: Inclusive Finance through Bank -
Moneylenders Linkages (from A.K. Garg, Agricultural Finance Corporation Limited (AFCL),
Mumbai)
Article; A.K. Garg and Neha Pandey; Agricultural Finance Corporation Limited; Mumbai
Available at http://www.afcindia.org.in/PDF/moneylender.pdf (PDF; Size: 304 KB)
        Recommends designing a comprehensive financial system based on the bank-
        moneylender linkages to reach the poor

From Monika Khanna, Research Associate

The Kerala Money Lenders Act 1958
Act; Kerala; 1958
Available at http://www.keralataxes.in/documents/KML%20ACT.pdf (PDF; 160 KB)
        The Act provides the regulation and control of the business of money-lenders in Kerala

Punjab Registration of Money-Lender’s Act, 1938
Act; Punjab; 1938
Available at http://punjabrevenue.nic.in/monlenact38.htm
        The Act provides the regulation and control of the business of money-lenders in Punjab

The Karnataka Money Lenders Act 1961
Act; Karnataka; 1961
Available at http://dpal.kar.nic.in/.%5C12%20of%201962%20(E).pdf (PDF; Size: 303 KB)
        The Act provides the regulation and control of the business of money lenders in
        Karnataka
Bank-moneylender Linkage as an Alternative to Bank Competition in Rural Credit
Markets (from Navin Anand, Resource Person)
Paper; by Adel Varghese; Oxford Economic Papers; 10 December 2004
Available at http://oep.oxfordjournals.org/content/57/2/315
        Paper proposes a new method in which banks and moneylenders can link in rural credit
        markets

Recommended Organizations and Programmes

From Navin Anand, United Nations Development Programme – India, New Delhi

Reserve Bank of India (RBI), Mumbai
Rural Planning and Credit Department, Central Office Building, 13th Floor, Mumbai 400 001; Tel.:
91-22- 22610261; Fax: 91-22- 22658276;
http://www.rbi.org.in/scripts/AboutUsDisplay.aspx?pg=Depts.htm#RPCD
        Rural Planning and Credit Department of RBI formulates policies relating to rural credit
        and monitors timely and adequate flow of credit

National Bank for Agriculture and Rural Development (NABARD), Mumbai
Plot No. C-24, "G" Block, Bandra-Kurla Complex, P. B. No 8121, Bandra (E), Mumbai - 400051;
Tel.:        91-22-26539244;          Fax:       91-22-26528141;         nabmcid@vsnl.com;
http://www.nabard.org/roles/microfinance/index.htm
        Apex institution providing loan funds for microfinance services in the form of revolving
        fund assistance to NGO-MFIs, SHG Federations and NGOs to lend to SHGs

State Bank of India, Mumbai (from PSM Rao, Independent Consultant, Hyderabad)
Tulsini Chamber, 1st Floor, West Wing, 212, Free Press Journal Marg, Nariman Point, Mumbai
400021 Maharashtra; Tel: 91-22-22820427; Fax: 91-22-22820411; crpd@sbi.co.in;
http://www.statebankofindia.com/viewsection.jsp?lang=0&id=0,8,67
        Nationalized public sector bank lending for microfinance services


Responses in Full
Kedareswar Choudhury, Darabar Sahitya Sansad, Orissa
Toms has raised an issue of involving/engaging the money lenders for better micro finance
products and services. I think the agencies working with communities on microfinance front, but
not for commercial gains can take up this challenge and design suitable programmes for
intervention.

Possible areas of intervention could be:

   Moderating the rate of interest.
   Group collateral in place of assets
   Group financing in place of individual financing
   Suitable terms of loan and terms of repayment


G K Agrawal, Rural Development and Microfinance Consultant, Mumbai
Seeking support of money lenders/indigenous bankers to improve credit flow and other
services/financial inclusion in rural areas is not a new issue but an age old issue. The issue is that
they do not want any formal support and are not prepared to share their information and do not
want to be transparent in their financial dealings. They run their business on commercial lines,
with no tags, on the lowest cost possible basis, with no grant/subsidies from government or
otherwise. NGOs have their own limitations to run on any big scale on commercial lines without
any subsidy and MFIs are not able to reduce their cost of operations. In Andhra Pradesh the
ordinance was passed as the situation had worsened. Lack of transparency and responsibility,
excessive rate of interest in the name of sustainability and a conflict of interest between serving
equity owners and social interests of poor borrowers and some times the charges of using high
handedness in recovery of their dues are some of the issues that we are grappling with. Unless
we find out some way to meet the cost of reaching interiors /unreached /unbanked areas to
finance poor thereby improving financial inclusion, the latter may continue to be like a mirage in
desert.


Resham Singh, Punjab Gramin Bank, Punjab
I would like to share my experience to free the poor from the yoke of money lenders. While
working as Recovery Officer in Punjab Gramin Bank, I have to contact each and every defaulter
for recovering the bank loan. During my interactions with the defaulters, I concluded that the
main reason to raise loan from the banks was to repay the loan taken from the money lenders.
The money lenders were successful in recovering the amount along with high interest amount by
getting one page signed from the borrowers. I feel the borrowers were keen on taking loan from
money lenders because of following reasons:

   The money lenders have moral pressure and social sanction in the society
   They are rich enough to circulate the flow of currency in exigency
   Control of market to sell produce of farmers
   Well aware of the past financial record of the borrowers

In 2000 when I took over the new assignment as Manager, I concentrated the program of micro-
credit through Self Help Groups. About 32 general Self Help Groups were formed and
subsequently 23 eligible groups were linked with the Over Draft Limits. I would like to share with
you some of the clippings from the various newspapers covering reports on how members of the
SHGs have benefited and were relieved from the Money Lenders. To read the clippings from the
newspapers, please visit: ftp://ftp.solutionexchange.net.in/public/mf/cr/res30081101.pdf (Size:
17 KB)


Rajesh K Verma, Daltonganj, Jharkhand
I have tried to put in my opinion and feelings as following:

To what extent Money Lenders can contribute to financial inclusion efforts of
Government and other agencies if they are considered as apart of the formal micro
finance chain?

To my mind financial inclusion consists of providing banking facilities: credit and deposit both to
unbanked sectors so that people are not left out of the main national financial stream and can
capitalize on their existing resources to gain further maneuvering space vis a vis livelihood
promotion. As far as the money lenders are concerned, they stand no where at par with the
people having hard earned money for example the SHGs who out of their small savings
contribute to the welfare of society and for its members. Money lenders work out of greed and
not out of service to the society. Instead of regulating them and providing a blow to the people’s
institutions it is better to strengthen the SHG movement where there is everything that is needed
for the growth of a healthy society.
What should be some of the mandatory provisions in the money lending Acts of
different states that provide protection to different segments of poor?

If at all we need to go for the practice of money lending by the so called rich, the entire process
has to be transparent enough to remove the stigma attached. The rates are to be regulated the
collateral are to be affordable and the musclemen should be kept at bay by legislation. The
recovery process should be akin to those of the banking agencies i.e. mild and non offensive.

In context of preparing new projects what could be the arrangements of engaging
Money lenders as a channel for delivering multifaceted Microfinance services? Can
money lending business be linked with Business Correspondent Model?

If you engage the money lenders they may not play the developing role because they shall work
more for self interest rather than for philanthropy. Why the government has to be a welfare state
because it works without any interest of earning any commercial benefits out of its development
programmes. The business correspondent model is entirely a different thing, the correspondent
works for its employing agency more often an NBFC or a banking company it still has the local
feel . We cannot expect the same from a moneylender who shall have always in the drive of
making its own money grow at the cost of the village society at large.

Are there any Microfinance Institutions working with the Money Lenders? If yes,
what are the experiences of working with money lenders?

In such a scenario, I say it again as I have said before that the best approach is to strengthen
the SHGs - the group of well meaning coherent women. Let them thrive on the basis of their hard
earned deposits and through training make them sustainable and creditworthy, on the basis of
my experience of 30 years working in the rural areas they can produce miracles the real
harbingers of the decentralized power.


A.K. Garg, Agricultural Finance Corporation Limited (AFCL), Mumbai
I would like to share a paper written by Neha Pandey and me on Making Money Work for the
poor in India: Inclusive Finance through bank – moneylender linkages. To read the paper, please
visit: http://www.afcindia.org.in/PDF/moneylender.pdf (PDF: Size: 304 KB)


Navin Anand, UNDP, New Delhi
For achieving faster growth in context of financial inclusion, it is utmost important to adopt
various methods and processes to reach each and every person especially vulnerable people who
are excluded and in need of variety of financial services. SHG bank linkage programme has been
a great success in covering poor women but the focus under the programme has been more on
women and therefore some segments of population are left out.

Historically, the word ‘Money Lender’ gives a very different impression due to acts of some
individuals who have not maintained the ethics of the business and harassed poor in one way or
the other. But, there are many others who are providing genuine services to the poor at their
door steps. So it is important to recognize the system and appreciate the money lenders who are
providing microfinance services in an ethical way. Poor still depend on money lenders for the
valid reasons of getting loan on time and for getting finance for a range of their credit needs,
including consumption needs. If we try to do a SWOT Analysis of banks/MFIs vis- a -vis Money
lenders we will still find some reasons for which people depend on money lenders.
Using a different Term for ‘Money Lenders’

Now the first question is whether we should continue using the word ‘money lenders’ or use
some other suitable terminology such as ‘Independent Financial Service Providers’
(IFSPs). Till the money lenders were involved in providing only credit services it was logical to
call them money lenders however the range of services has enhanced now. I believe that over a
passage of time the activities that can be taken up by money lenders are changing and not
limited to just providing credit to the poor. Today, poor need a combination of services such as
credit and insurance services or credit and money transfer services or a mix of all - savings,
credit, insurance and money transfer services.

On the first question of the query, I would like to express that the Money Lenders/ IFSPs could
be considered under the formal financial services delivery chain and must be monitored so that
they do not use any unethical practices in terms of charging high interest and use undesirable
methods to recover the loans. The money lenders/IFSPs can contribute to a large extent in
providing financial services to the economically and geographically disadvantaged people who are
still excluded and do not have access to formal financial systems. The NSSO survey has already
revealed trends that show the dominant role being played by money lenders in rural areas.

Linkage with Formal Systems
It is true that the activities taken up by Money Lenders/ IFSPs are very similar to Business
Correspondents/Business Facilitators but the major difference is that Money Lenders/ IFSPs use
their own capital in lending and therefore bear risks and also avail profits accrued out of the
business. Thus there is a thin line of difference between these two entities Money Lenders/ IFSPs
and BCs/BFs. It is quite possible that an IFSP also functions as BC/BF. Similar to the
arrangements made for BCs/BFs in terms of linking it with formal systems it will be good to have
money Lenders a part of the formal value chain of MF services, wherever appropriate.

Some of the suggested mandatory provisions that should be there in the money
lenders Acts

   Registration with an appropriate state level authority is to be made mandatory for all the
    Money Lenders/ Independent Financial Service Providers’. However, the system of
    registration should not be cumbersome so that new entrepreneurs can also undertake the
    lending activity formally without any hassles.

   As proposed in Microfinance (Development and Regulation) Bill 2011, Banks, NBFCs and
    other MFIs that are registered under RBI will not come under the preview of Money Lenders
    Acts of different states.

   In order to promote financial inclusion in remote areas ‘differential incentive system’ needs to
    be introduced by the state governments wherein incentives for the Independent Financial
    Service Providers are articulated well in the Act.

   At the state level, the outer limit of the interest to be charged by the money lenders and
    changes to be made from time to time should not be entirely on the Government but a high
    power committee comprised of government as well as representatives of different Civil
    societies and also primary stakeholders’ groups. Interest to be charged from the poor can be
    differential based on the vulnerability of people. The interest to be charged from for poor
    belonging to PwDs and Older people could be less than the other poor.
   Money lenders must keep simple and standardized books of accounts so that they can report
    based on the books of account and can show the same at the time of inspection.

   A separate desk in the state government can monitor and report on the activities of the
    money lenders. This is important to keep an eye on the lending undertaken by money
    lenders and also streamlining rules and regulations for them keeping the focus on client
    protection.

   A system of having a local level ombudsman will help in protecting the poor clients
    from exploitation. However it will be important for the ombudsman to play a proactive role
    in finding out the practices of money lenders time to time by conducting customer survey.
    This is important here due to the fact that majority of the clients of money lenders are
    illiterate and vulnerable. This quasi judicial system will not only solve the disputes but also
    keep an eye on the money lending activities so that customers are protected.

   Through FLCC ( Financial Literacy and Counseling Centers) developed under the NABARD’s
    scheme, Money Lenders/ Independent Financial Service Providers can be trained to
    deliver their services in a more professional manner. State can put their own norms to
    declare selected money lenders/ IFSPs to function as accredited loan providers’ proposed in
    the report of the technical group formed by RBI to review the legislation on money lending.

Keeping in view the importance of streamlining money lenders Acts of different states and
communicating about the recommendations of the RBI’s technical group report, it is important to
conduct a roundtable conference on this important issue for the relevant officials of the state
governments. Some Policy Advocacy initiatives will also be required so that states adopt relevant
provisions recommended by the technical group.


PSM Rao, Independent Consultant, Hyderabad
The importance of money lenders has been increasing as a result of the increasing apathy of the
formal financial institutions in meeting the credit requirement of the poor. This is really an
unfortunate situation.

As you know the goal of institutional arrangement and the related steps has been to provide
hassle free and cheap credit to the poor and to free them from the clutches of the money
lenders. It was with this goal, that the cooperatives were brought in during the first decade of
the 20th century, State Bank of India was established in 1956, social control on banks tried in
1968, nationalization of the major banks effected in the following year and the RRBs were set up
in 1976. The setting up of the ARDC and NABARD too were with the same goal.

When all these efforts could not completely eliminate the need of the money lenders and when
there is a thinking of including the money lenders too in the process of ‘inclusive growth’, a
change in paradigm, it looks that it will be a futile attempt to advocate for the total elimination of
the private money lending system.

The choice, therefore, is to regulate them and to effort for achieving ‘optimum’ benefits to the
society from their operations. But the money lenders are most likely, as experience suggests,
evading the rules and regulations. And the victims are unlikely to recourse to a legal action due
to various factors including costs on litigation, ignorance of law and the fear of losing only the
source of credit they have for future needs. Rather, it will be difficult for the poor borrowers to
fight against the powerful money lenders.
In my view there is a dichotomy which is difficult to resolve. The access to credit and rate of
interest are equally important for the poor. I do not agree with some economists who say that
the rate of interest is not as important as the access quoting the example of the ‘successes of the
MFIs and SHGs. There is a limit to the affordability. But the money lenders can’t do business if
low interest rule is enforced on them. This is the dichotomy.

So, there should be a compromise; a little higher interest than that of the formal system should
be determined. The money lending Act should make exhaustive rules taking into account the
practicality of the scheme.

Then, there should be a separate arrangement for resolving the disputes and enforcing the law.
A separate tribunal with the membership of legal and other experts empowered to quickly
dispose of the cases will be in order. The special Court/Tribunal should be empowered to
arbitrate between the lenders and borrowers and settle the claims. This would help avoid the
collection of exorbitant interest to some extent.

I am suggesting a kind of informal approach since we are dealing with the informal credit.


Jaipal Singh, Centre for microfinance, Jaipur
It is very interesting query, especially because it begins with the lecture of Prime Minister. Please
see below my comments on money lenders:

   Money lenders are like any other businessmen. They are there to maximize their returns and
    they carry the risks like any other business. It is like grocery stores- if one has capacity to
    bargain and the options to go to any other store, the chances of cheating will be less. But if
    one has to take things on credit then there is little bargaining space. Money lenders also have
    different rate of interest depending on their perception and assessment of one’s repaying
    capacity.
   As it is not possible to force all small shops to obtain licenses, all moneylenders will never be
    forced to come under any form of regulation. Once they come under regulation, their
    business will become unviable. In fact, I strongly feel that the rate of interest charged by
    money lender will increase because the fee, expenses on documentation, travel to file the
    reports, and bribe they will have to the agents of regulator will be passed on to the poor
   Certain things are best if they are left alone and money lenders and small shops are in that
    category. Calling a ‘moneylender’ as a ‘moneylender’ is fine and there is no need to give
    them a fancy name. Changing a name will not help any poor, I am sure.
   A large number of moneylenders these days are people who have some regular source of
    income and who do not want their money to be placed idle in banks- like school teachers and
    other government employees staying in villages, small shop keepers who give credit in cash
    and in kind; some bigger farmers who are also doubling as agents of political parties and are
    small time politicians. Very few have money lending as sole business.
   We tend to deliberately forget the inefficiency of many of the institutions and then create an
    atmosphere of helplessness. This is being done by ‘suggesting the financial inclusion through
    money lenders’. I do not understand what value addition it will have. Even now the money
    lenders are providing credit services (I have not seen any money lender providing any other
    service) and to that extent people are financially included. It is different issue that RBI and
    Government do not think this as financial inclusion. For them ‘opening of a bank account –
    no matter if it is operated or not’ is the financial inclusion.
   The basic issue is of the failure of formal financial institutions to reach out to poor or may be
    the failure of poor to reach out to formal financial institutions. I agree that banks are there as
    commercial entities and they should not be compelled to lend to people whom they do not
    trust. After all they are only custodians of public money. But it is the duty of State to see that
    all of its inhabitants get necessary services. Government should have different model of
    banking for poor- support coops of poor, support low cost mobile banking exclusively for
    poor etc. In fact the real test of economists like Man Mohan Singh is here (in designing
    appropriate banking model for poor) and not in suggesting regulation of free entrepreneurs
    like money lenders.
   Linking money lending business and BC model is futile. It is like converting a businessman to
    an agent. It can only happen if the businessman incur heavy loss in business and is forced to
    do any work. Those who know businessmen will know that agents are not respected by
    entrepreneurs/ businessmen.
   I suggest that the term ‘financial inclusion’ needs to be redefined. Moneylenders should be
    left alone. Build the negotiating power of poor and give them options if we can.


N.Srinivasan, Consultant, Pune
Money lending is one of the oldest surviving practices that will continue to exist regardless of
attempts to ban or regulate the same. It is an important informal arrangement that is critical to
people. The formal institutions are never a substitute for the ubiquity and speed of service of the
moneylender.

It is very difficult to generate information adequate for regulating money lending as it is mostly
informal. The State Money lending Acts attempt to regulate the symptoms rather than the
causes. By doing so money lending is driven underground and the increased risks of doing
business increases the rates of interest for borrowers. A policy response to exploitative practices
in money lending should be to provide a viable alternative that can be regulated. Unless the
spread of formal financial services is ensured, the undesirable part of money lending cannot be
controlled.

Wherever SHG and MFI lending had turned intensive, interest rates of money lenders had
declined according to several studies. In AP after the credit flow declined after October 2010,
high interest loans from informal and semi-formal sources had increased. Money lending
occupies the institutional vacuum.

But it is naive to conclude that money lending will not be there if we have full coverage of all
villages with formal financial institutions. Emergent loans, borrowers without collateral,
customers perceived to be high-risk by financial institutions, etc., will continue to be with money
lenders.

The RBI report has captured the possible interventions of the State Government very well.

   Money lenders cannot be a part of the financial inclusion effort. They cannot provide
    continued service with any certainty to their customers.
   Protection to poor cannot come from law - enforceability is not easy as money lending is
    informal and cost of litigation and access to legal protection is expensive and tedious.
   Poor can be protected by making available loan redemption products by formal institutions -
    instead of trying to provide refinance money lenders.
   Money lender as a BC might not work well with majority of local population, on account of
    credibility issues. Money lenders are not a natural extension of formal financial sector on
    account of persistent negative publicity over the years (with justification).
   Some banks had provided bulk funds to money lenders and tried to influence their prices on
    the ground. But such schemes did not get upscaled.
   Money lending as an institution has to be ignored. Neither State support is needed nor is
    hostility warranted. They have a critical informal role to play, but they should not be allowed
    to play a mainstream role.
Hemantha Kumar Pamarthy, Chennai
I am always of the opinion that Money-lenders could not be totally done away with. You may
change their nomenclature but their relevance to the society is there and we simply cannot
ignore this fact.

Despite technological advancements in areas of Internet money transactions, ATMs and what not
the relevance of money lenders is there to stay. Now let us examine the reasons:

   The rural poor or the disadvantaged needy cannot access internet due to their low levels of
    education.
   Banks and MFIs work only between one set of time to another, daily. And they also have
    holidays.
   The knowledge of using ATMs is to be imparted to the poor. Do the banks have the time and
    inclination and most importantly budgets for this?
   Sure, mobile money is catching on, but is it catching up rapidly as needed?

In the absence of any of the technologically advanced facilities for the disadvantaged needy and
poor and especially in the rural areas, what is the alternative?

Whether we like or not, whether we agree or not, it is the "LOCAL" Moneylender.

S/he may abuse you, kick you and exploit you but it is s/he who is really coming to the rescue for
the poor in emergency.

Interestingly a Tamil film song caught with this essence when it sings "even when banks are
bankrupt, it is the Seth's (as Rajasthanis are locally referred to in Tamil Nadu) shop (since many
Rajasthanis set up moneylending and pawn-broking businesses in Tamil Nadu, these businesses
are called 'Settu Kada' or Seth's Shops) that becomes the emergency ward"

Our AP friends from the MF sector would agree, if not publicly, at least privately, that
promulgating the AP MF Ordinance, only largely helped the money-lenders who came back into
business with much more vigour.

Though it was exploiting the poor, it only could support a section of poor who were neither being
covered by the MFIs in the wake of the Ordinance, not covered by other formal lending.

Even the rich tend to borrow from the money-lenders to tide away temporary shortfall in cash
flows due to the by and large and relatively less hassled borrowing from the formal credit
sources.

Yes it would be well to regularize the money-lending business and money-lenders but with
realistic terms and conditions than Utopian and imaginary ones.

Apart from regularizing, the most important component would be to build compassion in the
money-lenders and this would be a challenge and the cause for another thread of discussion
altogether.


Marc Roesch, French Institute Pondicherry, Pondicherry
Working in Tamil Nadu on the impact of microfinance on poor rural household since 10 years we
interviewed many “moneylenders”. I would like to give some element which comes out from
these contacts.

There are very different type of “moneylender”, and many different type of relation between
“moneylender” and “borrower”. In Tamil Nadu you have the “tandal” who lend small amount on a
weekly base, pawnbroker, “Terinjavanga” which means “people you know” who can be your
neighbor, employer or a rich person. Implementing regulations on such a diversity of
moneylender is tricky.

The second element is the link between lender and borrower. In Bambara (a West African
language) debt is called “djourou”. It’s the same word as a rope. In French we say “debt is a
social link”. By taking a loan from a rich person, you put yourself under the protection of this
person. The lender has to protect you, to take care on you that you continue to be able to
reimburse your loan. Many poor people continue to lend from moneylender to maintain the tie
with a rich people who can help them if necessary. A debt can be a kind of “insurance” against
vulnerability.

Last element - We follow 400 families, SHG members during 6 years after the introduction of
microfinance. Roughly we found that after two years, people borrow less from the different type
of moneylender. But 6 years after they continue to borrow with SHG and borrow more with
moneylenders. The main reason is that they increase their level of consumption, their
indebtedness, and the juggling between the different lenders. As member of SHG they are more
“trustable” for the moneylender and have a better access to their loans.

Microfinance and money lending are complementary. If they seem play in the same financial
playground, they are different at the social level. Associating moneylender to microfinance is a
very complex task because they do not have the same social role.


N.Jeyaseelan, Hand in Hand, Chennai
 I would like to share the experiences I had when I was working with a commercial bank in south
India.

Role of money lenders is more crucial as they continue to remain as a last resort to the rural
people, who do not have access to formal credit. They are almost like a Rural ATM (Any Time
Money) assuring 24 x 7 service. Hence, we need to think of how best they can be regulated so
as to ensure that they provide credit at reasonable rates with more transparency.

In 2003, when I was working in Paramakudi (Ramanathapuram District of Tamil Nadu), our bank
introduced a scheme to bring the money lenders into the mainstream.

   The selected - registered money lenders will be given a bulk loan limit by the bank
   Using the bank limit, the money lenders will lend to poor against the collateral -gold
    ornaments and will pledge the same gold ornaments in bank.
   Bank will provide a margin of 3% interest to the money lender.
   Money lender has to display the final rate to the borrower and use the documents prescribed
    by the bank.

Even though it is a good scheme, it did not take off because of the following reasons.
   Registered money lenders felt the documentation suggested by bank is cumbersome. As
    they follow a very simple system in their routine transactions, which help them to reduce the
    cost of transactions.
   The spread allowed by the bank @ 3% was not enough and not attractive to them.
   Jewels cannot be redeemed back from the bank by the moneylender after office hours, for
    the clients who pay their liability at odd hours and demand the jewels back immediately.

Another scheme of Government of India introduced around 2005-06, swapping Money lender
debt with Bank loan also did not take off, as money lenders were not willing to put in the terms
of their loan in black and white in documents.

Hence, the state government may think of the following regulatory changes to improve the
informal system.

   Interest ceiling prescribed by state government (example in Tamil Nadu - Money lenders act
    prohibits interest rate beyond 12% per annum for unsecured loans and 9% per annum for
    secured loans.) should be relaxed and should be fixed at a reasonable level.
   Money lenders also should be asked to share their data to Credit bureau to find out the
    actual indebtedness of the individual borrowers. Transparency on the credit flow at the micro
    level will enable social sanctions in the event of defaults. Over the period, the credit history
    can be developed as collateral.


                     Many thanks to all who contributed to this query!

If you have further information to share on this topic, please send it to Solution Exchange for the
Microfinance Community in India at se-mf@solutionexchange-un.net.in with the subject heading
“Re: [se-mf] Query: Strengthening Money Lenders Act for Financial Inclusion – Advice. Additional
Reply.”

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