A Typology of Informal Credit Suppliers:|
"The Business of Lending: Money Lenders as Enterprises"
Lending by money lenders is an activity that antedates contemporary banking system
from ancient times. They have been organized in the form of family or individual business. They
vary in their size from small petty money lenders to substantial indigenous bankers whose
businesses, at times, have exceeded that of commercial banks.
In India, historically, money lenders have had a prominent position in the capital and
credit markets. They are usually aligned along ethnic lines and are variously called as shroffs,
seths, sahukars, mahajans, chettis etc. in different parts of the country [Das-Gupta, 1990:9-12].
Money lenders lend money, act as money-changers and finance loan trade by means of
bills of exchange. They usually use working capital of their own, and do not generally get
deposits or solicit savings from the public. They grant loans on personnel recommendation and
guarantee to persons well-known to them. They also sometimes grant loans against securities
such as gold, jewellery, land, promissory notes etc [Iqubal, 1988: 367-369]. Money lenders
usually do not have contact with other suppliers/institutions as they usually depend on their own
funds. But they do borrow from joint stock banks and other financial institutions in times of high
demand, thus creating a channel where formal funds are channeled to the informal sector .
Various attempts have been made by the Reserve Bank of India (RBI) - to regulate and
bring into its preview, the functioning of money lenders and indigenous bankers.
Recommendations from RBI that detailed accounting styles, rediscounting and deposit taking
functions, support by commercial banks etc. were not accepted by associations and unions of
lenders, disagreeing with some of the provisions made by RBI [Sundharam, 1996: 5.23-5.27].
Money Lenders in India come under control of the Money Lenders Act, promulgated by
each of the different states. The Act essentially sets out the appointment of a Registrar-General
of Money-Lenders who maintains a Register of Money-lenders in their jurisdiction. The
Registrar provides for a license to money lenders to carry out their business, regulates the terms
and conditions under which a loan is provided to borrowers, and arbitrates in disputes between
money-lenders and borrowers in cases of default or other aspects. Compliance with the Act is
rare however, and majority of the money-lenders do not obtain such a license to operate.
Literature Review of Money Lenders
|Advantages of money lenders
- They usually provide short-term finance of small
loans - which is ideally suited to low-income
groups, who cannot digest' larger loans, and do
not prefer long-term commitments.
- They provide loans to borrowers expeditiously
and in a flexible manner, thus making finance
available immediately, when it is needed and with
a minimum amount of paper-work and official
- They function in close physical proximity to the
borrower, enabling frequent contact and thus
dispensing the need for collateral requirements.
- They do not have fixed business hours, and
therefore provide loans as and when requests are
- They are unorganized and do not have any contact
with other sections of the banking industry
- They combine money lending with trading and
commission activities and thus introduce risk into
- They do not distinguish between short-term and
long-term finance and also in the purpose of the
- They follow traditional methods of keeping
accounts and do not give receipts in most cases.
- They charge high rates of interest in proportion to
- Money lenders play a useful role in providing
credit loans to sectors not supported by
- Money lenders may borrow from commercial
banks during high demand for credit, by using
bills of exchange or their own funds as security.
|Key Implications of Money Lenders:||
- Credit provided by money lenders is timely - that is, it is available immediately when
it is most needed - need for quick/timely credit.
- They do not maintain regular business hours, and usually work throughout the day -
thus making themselves available to borrowers at any time - flexible business hours.
- They live or work close to the residences and work places of their borrowers, and are
hence easily accessible - close physical/psychological proximity.