A Typology of Informal Credit Suppliers: MONEY LENDERS

"The Business of Lending: A Typology of Money Lenders"

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

Issue Discussion References
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 requirements.
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 made.
Sundharam, 1996: 523-527 Tannan,1954:9-21 GoK, 1968 ADB, 1990

Disadvantages of money lenders

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 their business.
They do not distinguish between short-term and long-term finance and also in the purpose of the loans.
They follow traditional methods of keeping accounts and do not give receipts in most cases.
They charge high rates of interest in proportion to banking institutions.

Relationship with Banks

Money lenders play a useful role in providing credit loans to sectors not supported by commercial banks.
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.

Return to the ICM-Suppliers Page
Hari Srinivas - hsrinivas@gdrc.org
Return to the ICM Homepage

Issue	Discussion	References
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 requirements. 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 made.	Sundharam, 1996: 523-527 Tannan,1954:9-21 GoK, 1968 ADB, 1990
Disadvantages of money lenders	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 their business. They do not distinguish between short-term and long-term finance and also in the purpose of the loans. They follow traditional methods of keeping accounts and do not give receipts in most cases. They charge high rates of interest in proportion to banking institutions.
Relationship with Banks	Money lenders play a useful role in providing credit loans to sectors not supported by commercial banks. 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.