A Typology of Informal Credit Suppliers: PAWN BROKERS

"Pledging for Security: Role of Pawn Brokers"

Pawn brokers, as the name suggests, lend money by using marketable assets such as gold, jewellery, household articles etc as collateral or security. Borrowers in need of money pawn' an asset or article as security or pledge and receive a loan which is lower in proportion to the value of the pawned article - this is usually 40 to 50 percent of the value of the item.
A pawn ticket' is issued to the borrower as a transaction record. On repayment of the loan plus interest, the pawned article is returned to the borrower. The pawn ticket usually records name and address of the pawn broker and the pawner' or borrower, loan amount and its terms and conditions, detailed description of the pawned article etc.
Pawn broking has been in vogue from ancient times with households holding their assets primarily in gold and jewellery - assets that can be transported' easily in times of unrest and pawned in times of financial need. Thus ... pawnbroking has its attractive points for the lender (the pawn broker) as well as the borrower (the pledger or pawner) ... The pledger sells, as it were, his pawn for a certain sum below the going (appraised) market value and retains the right to buy it back within a specified time by returning the original sum plus interest. If he does not, he will lose his property, but no further debt exists and hence no ever-ending debt load ...' [Bouman, 1988: 73].
As with money lenders, pawn brokers in India come under the preview of the Pawn Brokers Act of 1962. It lays out the procedure for a pawn broker to register and obtain a license-to-operate from the Register of Pawn Brokers, and fees to be paid for the license. It details out the rates of interest chargeable (ranging from 12 to 18 percent, depending on the loan amount), repayment details, and grace periods. Compliance with this act has also not been widespread, with only about 35 to 40 percent of the pawn brokers in any city actually registered with the Office of the Registrar of Pawn Brokers.

Literature Review of Pawn Brokers

Issue Discussion References
Advantages of pawn brokers
No spiraling debt cycle is created by loans from pawn brokers as a defaulting loan is recovered by the pawn broker from the pawned item
Costs of lending is covered by providing loans that are lower than the cost of the pawned item.
Collateralized/pawned item is usually a movable' asset, as against immovable/fixed assets such as land, houses etc.
Lengthy procedure for establishing credit worthiness is avoided as it is established by the value of assets pawned.
Bouman, 1988: 69-89
GoK, 1962
Newsweek, 1985: 43
Disadvantages of pawn brokers
If for some reason, the borrower is unable to repay the loan amount, he looses his right to redeem his pawned article. This is a loss, since the amount he received as a loan is less than the value of the article pawned.
Pawn Brokers auction or sell off articles that are not redeemed by the borrowers and usually make a profit from the sale - which is not passed on to the article's original owner/borrower.

Key Implications of Pawn Brokers:
While establishing credit worthiness of a borrower, in absence of viable information, and a steady income, alternate means of collaterizing may have to be used in special cases. This, in effect further reduces transaction costs of loans as the costs of assembling information is eliminated - alternate types of collateral used for guarantees, including recommendations.
Loan transaction methodologies have to take into account existing patterns of asset creation among low-income households - assets based on income cycles, long term savings plans etc.

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Issue	Discussion	References
Advantages of pawn brokers	No spiraling debt cycle is created by loans from pawn brokers as a defaulting loan is recovered by the pawn broker from the pawned item Costs of lending is covered by providing loans that are lower than the cost of the pawned item. Collateralized/pawned item is usually a movable' asset, as against immovable/fixed assets such as land, houses etc. Lengthy procedure for establishing credit worthiness is avoided as it is established by the value of assets pawned.	Bouman, 1988: 69-89 GoK, 1962 Newsweek, 1985: 43
Disadvantages of pawn brokers	If for some reason, the borrower is unable to repay the loan amount, he looses his right to redeem his pawned article. This is a loss, since the amount he received as a loan is less than the value of the article pawned. Pawn Brokers auction or sell off articles that are not redeemed by the borrowers and usually make a profit from the sale - which is not passed on to the article's original owner/borrower.
Key Implications of Pawn Brokers:	While establishing credit worthiness of a borrower, in absence of viable information, and a steady income, alternate means of collaterizing may have to be used in special cases. This, in effect further reduces transaction costs of loans as the costs of assembling information is eliminated - alternate types of collateral used for guarantees, including recommendations. Loan transaction methodologies have to take into account existing patterns of asset creation among low-income households - assets based on income cycles, long term savings plans etc.