INFORMAL MONEY MARKETS –JOURNEY FROM DEBT TO DEATH
INFORMAL
MONEY MARKETS –JOURNEY FROM DEBT TO DEATH
B
Guruva Reddy, B.E (Agri. Engg), PGDRM (IRMA)
Call money rockets
The very recent issue "CALL
MONEY RACKETS” and their atrocities including sexual abuses reporting from
Vijayawada and surrounding areas are very painful and public shame. Civil
society has to bow its head down and think seriously to eradicate these abuses.
It has become order of the day for media, political parties, policy makers to
keep any issue live 24x7 for few days, take full commercial advantage and
forget about it without finding out the causes for the issue and try to find
permanent solutions. The call money issue already became causality.
Media has to play vital & positive
role and give comprehensive picture on the issues, reasons for debit trap,
implications, exit strategies, legal support etc rather than seeing it from
pure commercial advantage. Police has to look at the issue from larger perspective
and ensue that these rackets prevailing are exposed, and has to work seriously
on preventive strategy. If everyone is treated equally in police stations, most
of the problems will be resolved before they get magnified. Policy
makers have to re look into the policies on money lending act, financial
institutions and operational issues and bring out effective systems with sound
preventive strategy.
Role
of political parties:
All political parties have to extend
full support and cooperation to the Government in handling the situation in the
best interest of the state, rather than blaming each other by coloring the
culprits with political parties and derive pleasure through colored head
count. The role of political parties is very important and they are
expected to play big brother role and create confidence among the people
particularly suffered and vulnerable sections, rather than mudslinging. The
united political voice will strengthen the administration and certainly prevail
to enforce the law with authority and iron hand.
It is very important to understand why
and how people are getting into these debt/death traps and how best we can work
out strategies and implement the same, rather than touching the peripheral
issues. Prevention is always better than cure, but in present situation, the
immediate requirement is curative strategy followed by preventative action
plan.
Effects
of Globalization:
Though Globalization augmented wealth
creation, it had widened the divide between rich and poor. Widened markets,
influence of peer groups are wooing poor to spending, but their incomes are not
rising at same phase. Governments have to seriously work towards effective
reach of globalization benefits to poor. Failure of banking system to
design debt instruments suitable to poor, failure in effective delivery systems,
taking the routes of micro finance institutions to reach mandatory
priority sector lending , resulting in another form of money lenders rather
than establishing alternatives to money lender.
Evolution
of rural credit:
Informational money markets are nothing
new and they are prevailing in different forms for ages. The famous movie of
Nargis Dutt "MOTHER INDIA" of 1957 clearly reflected the ill
effects of money lenders including sexual abuses and their larger impact on
society. The nationalization of banks in 1969 by Smt. Indira Gandhi was the
first major move towards providing credit access to poor and landless. Credit
access acted as catalyst to the "GREEN REVOLUTION" began
almost at the same time, resulting in many fold increase in food production.
The efforts to increase rural credit continued till mid 80s and extended its
base to cover trades other than agriculture.
Rural branch network had extensive
coverage and loans were granted without collateral to poor and such loans were
popularly known as "POOJARI LOANS" in the name of Janardhana Poojari,
then Minister of State for Finance in Mrs. Gandhi's cabinet. The sudden scale
up of rural credit without proper systems, very soon resulted into poor loan
recoveries, high administrative costs, insolvency of Agriculture Development
Banks, accrual of disproportionate credit to large farmers. It gave scope for a
new school of thought called “financial systems approach", wherein
credit was seen not just as another input and it is defined as financial
service. By default due to its basic design, this model benefited only large
scale producers rather than small & low income producers.
Micro
credit – Micro Finance Institutions:
This gave scope for strengthening of
micro credit institutions from 1990 and the models at micro level are proved
successful and exhibited that poor particularly women are excellent at
repayment and these models were scaled up into large institutions. This
is the period these institutions shifted from micro credit to micro finance through inclusion of savings, capacity building, insurance
etc and promoted as institutions to address poverty.
It was the time the globalization
under P V Narasimha Rao' s leadership as PM started yielding results and
Indian economy had shown positive results with comfortable balance of
payments. Foreign Direct Investments (FDI) into banking sector had opened
new opportunities, giving scope for huge presence of private sector banks across
the country including rural branches. As certain percentage of funds is
mandatory for banks to spend on priority sector lending, these banks prepared
engagements with micro finance institutions to meet their mandatory social
sector obligations.
The fairly large success rate of MFIs,
increased financing/ refinancing options resulted in mushroomed growth of MFIs.
The smart among gaddiwala money lenders, NBFCs and others saw an opportunity
and entered the sector with pure commercials in mind. This had resulted in dilution
of motivated and committed efforts of real NGOs and social entrepreneurs in the
sector. The competition among MFIs , huge expansion of Government promoted
DWACRA, gave opportunity for people to access credit from multiple channels,
resulted in diversion of credit to luxuries. The result was huge bad debts,
MFIs increasing interest rates to compensate for bad debts etc and MF sector
almost met with the fate of formal financial institutions of mid 80s.
Failure of formal institutions &
micro finance in effective service delivery, gave scope for informal money
markets to come out with instruments like daily finance, auto finance,
discounting etc and cash on people's weaknesses.
Resurfacing
of informal money markets:
Financial markets over the years took
different shapes and traditional money lenders mostly converted as private
banks, Non banking finance companies, Stock market operators and few still
continue traditional finance with diversified portfolio like unsecured loans
with very high interest rates, daily finance etc. There is another net work, wherein few operators have access to ill-gotten funds through corrupt
practices and do huge cash funding to movies, liquor business, real estate,
large events, political operations, unaccounted business operations etc. These
operations run mostly on faith and also fully secured (not official).
The near failure of micro finance
institutions in servicing the genuine needs of poor and inherent limitations of
banking system to reach real needy and poor, coupled with increased wants of
people for education, health, needs other than food etc gave scope for growth
of informal money markets across the country both in rural and urban areas. A
new breed of money lenders more with muscle power (earlier henchmen of
traditional money lenders, farming community migrated to towns for children
education, trade union leaders, teachers, and pahalwans) came into money
lending business.
This new breed believes more in informal
way of money rotation, threatening, pressure tactics, forcible
collections, sexual abuses etc rather than legal system. The case study
narrated below give an insight into the ill effects of money lenders &
influence of global instruments.
Mr. X hails from lower middle class family,
a science graduate got a job with salary of
Rs.12,000/- month. Initially he used to go to office by bus and carry lunch
box. After few months due to influence of banking instruments he took two
credit cards. As he felt little comfortable financially, got hold of girl
friend resulting in shrinking take home salary. The next move was to buy a
bike to impress upon the girl friend. With some lame excuses and a bit of
bluffing he could convince parents to give seed capital to buy bike and took
Rs.50,000/- loan from a Pahalwan who runs a gym in his locality with
exorbitant interest rate of 10% per month. With this, his interest burden is
Rs.5000/- month, in addition to fuel expenditure. His situation became worse and
started taking hand loan from friends. There is pressure Pahalwan for prompt repayment
and often threatening him with dare consequences and approaching the family.
Now he got into a paradoxical situation from which it is not that easy to
escape.
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Whom to blame for his present situation?
Certainly this is not an isolated case and many such individuals are getting
under the influence of tempting market forces and getting into tremendous
pressure at very tender age itself. It is our responsibility to educate, guide
our younger generation and inculcate the habit of financial planning, savings
for future, children etc, which is major strength of our country.
Changes
in education & health sectors:
As a National policy, education and
health sectors are highly subsidized and huge funds are allocated in five year
plans. Annual budget allocations are given to create quality infrastructure and
well knitted network across the country. In last 25 years there are drastic
changes in the country and the globalization gave opportunity for many fold
increase in corporate education and health facilities. It is a welcome move, if
the competition is fair and healthy. But in reality the Government
facilities are made inactive and intentionally yielded to the private players,
resulting in huge budget drain without achieving desired results.
The deterioration in school education
& primary health care started with delinking from Panchayat
Raj (PR) system. In the areas with road access, there is nearly 70% shift
to private education and the Government schools are left with mostly SC/ST
& very few students from other communities. Government school's enrollment is somewhat better in remote and tribal areas, as it is not viable
for private operators to operate. As the students/parents in these
schools has no voice (poor people) and also due to lack of monitoring, inferior
quality of teachers, resulted in near total collapse of government run
education system.
Impact
of money lenders on education system:
The expenditure on education has gone up
from Rs.100 - 200/- to Rs. 1000 - 3000/- per month per child. Other than the
fees, dress etc, huge amount is incurred on transport and in few cases
relocation expenses to towns. The effective marketing of education institutions
& craze for English, is the main reason for shift to private education, in
the process people are spending huge money. Government is also increasing its
budget spending on education, but most of it is getting into drains. Bringing
synergy in education system is need of the hour and hope governments understand
the importance of the same.
The field experiences revealed that the
private education is no way better than well maintained Government schools or
missionary run institutions. The huge expenditure they incur on publicity
related to ranks achieved (actually in percentage terms they are no way
better than other schools) people are getting carried away. The real
culprit for the debt traps is education other than health and agriculture. People are taking unsecured loans at
exorbitant interest rates to admit their children for IIT/Medicine/CA coaching
and often ending up with a trap from which it is not easy to come out.
The Government has to intervene,
understand the implications of the issue and address the education system. A
comprehensive study on education system across the country is immediate
requirement. We may have to come out with sustainable models with PP models
with sharing of Government infrastructure, budget support with private players,
with workable model of affordable education to poor and needy. Instead of
spreading all over, Government can focus in remote and backward areas and make
its presence felt.
Impact
of money lenders on primary health:
Health related expenditure is another
major culprit in debt related to poor. It is good that life expectancy had gone
up; infant mortality had come down in our country. At the same time diseases
related to heart, diabetes, hypertension etc also had gone up due to drastic
change in lifestyles.
Till late 80s the major health issues
used to be addressed at PHC or at the most at nearby town level. With
mushroomed growth of Super specialty hospitals, these local facilities became referrals,
resulting in many fold increase in health expenditure. The peer pressure from
the relatives and neighborhood is making families to spend huge amounts by
joining the patients with no serious ailments also into corporate hospitals,
resulting in huge debts.
Though Governments are trying to cover
the poor with innovative health insurance policies, the reach and usage is very
limited.
Conclusions:
The expenditure on health, education,
craze for cell phones & consumer durable added to the traditional causes of debt like
agri. Infra (bore wells), festivals & marriages, dowry, influence of liquor
etc and making the life of worse.
As discussed the focused effort in strengthening
our local institutions, linking them with referrals, encouraging PPP models
with measurable indicators, effective stake holders engagement may yield positive
results.
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