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July 30, 2014

Non Institutional Credit Agencies - Introduction

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The Non-Institutional Credit Agencies are still playing a significant role in our financial system. The private moneylenders and indigenous bankers are the two important constituents of the non-institutional credit agencies. The private money lenders refers to those individuals who lend credit to the people who require it. Where as the indigenous bankers refers to those bankers who not only deal in "HUNDIS' but also lend money and or accept deposits from the public. Despite the dominant presence of various 'institutional credit agencies' the private money lenders and indigenous lenders are playing their due role in our financial system. Hence, there is a need to understand these two non-institutional credit agencies.

Features, Operations of Money Lenders

Money lenders are those whose business is to lend money for interest. Money lenders do not constitute one homogenous category. Broadly they are of two types.
  1. Professional money lenders whose main activity is money lending.
  2. Non-professional money lenders whose main source of income is not money lending. Professional money lenders generally hold licenses for money lending. In India there are specific communities which have traditionally been associated with money lending. Banians, Vysyas, Mahajans, Shahukars, Seths, Chettiars have generation after generation been involved with professional money lending business. The primary source of income of non-professional moneylenders is trading or farming. They include landlords, large farmers, merchants, goldsmiths, jobbers, contractors etc.
Money lenders are a heterogeneous group. However we may identify some common features and types of operations they undertake. They are :
  1. Money lenders have flexible lending policies. Terms of lending are negotiated between the parties.
  2. Interest on loans is a major source of income for the money lenders, and for many it is a source of livelihood.
  3. They sanction loans to customers against personal security for personal consumption. Thus, loans may be sanctioned for unproductive purposes also.
  4. Operations of moneylenders are very informal and do not involve complicated procedures and rules. They are prompt and flexible.
  5. Moneylenders rely mostly on the information they collect about the borrower, for decision making purpose. 
  6. Source of finance for moneylenders is mostly their own funds. 
  7. They maintain social contracts with their clients, which helps them exercise social control over borrowers while recovering the loans. Social control may take the form of caste disapproval, social boycotting, pressure from local government or authorities. This minimizes the chances of default. 

Defects of Moneylenders 

Money lenders resort to various undesirable, unethical and repressive practices, which has made them very unpopular. they are :
  1. Charging exorbitant rates of interest, deducting interest charged in advance which is disadvantageous to the borrower, deceiving the innocent, illiterate borrower through manipulation of accounts.
  2. Where the borrower commits default, the money lender does not hesitate to exact free service from him, which amount to bonded labour. Loans are disbursed in installments. The very purpose of borrowing may be defecated, as a consequence. 
  3. Demanding gifts and donations, which may add to the debt burden of the poor.
  4. Confiscating land, house or other property belonging to the borrower in settlement of the debt.
  5. Money lenders often do not use the legal methods for recovery of loans in case of default. They may resort to violence, defaming the borrower and other undesirable methods to receive their loan. 
That's all for now friends. In our next post we shall discuss about the characteristics and operations of Indigenous Bankers in detail. Happy Reading :)

 Read complete Banking Awareness study material for RBI Grade B Exam from here
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