In today's newsletter, we talk about the resurgence of the Indian Moneylender on the back of COVID-19.


The Story

Yesterday, LiveMint had some very sobering news —

Almost a third of the micro, small and medium enterprises in Tamil Nadu are either tapping or ready to tap money lenders for cash amid the current difficult times, indicative of the challenges faced by such entities in availing institutional credit, according to survey results of IIT Madras.

Conducted in collaboration with MSME federations to assess the impact of COVID-19 on these firms in Tamil Nadu, the survey found that 31.3% of the respondents were looking to access finance from money lenders.

This bit isn’t surprising. After all, when your chips are down and banks aren’t lending, some people inevitably turn to moneylenders. But it’s still mind-boggling how this business can thrive the way it does. Why is it that moneylenders still hold so much sway despite formalized banking penetrating most corners of India? How can they still be relevant in 2020 despite charging interest rates of up to 200% sometimes?

Well, to fully understand the premise you have to understand the nature of the profession. Money lending has a pretty low barrier to entry. Anyone with some extra cash can enter the business. You don’t have to start big. You can simply start small, work your way up through the ranks by doling out small loans and then gain prominence. This is precisely why the industry can crop up seemingly overnight.

Then you’ve got the non-intrusive on-boarding process. Moneylenders don’t ask you a lot of questions. You don’t have to present your Aadhaar card. You don’t have to furnish your borrowing history. You don’t even have to know the individual so long as you have someone who can vouch for you. It’s relatively easier to deal with a moneylender than a representative from your local bank. Finally, you have transaction costs.

As the former RBI Governor Raghuram Rajan noted — “It takes as much time helping a client fill out the forms and to provide the necessary documentation if he is applying for a loan for Rs. 10,000 as it takes to help another one borrow Rs. 10 lakhs. A banker who is conscious of the bottom line would naturally focus on the large client in preference to the tiny one.” Put these problems together and you birth an institution that keeps resurrecting every time there’s a crisis abound. The Indian Moneylender is like the nine-headed Hydra. Cut one head and two will take its place. So long as the demand remains robust, moneylenders will continue to thrive. There’s simply no way around it.

And this eventuality has several policy implications. The government has announced a flurry of schemes to protect MSMEs from the brink of ruin. However, policymakers have been predominantly focusing on the quantum of allocation — Is it 1 lakh crore? Is it 2 lakh crore? Is it 3 lakh crore? When maybe, we should be focusing on compliance costs.

How can we effectively disburse these loans with as little documentation as possible? How do you make sure that banks can compete with moneylenders on a more even footing? How do you incentivize bankers to prioritize these institutions right now? These are the questions that need answering.

Also, it’s imperative that we act quickly. Most MSMEs surveyed in the report only had cash-flows lasting a month. Even others said they could last 3 months at best. If they go bankrupt in the meantime, they aren’t coming back. It’s Endgame. Not just for MSMEs, but the job market in India.

So hopefully we can cushion this blow and prevent them from turning to predatory moneylenders.

Until next time…

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