Why they go to moneylender land

Banks and NBFCs have a platter full of loan offerings. Yet many prefer to borrow from moneylenders. Meera Siva finds out why

Moneylenders continue to thrive — amidst public and private sector banks eager to offer a variety of loan choices, NBFCs that specialise in gold loans, small business loans and affordable housing loans, and micro-finance institutions that give small-ticket loans to entrepreneurs. High interest rates and sometimes tough collection procedures do not seem to deter borrowers from availing loans from private lenders. Simple terms, quick cash, trust and ease of repayment are some reasons why borrowers continue to opt for moneylenders.

Simple but high interest

Taking a loan from private moneylenders is easy. They often do not ask for any collateral if the borrower has been running a business for many years. The loan amount depends on the working relation but is given nearly instantly. If you want to borrow ₹10,000, the lender gives you ₹9,000 after deducting interest upfront. This looks like a low 10 per cent interest. But paying ₹1,000 for a loan of ₹9,000 with tenure of 100 days annualises to about 40 per cent. Also, given that the borrower pays ₹100 daily for 100 days, the internal rate of return, taking into account the time value of money, pushes the interest rate to north of 75 per cent. But for borrowers, paying a higher rate is not a show stopper. K Bharathidasan, who runs a newsmart alongside selling temple supplies in Chennai, says that trust factor is one reason why he opts for loan from private lenders. They have faith in him and do not mind occasional delays in payments. “For example, during the floods in Chennai, the lenders extended the repayment period till things stabilised because they trust me. This personal comfort is important to have a relationship,” he says.

Institutions lagging

Generally, the borrowers, who come from simple backgrounds, find the terms and procedures in banks very intimidating. Rajamannar, who runs an eatery business in Chennai, says that a few years ago, many private banks eagerly came to his shop and lent more than what he could afford to repay. Once he took the loan, it dawned on him that he did not understand the loan terms and found himself paying heavy service charges, fees and penalties. When he went to close the loan, he was slapped with a pre-closure penalty as well.

Daily collections at his doorstep make private lenders a welcome choice, he says. “Moneylenders help me manage all my cash needs, buying equipment for the hotel, money for rotation during certain peak-demand periods, family and medical expenses. I do not own any assets in my name and do not like pledging family gold for business purposes,” says Rajamannar. If government-run banks would offer lower interest loans, simplify the loan disbursal and collection process, it would greatly benefit small business owners, he says wistfully.

No alternative

For others such as Jayabal, a painter in Chennai, moneylenders turn out to be the only option during times of need. He managed his daughter’s wedding last year borrowing from private lenders as he could not sell or take a loan against the land he owns in his native village. He earns wages weekly and now works extra hard to repay a portion every week.

He could not avail government schemes that provide financial assistance for marriage, as it required paying bribe. He is frustrated about the system that seems to need a lot of documents and IDs that are not easy to get. For instance, he does not have a PAN card as it required a birth certificate; getting that through the court would cost ₹10,000, he was told. His Aadhaar card had his picture printed in negative and he is now following a long procedure to have it reissued.

Need for change

While borrowers have their reasons to depend on moneylenders, the flip side of private lenders is all too real.

Take the case of Dhanashree Rane, a tiffin business owner in Mumbai. She pledged the family-owned home and her gold to moneylenders; unfortunately she fell sick and was unable to repay her loan as she could not earn.

She lost all she had pledged to the moneylender and the family had to move to a rented house. A few years later, when she wanted a loan to buy a home, it was not easy to get approvals from banks.

The credit system for those wanting to borrow is in dire need of overhaul, says Vinod Kothari, a Kolkata-based consultant. The rules governing money lending are impractical and as a result the entire industry is out of the regulatory ambit.

For example, the lending rate suggested in West Bengal for private registered moneylenders is 10 per cent for secured loans and 12 per cent for unsecured loans. No one knows who the licensing and regulating authority is in the State, he says.

As a result, no new licences are issued but private lending continues and borrowers suffer. He believes that the regulatory attitude towards moneylenders needs to change.

The rules differ from place to place as money lending is a State subject. Lenders do not bother to get a licence due to tedious rules and the courts do not admit their claims in case of borrower default; lenders have recovery risk and charge higher interest rate or find other ways to recover their loans, hurting borrowers.

Things are changing, slowly but surely. Rajamannar recently applied for a loan from an NBFC which has cut his interest expense in half.

The loan was given the next day, with the collection being done on a daily basis.

Dhanashree was able to get a loan of ₹8 lakh from an NBFC at 11 per cent interest rate to buy a home. The affordable housing finance company looked at her saving habit, repayment track record and family background to grant her a loan.

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