India’s Illicit Moneylenders Aren’t Going Away

Thursday, March 26, 2015

Three bank branches stand across the street from Ajay Kumar Jaswal’s vegetable stand. But their loan officers shun his small business, forcing him to pay up to 20% quarterly interest to an illegal moneylender for the roughly $160 he needs as working capital.

“I’ve tried and I’ve tried and I’ve tried,” Mr. Jaswal said. But without any property to pledge as collateral, “it just never works out.”

India’s new government and its central bank have stepped up their battle with the country’s myriad illicit moneylenders by trying to ease Indians’ access to the formal banking system—a move they say will lower borrowing costs and help the country’s poorest households.

“By liberating the poor and the marginalized from the clutches of the moneylender,” measures aimed at expanding financial inclusion can “set them on the road to economic independence,” said Raghuram Rajan,governor of the Reserve Bank of India, the country’s central bank, in a November speech.

Last year, the government carried out a campaignaimed at extending banking services to lower-income Indians that led to more than 125 million new accounts. And the central bank has started a process to license new types of financial institutions that will serve small borrowers and migrant workers seeking to send money home.

Some, however, think that trying to undercut moneylenders too soon is unwise. Despite their high rates they provide the credit that fuels India’s informal sector, which accounts for about half of the nation’s economic output. And they operate outside the rules that often restrict bank credit.

Source: The Wall Street Journal (link opens in a new window)

financial inclusion, lending