If you walk on the road and travel by public transport you meet really different types of people. I met one man who is a moneylender who charges 10% per DAY INTEREST.

Ridiculous, right? Well, not so fast.

He is an employee of a brilliantly run UNREGISTERED money lending company with insignificant NPA.

He lends to small shopkeepers, and vegetable vendors. His system stunned me. He is reasonably literate and has educated himself to class 12 in a UP village, but now settled in Mumbai. His company has 5 branches in one Mumbai suburb (see the size of the unbanked population?) and is one of the 200 employees that the company uses. These people go around in the morning (money cannot be lent in the night (it gets consumed on girls or drinking bars). He lends money at 4am when the shopkeeper goes to the wholesale market. He lends about Rs. 1000 per person, but these days he is being asked to lend Rs. 1500. So he says soon it will be Rs. 2000 for the fruit vendors and Rs. 1500 for the veg vendors.

At around 7pm he / his colleague go and collect Rs. 1100 from the vendors. Some of the vendors are ready with the money and in some cases he has to collect it by 9pm.

If a regulator (means a person who has a helicopter view of India) sees this, he is likely to bring a law saying interest rates cannot be more than 12% p.a.

Now look at the business at the micro level of one employee. He starts the day with about Rs. 100,000 (soon it will be Rs. 2L) in reasonably good notes. Goes around with a note book and writes down the name of the borrower  – amount is usually the same he says. He may put a mark against his name if the amount is double. It is not available in any other denomination, and NEVER more than double the minimum. So he has to meet about 100 people if he has to finish lending. Even assuming 1 minute per transaction, he finishes lending at about 7am. Rarely will somebody need money beyond this time.

He then goes home and sleeps for some time. He then goes to the office and then does some money lending to small shop keepers. Here the amounts are bigger (say double) and for a longer period say (one week). Works on similar lines but the corpus is smaller. He then does some paper work in the office (likha padi is the only thing he would say) and one girl enters all the data into a computer. He has no clue on what she does with that data. Saturdays are a little dull and Sundays are holidays.

He starts his collection round at about 5pm and finishes collection by 8.30 pm..sometimes it become 9 – but that is the exception. He has never had to use force in the last 6 years, but he buys tea for the occasional law enforcing authority. He says some of the vendors borrow on some days that they need to buy more (say Saturday) – this amount could be repaid even on Monday, if it is a vendor with a good track record. He also talks about a few rich fruit vendors who deposit money in the bank everyday.

He earns about Rs. 350,000 for his boss, but there are costs. In the night the small notes have to be counted (he pays if he makes a mistake) and the notes exchanged for bigger notes! Most of his collection is in notes smaller than Rs. 100, but his lending is in 500 and 100 only. The avoid the Rs. 1000 note like the plague. He gets a salary of Rs. 35,000 per month, and that is understandable. Every day the bank earns about 200 times this amount. They have a big office, it is a registered office for the para banking …and no they are not keen on a banking license!! I do think that the rate of interest is high, but if you break it into a) interest cost b) salary cost c) admin cost d) risk premium – he says they have some insurance too – bribes (he does not know)…i think it will be a fair business.

Interesting indeed..

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  1. The entrepreneurial Indian has always shined regardless of major obstacles. law, government, permits? Who cares, there’s a way out.

  2. Big banks (like SBI, PNB etc) and co-operative banks are stooges of politicians and just lend to useless people like Mallya and relatives/friends of politicians and create lot of NPAs. They dont want to look at these hardworking enterprising people. If they help them they can also benefit from them and create a completely new era of Banking

  3. Poor people/middle class people have a better track (absolute sum of loan) as compared to corporate loan defaults (absolute sum of loan defaulted).

    Look at the performance of HDFC (retail oriented bank) vs PSU (mainly lend to corporates)

  4. Interesting article indeed!

    A few days ago someone was cribbing about high interest rates choking liquidity/growth/entrepreneurship! There is a clear argument to be made that higher interest rates have nothing to do with liquidity crunches. In fact, lower interest rates CAUSE liquidity crunches because people simply clam up and don’t want to lend at lower rates to ‘perceived’ high risk borrowers, letting their money languish in savings accounts instead.

    And finally, note again that lending at night is prohibited. That’s simply because that money gets ‘consumed’! Borrowing for consumption is poisonous to the economy!

  5. This practice is very commonly observed in villages. Most of them borrow in morning, get some stuff, sell it by evening, pay interest and principal.. go home.. 🙂
    Sometimes even big business man (not corporates) borrow at these high rates when they just need to borrow for a day or two..

  6. Thats why retail inflation of fruits and vegetables never comes down. There is a huge scope for big private players to enter the farm to table business.

  7. The write-up is very insightful and informative, most importantly the lucidity in writing. The market for easy lending is indeed vast and duly tapped by such small enterprises. Despite RBI realizing and issuing licenses for small banks such small and effective players would thrive. Reason,organized lenders would need documents, credit worthiness, repayment history, guarantor and what not. Interest rates are never a deterrent when there is a genuine need for funds, most of the borrowings are done based on emotions be it car or home. For these small vendors Interest rate calculations are not understandable and their primary need is to take some money back home despite starting the day with no money of their own.
    Keep writing.

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