H. Singh in Tehelka:
For Bhai Mondal, a fish-seller in Calcutta’s Golf Garden area, business capital comes at a very heavy price of 432 per cent interest per annum. If he borrows Rs 2,000 from the local moneylender, as he does most often, he will pay Rs 50 per day over the 76-day loan period which adds up to Rs 1,800. Just Rs 200 short of the capital.
If he cannot make the cash payments he has to surrender fish of equal value. Even if he were to try to get a better deal, there is no way poor people like him can cross an interest barrier of “one rupee per day per Rs 100 borrowed” which amounts to 365 per cent per annum.
Agli di sells vegetables. Her case seems simpler. She borrows Rs 200 in the morning and parts with Rs 215 to Rs 218 in the evening. The slight variation in the amount to be returned depends on the daily rate and the moneylender’s perception of the intensity of her need. Assuming that she gets the easier option, she pays interest at 7.5 percent per day an annual rate of 2,738 percent.
Read the full article: Cashing in on distress
Hardly a new thing, in mysooru it is called as “deepada baddi” and it hovers around 10% a day.
Makes a valid point… and then promptly confuses the matter with liberalization as though it would stain Tehelka’s name to publish an article that does not deride liberalization.
While the point about micro-credit institutions is valid to an extent, it must also be noted that they don’t work like banks and are not subject to the same exacting requirements that the RBI imposes on them. Likewise, financiers like Margadarsi and others are also covered by RBI regulations. Its not as if rural banking started giving money to people without collateral and/or political connections, so blaming liberalization in this aspect makes no sense.
The author misses the point that stricter implementation is difficult in the kind of cases that he mentioned because without adequate micro-finance schemes and institutions, it is not in the interests of a daily borrower to rat out the money lender.
Money lending itself is not a problematic activity since the economy cannot run without capital (as the USSR has shown the rest of the world). Rather it is the charging of unwitting borrowers high rates of interest that is problematic. This is essentially because of an information asymmetry between consumer and provider. Removing the producer will not remove the information asymmetry, but empowering the consumer (ala consumer law) will actually make a difference….
If only more Commies bothered to read Law and Economics a little more carefully….
….they would stop being Commies
That is also the intention ;)