While in Kutch I also learnt about the money lenders who operate there. The town of Anjar has around 150,000 people and has more than 40 money lenders. I was told that each of these money lenders has a loan portfolio of around $60,000. There seem to be two types of loan products available – the first is a 100 day daily repayment product and the second is a ‘Meter’ product. The first choice for a borrower is always the 100 day daily repayment product.
The daily repayment product is offered by a local money-lender who is often called a Bapu or Jadeja. To get a loan from a money lender a borrower has to find an agent or ‘Jhamin’. The agent takes the borrower to the money lender who makes the loan, but loans are rarely made to women.
If the money-lender makes a loan of Rs. 5,000 (approximately USD 111) to the borrower, then the borrower needs to make the ‘interest’ payment upfront. For Rs. 5,000, the upfront interest is around Rs. 800 (16%). The agent also collects his fee of Rs. 300 (6%) upfront. Thus the borrower gets Rs. 3,900 in hand.
Now the borrower has to make 100 daily installments of Rs. 50 (1% of loan amount) each. The annualized interest comes to 736% using the calculator here: http://www.efunda.com/formulae/finance/apr_solver_u.cfm. In case the borrower is unable to pay for 3 consecutive days, then the borrower has to pay Rs. 50 in penalty.
The local money lenders have also developed standard techniques of collection. In Anjar, if the loan is overdue for more than 7 days, then the agent (Jhamin) will visit the borrower and ask the borrower to pay the overdue amount. On the 10th day, the Jhamin will come and take the borrower to the money lender’s office. Very few borrowers ever want to go the money lender’s office on the 10th day. Some money lenders I learnt adopt strong-arm collection techniques. As soon as the borrower enters the money lender’s office, he is first assaulted by one of the men sitting in the money-lender’s office. Only then is the borrower asked why he is unable to repay the loan.
After the 10th day very few borrowers can endure the stress. If the borrower is seen around then some of the money lender’s men abuse the borrower in public. The borrower now has only two choices – he can refinance the loan through another money lender or simply leave the city. Every year one or two borrowers also commit suicide.
If he chooses the refinance option, then he has to go to another money lender who offers the Meter product. In Anjar this type of money lender is called ‘Sheikh Dada’. For the Meter product, there are often minimum loan amounts. The money lender for the Meter product may also insist on collateral. On the Meter product the borrower has to make a monthly interest repayment of 15-20% of the loan amount (e.g. if the borrower borrows Rs. 10,000 then the repayment is Rs. 1,500 to Rs. 2,000 every month) and the principal of Rs. 10,000 cannot be paid in partial payments, Thus, the borrower is forever trapped in a cycle of poverty, repaying the money lender till he is able to accumulate the Rs. 10,000 needed to pay off the principal.
In the nearby town of Gandhidham, the lending terms were even harsher. Gandhidham has an estimated population of 300,000 but has only 15 money lenders. Thus there is much more demand for money lending as there are very few alternative finance channels. Thus with limited or no competition, the money lender makes the loan product even more stringent. Thus, on the daily repayment product in Gandhidham, a penalty is charged even for a delay of one day. In case of the Meter product, the repayments are higher and are on a daily basis. Thus on a Rs. 10,000 loan through a Meter product, the daily repayment is Rs. 100.
The money lender interest rates we see in Kutch seem to be higher than in other parts of India. In both these towns Prayas is the only major microfinance institution working. Competition from microfinance institutions and other financial institutions will eventually bring down the money lender interest rate. But one thing obvious, in the absence of microfinance and other formal financial institutions lending to the poor it is almost impossible for the poor to escape from poverty.