Unregulated Credit Market in India Bcom Notes
Unregulated Credit Market in India Bcom Notes:- In this post, you will get the notes of B.com 3rd year money and financial system, by reading this post you can score well in the exam, hope that this post has helped you with this post to all your friends and all groups right now I must share it so that every student can read this post and it can also be helped in this post. Unregulated Credit Market India
UNREGULATED CREDIT MARKET IN INDIA
Meaning of Unregulated Credit Market
In India, there are a number of private credit agencies which are not regulated by any authority. There is a great diversity in their organisations, methods, functional areas of operation, sources of funds, effective rate of interest charged on their loans. Reliable and complete information is not available about their operations. In the Indian economy these agencies played a very important role at the time of independence and for many decades thereafter. Even today they are one of the most important sources of finance in some parts of the country. The study and knowledge of unregulated credit markets is important as they meet a large part of the working capital needs of several segments of the Indian economy.
Main Features of Unregulated Credit Market
(i) The forms of organisation and methods of working are not standardised.
(ii) Their common characteristic is that they are not regulated by any authority.
(iii) The credit markets in these unregulated credit agencies operate are unorganised and not integrated with each other.
(iv) They are not linked with the organised sector of the credit market.
(v) The rates of interest charged by them differ over a wide range.
(vi) They meet a large part of the working capital needs of several segments of the Indian economy, such as whole sale and retail trade, several manufacturing industries, export trade, film production, construction, restaurants, etc.
(vii) In rural areas, money lenders are the largest single source of credit for agriculture and village artisans.
(viii) They play a role which is both competitive and complementary to that of banks.
(ix) They compete with banks by attracting loanable funds from surplus units a size of a large part of which would have otherwise flowed to banks.
(x) They are complementary to the banks in their loan operations; they provide credit for such uses and to such users as cannot be accommodated by banks.
(xi) The allocation of unregulated credit does not conform to social priorities.
(xii) Their credit often runs counter to credit control objectives and measures of the monetary authority.
Structure of Unorganized Sector
Organisationally as well as functionally, different agencies constituting the unorganised or unregulated sector of Indian credit market can be grouped as follows:
- Unregulated NBFIs The unregulated non-bank financial intermediaries (NBFIs) include finance companies, hire purchase finance companies, chit funds and nidhis:
- Indigenous bankers: Indigenous bankers are private individuals who operate as banks and thus receive deposits and give loans. Like banks, they are financial intermediaries. They should be distinguished from money lenders whose primary business is only money lending.
- Finance Brokers: As the name indicates finance brokers work as brokers or middlemen between lenders and borrowers. Finance brokers are found in almost all major urban markets. Some brokers are full time brokers, while others work part time.
- Money lenders: The money lenders belong o heterogeneous group. They include professional money lenders whose main source of income is money lending. Each money lender generally operates in a small local market.
- Other Lenders: A large part of borrowing and lending takes place among private parties which cannot be placed in any of the financial market categories. For want of a better term, such borrowings and lendings can be named as informal loan transactions and the market in which these transactions are made are known as informal loan market.
Adverse Effects of Unregulated Credit Markets
The existence of unregulated credit markets interfere in the smooth and successful operations of the country’s credit policy. Important adverse effects of these markets may be summarised as follows:
(i) The unregulated credit markets create serious problems of credit control for the monetary authority, both at the aggregate level and at the level of credit allocation.
(ii) The existence of these market means that a part of the total loanable funds of the economy get leaked into these markets. The bigger the leakage, the larger the portion of the total that falls outside the direct control sphere of the authorities.
(iii) This does not mean that the credit control policy of the RBI is rendered totally ineffective, because if the credit conditions are tightened in the organised segment of the credit market, the impact is felt in the unregulated markets as well. This happens in two ways:
(a) a part of the unsatisfied demand gets diverted to the unregulated market.
(b) a part of the supply of funds fed from the organised market disappears. As a consequence tightness is extended to the unregulated market also, and the rates of interest in these markets are pushed up and borrowings get curtailed.
(c) when we talk of the operation and success of selective credit controls, the problem becomes much more serious.
(v) Request for bank credit that gets rejected under the imposition of selective credit controls by the RBI can be partly accommodated in the unregulated credit markets, even at much higher rates of interest.
(vi) Also the allocation of credit in the unregulated credit markets is not according to any social design and thus can not be made a part and parcel of any overall credit allocation plan for the economy as a whole.
Meaning of Indigenous Bankers
Indigenous bankers are private firms or individuals who operate as banks and as such both receive deposits and give loans. Like banks they are also financial intermediaries. The system of indigenous banking in India data back to ancient times. The indigenous financial agencies constituted the bulk of the financial system in India until the middle of the 19th century.
The indigenous bankers can be divided into three categories: (i) those who deal only in banking business (e.g., Multani bankers); (ii) those who combine banking business with trade (e.g., Marwaris and Bengalies); and (iii) those who deal mainly in trade and also have limited banking business. The indigenous banker is different from the money-lender. The money lender is not a banker; his business is only to lend money from his own funds. The indigenous banker, on the other hand, lends and accepts funds from public.
Importance and Functions of Indigenous Bankers
The indigenous bankers is popular in Indian economy mainly due to the following reasons: (a) They provide prompt and flexible credit. (b) They give loans to the small productive units not fully catered by the commercial banks. (c) They have cordial relationship with the customers. (d) They keep close contact with their customers and remain fully acquainted with their problems and financial requirements; (e) They are not merely bankers to their customers, but are also their friends and advisers.
The main functions of the indigenous bankers are as follows:
- Accepting Deposits: The indigenous bankers accept deposits from the public. These deposits are of two types: (a) the deposits which are repayable on demand and (b) the deposits which are repayable after a fixed period. The indigenous bankers pay higher rate of interest than paid by the commercial banks.
- Advancing Loans: The indigenous bankers advance loans to their customers against all types of securities such as land, crops, gold and silver, etc. They also give credit against personal security. They provide loans to small industrialists who cannot fulfill the necessary loan conditions of commercial banks.
- Business in Hundies: The indigenous bankers deal in hundies. They write hundies and buy and sell hundies. They also discount hundies and, there by, meet the financial needs of the internal traders. They also transfer funds from one place to another through discounting of hundies.
- Non-Banking Functions: Most of the indigenous bankers also carry on their non-banking business along with the banking activities. (a) They generally have their retail trading business. (b) Sometimes, they act as agents to large commercial firms and earn income in the form of commission. (c) They also participate in speculative activities.
Defects of Indigenous Bankers The organisation and functioning of indigenous bankers suffer from the following defects:
- Unorganised Banking system: The indigenous banking system is highly unorganised and segmented. Different indigenous bankers operate separately and independently. They have no coordination with each other and have no link with other banking sectors. The transfer of funds is not possible in such a system.
- Insufficient Capital: The indigenous bankers largely depend upon their own capital or that of their family members or relatives. The financial resources of these bankers, therefore, are insufficient to meet the demand of the borrowers.
- Meagre Deposit Business: The main business of the indigenous bankers is to give loans and deal in hundies. Their deposit business is very small. They do not mobilise saving of the general public. PAS
- Higher Interest Rates: The indigenous bankers charge much higher interest rates from their borrowers than those charged by the commercial banks. High rates of interest adversely affect the inducement to produce.
- Defective Lending: The indigenous bankers generally do not follow the sound banking principles while granting loans. They provide loans against insufficient securities or even against personal securities. They also extent credit against immovable properties. They also do not distinguish between short-term and long-term loans.
- Unproductive Loans: The indigenous bankers do not pay attention to the purpose for which the loan is used. They generally give money for unproductive and speculative activities, for paying interest or for paying off old debts.
- Secrecy of Accounts: The indigenous bankers keep secrecy about their accounts and activities. They neither get their account audited nor publish annual balance sheets. This raises suspicion in the minds of the people.
- Exploitation of Customers: The indigenous bankers indulge in all types of malpractices and exploit their customers in many ways: (a) They make unauthorised deductions from the loans. (b) They overstate the amount or loans in the document. (c) They do not give receipt against payments received.
- No Control of Reserve Bank: The indigenous banking business is unregulated. The Reserve Bank of India has no control over these bankers and cannot regulate their activities. In this way, the indigenous bankers are a great hurdle in the way of creating an organised morfey market in the country.
- Discouragement to Bill Market: The indigenous bankers also stand in the way of development a proper bill market in the country.
The main business of the money lenders is to lend money from own funds. Money lenders may be distinguished from the indigenous bankers on the following points: (a) The indigenous bankers accept deposits and give loans, whereas the money lenders generally do not accept deposits and mainly engage in the lending business. (b) The indigenous bankers deal in hundies and the money lenders do not deal in hundies; the money lenders conduct their transactions in cash. (c) The indigenous bankers generally lend for trade purposes, whereas the money lenders lend for consumption purposes. (d) The indigenous bankers are largely urban-based, whereas the money lenders carry on their business in rural areas..
Features of Money Lenders: The methods and areas of operation vary from money lender to money lender. However, there are certain common features of their activities: (a) The money lenders mostly lend their own funds. (b) The borrowers from money lenders are mainly illiterate and economically weaker sections of the society. (c) The loans of the money lenders are highly exploitative in nature.(d) The loans of the money lenders are unregulated. (e) The credit provided by the money lenders may be secured or unsecured. (f) The lending operations of money lenders are prompt, informal and flexible.
Defects of Money lenders: The working of the money lenders has the following defects:
(i) The money lenders have inadequate resources to meet the needs of the rural people.
(ii) The loans of the money lenders are exploitative in character. They charge very high interest rates and adopt all types of malpractices in their business.
(iii) The loans are mostly provided for consumption and unproductive purposes.
(iv) The money lenders give loans against standing crops. In this way, they compel the cultivators to sell their produce at low prices to them.
(v) They get conditional sale deeds from the borrowers and thus exploit
Unregulated Credit Market India
Other Financial Institutions
Some other financial institutions operating in the unorganised sector are discussed below:
(i) Loan Companies: Loan companies (or finance companies) are found all over the country. Some loan companies are private or public limited companies, but most of them are individual or partnership concerns. Loan companies are able to attract fixed deposits from the public mainly by offering high rates of interest, coupled with various kinds of prize, gift, insurance and schemes. Apart of funds are kept in fixed deposits with the banks, and the rest are used to make loans. The borrowers are persons who cannot get any or adequate credit from commercial banks. The rate of interest charged on loans is very high. The loans of these financed companies are unsecured.
(ii) Hire-Purchase Finance Companies: Hire Purchase companies provide credit facilities. Hire-purchase means purchase on an installment basis. Credit involved in the installment plan is provided by hire-purchase finance companies. Hire purchase facilities are needed mostly by small buyers to purchase mainly durable goods. Small buyers generally find it difficult to buy the durable goods directly on cash basis.
(iii) Chit Funds: Chit funds are essentially savings institutions. The members of a chit fund make regular periodic subscriptions to the fund. The periodic collection is given to some members of the fund, selected in a previously agreed manner. Each member is assured of his turn before another gets second time. Chit fund business is particularly popular in Kerala and Tamil Nadu.
(iv) Niddhis: Niddhis operate as mutual benefit funds and thus deal only with their members. They are popular mainly among middle class families in urban areas. The major source of their funds is deposits from the members. They make advantage to their members usually for such purposes as house construction or repairs, etc. The loans are mostly secured and rates of interest are reasonable.
Unregulated Credit Market India