Informal sector constitutes a major chunk of GDP in India. The sector is often associated with generating non-taxable income and is seen as a hub of black money investment, but it has rarely been looked from the viewpoint of employers, employees and their struggles.
Though there is a mandate of priority sector lending which encompasses people and businesses of the grey economy to access mainstream financial institutions, huge financial distress exists among people in this sector. Due to stringent banking policies and big operational costs involved in dealing with people employed in the informal economy, lending institutions find it easier and sometimes even profitable to disengage themselves from those in financial distress. As an outcome of this, informal credit market holds a firm foot in the informal economy. Even with the presence of micro-credit institutions, the situation somehow remains the same.
At present, I am working with Shram Sarathi, a micro-credit organisation that works in the niche segment of providing financial assistance to the most vulnerable communities or riskiest profiles on loan application forms. On a day-to-day basis, I meet several people and get the opportunity to understand their financial needs and purpose of taking loans. A purpose that I repeatedly come across is old debt repayment.
Households have mortgaged their assets to moneylenders at an exorbitant rate and unreasonable terms. Players of informal credit market take advantage of localisation and inability of micro-credit institutions to serve their clients during the hour of emergency. By being a part of the informal sector, the moneylenders offer their services by exploiting the financial needs of the under-served.
In less than two months, I have heard of cases where a farmer is obliged to give a part of his agricultural output to the sahukaar in lieu of interest on the debt obligation. Such incidents remind me of Premchand’s character ‘Shankar’ who ended up as a bonded labour for borrowing 1.25 kg of wheat. Many a time, women lose their jewellery for not being able to pay one-time principal repayment or because the accumulated interest goes beyond the value of the asset.
These days, micro-finance institutions (MFIs) have somewhat become indifferent towards the need and capacity of an individual and are more focused on increasing their portfolio size by setting targets and cross-selling, which leads to over lending and further increasing the financial distress.
Another financial need that is often neglected by MFIs is for the construction and restoration of houses. Since this is not regarded as productive and income generating, MFIs do not enter this area. Most of the borrowers live in kuccha houses which are often susceptible to damage and can be life-threatening during adverse weather conditions. People do get assistance from the government for building homes under PMAY (Pradhan Mantri Ahwaas Yojana) scheme but money allocated is either not sufficient, or funds get delayed during construction.
For most people in migrant communities, having a pukka house has an indirect impact on their productivity. The frequency of travelling back home reduces if they have a pukka house as they feel a sense of safety for family members living there. Migrants can now be more focused on earning a livelihood. Informal credit market gives loans without asking any questions as long as assets twice the worth are put as collateral. Local moneylenders do not care whether the loan is productive or not.
Many people are self-employed or run small businesses. They form a significant portion of the informal economy. They are in constant need of financial support for working capital, but due to lack of proper documentation, it becomes practically impossible to approach banks for loans. Even if they want to maintain documents, the financial overheads and complex taxation system inhibit them to do so. The idea of approaching government official for paperwork is seen as time-consuming and unnecessary trouble – that no one wants to go through. Under these circumstances, they are left with a few options to raise capital either through friends and family or a nearby moneylender, both of which become a vicious circle.
About the author: Gautam Kumar is an India fellow, working with Shram Sarathi in Udaipur, Rajasthan as a part of his fellowship. He is working with the local community to understand their needs to design a financial product for migrant labour.