A recent Economist article outlines the trend in which American cities are cracking down on payday lenders by capping high interest rates. Over the summer, my colleague Dan wrote a lengthy article on payday lending, including a scenario of the cycle of debt that the poor often get trapped in as a result.
Clearly, payday lending is not an ideal form of finance. And while interest rates are exorbitant (as much as 400% annualized interest), I would stop at saying extortionate. From the article: “Industry supporters consider this attitude elitist, as if only rich people can handle living on credit. They say that if a hard-working American finds himself in a bind, taking an occasional payday loan may be better than bouncing a cheque or having the power cut off.” Dan argues the same, pointing out that people choose to take these loans as a last resort, most likely because they don’t have access to cheaper loans on such short notice.
In India (and in many developing countries), moneylenders are the equivalent. Like payday lenders, they are oft villanized. Until this summer, the word moneylender evoked images of Tollywood-esque villains, complete with goonda sidekicks. In reality, when I met a moneylender as a welcome surprise of the TIP F/D internship over the summer, he was….scared. There he was, sitting in front of about 25 mostly foreign 20-somethings that he couldn’t understand, and he looked frightened. He probably thought he was there for us to interrogate him about why he was so evil. It turned out that he was a normal businessman providing a service that is sorely needed in many rural areas of the country. Obviously, my sample size of one prevents a blanket statement, but I think I can fairly say that rather than painting the moneylender as villain, we should acknowledge that they exist because the financial system has not yet come up with an adequate solution.
In India, when people take loans from moneylenders, it is usually because they have no place else to turn. According to RBI, 41% of the Indian population is unbanked. This number is likely significantly lower than the reality as most of the well off probably have more than one account to protect their savings. So, should we really place the blame on the moneylender (or payday lender) rather than the gaps in the financial system?
3 comments:
This is a really interesting post and it made me think of the convenience of moneylenders versus banks/microfinance institutions. Moneylenders can come directly to the doorstep and the borrower can have uninterrupted access to funds, whereas with microfinance they must take several hours out of their day to attend meetings (this could translate to lost productivity).
This is a little off-topic but your post made me think about the psychology of moneylenders and how they themselves conceive of interest rates etc. With financial literacy so low amongst borrowers, I wonder what the financial literacy rates, or the type of financial literacy that exists amongst moneylenders. An ethnography of some of them would be interesting......
Ooh, that would be a fascinating study. We met the moneylender, because he was the father of a research associate with one of the other centers. They were trying to research moneylenders, because so little is known, but I can't recall specifics. Definitely something to look up..
I am currently planning an ethnography for my dissertation with regard to both Debt Recovery Firms (in urban India) and rural money lenders in the north. I will keep you posted as my research continues and grows. -S. Dowdy (University of Chicago)
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