Business Logistics of Informal Lending
This paper examines how moneylenders are organized, do business, and are affected by the changing legal environment. Most research into money lenders' cost of capital and margins has concentrated on interactions with borrowers, due to moneylenders' low visibility and unwillingness to reveal business details. The study interacted directly with eleven money lenders from three small towns of Maharashtra, India. It examined their operational set up and constraints. Findings indicate that money lenders:
- Inhibit their own growth by making all important decisions themselves and letting employees only play a supporting role;
- Face high capital costs because they use their own funds for lending;
- Do not use any kind of promotional tools to get new clients and acquire them through word-of-mouth;
- Often go out of business due to defaults and inability to ensure repayments;
- Prefer liquid assets like gold as collateral, over land.
The study reveals that money lenders are coping with stricter legislation by turning into registered moneylenders or avoiding riskier clients like farmers. It concludes that legislation meant to protect farmers is harming them by drying up their credit sources.
