PM To Launch Mudra Schemes – Money Is The Root Of All Evil!
The government recently launched MUDRA. No one really cared!
The other day I was sitting with my brother and he started telling me about “Meter Interest”. Yes Interest that ran like our famous auto meters. So how does it work. A road side vendor needs to buy his daily stock of fruits. He basically buys a box or two of the seasonal fruit from the wholesale market then travels along in the local trains, stations, buses trying to finish his stock. Depending on the fruit he is buying he will need anywhere from Rs. 1000 to Rs. 5000.
So how does he arrange the requisite finance? There is always a local financier who is willing to lend. The interest terms are also very simple – Rs. 1 per day for every Rs.100 you borrow. Does not seem much – does it not? In actual that is 1% per day, 30% for 1 month and 356% for 1 year. This is the going norm – the interest can increase or decrease based on risk.
Previously it used to be the local “Sett” (सेट) who would mask his operations as the local pawn broker. Since now there are strong laws in most of the states against financing @ very high interest rates – these sett’s have moved on to control the whole sale business. Instead of lending money @ high interest rates, now they give materials on credit @ high interest rates – be it fertilizer and seeds to small farmers to now auto’s and cars to drivers. And it is no longer just the Marwadi and other trading community, even the middle class families who have access to cheep finance have ventured into this very risky & profitable territory.
Why do these people go to such people and get finance @ such high rates. Banks cannot be bothered – as these people cannot offer any security, and more over the amounts are just too small for them to put in the effort. Giving one loan of Rs. 1000 is much easier than giving 1000 loans of Rs. 1 each.
If the risk is so high that the banks dont want to get involved, why do these people get involved? Well there is a lot of money to be made. For example if you lend Rs. 10,000 for 120 days you will make Rs. 12,000 on top of the Rs. 10,000. Now tell me which bank will double your money in 4 months?
Then there is the question of Risk. How do they mitigate risk? Other than the sign on blank paper – you need to have good contacts here. The local police officers & local gangs are very important to keep your operations afloat. When you have a problem with one of your clients, you outsource the work of collecting the dues to one of these people and they will take care of harassing the client and any one related to him or her. Once they get the dues collected – a big percentage is given as payment for the services. I am impressed at the way they have learnt about outsourcing from the IT industry, and offloading bad debit from wall st.
We talk about Black money and Swiss bank accounts with millions in it as if the problem of corruption is limited to the politicians, bollywood actors, and the rich industrialist. These informal finance operations are in fact one of the biggest sources of black money generation and every day crime in India. Indeed money is one of the root causes of evil in our society.
So is Mudra an attempt to address this? Though Providing finance to these people is one of the objectives of Mudra, the problem I found is that – firstly it is structured in such a way that it is almost impossible for these small time traders to get finance. It is more structured towards small scale industry – where you give your proposal with all details including finance, and mudra will finance part of it. Also I see there is scope for abuse, but since the loan amounts cannot exceed 10L, I dont see any huge scams happening. The only way this can actually become successful is if there is first proper connect and education with these people who desperately need the money. This is where the Grameen Bank of Bangladesh has been successful. Just the effective operation of such a finance operation can not only alleviate poverty and build a self reliant nation, but can also alleviate day today crimes associated with loan sharks and the black money problem.
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- PM To Launch Mudra Schemes – Money Is The Root Of All Evil! - October 1, 2015