Non Institutional Credit Agencies

Non Institutional Credit Agencies : The Non-Institutional Credit Agencies are constant playing a significant role in our financial system. The private merchant and indigenous bankers are the two important constituents of the non-institutional credit agencies. The private merchant refers to those individuals who lend credit to the people who require it. Where as the indigenous bankers refers to those bankers who not only deal in “HUNDIS’ but also borrow money and or accept deposits from the public. Despite the dominant presence of various ‘institutional credit agencies’ the private merchant and indigenous lenders are playing their due role in our financial system. Hence, there is a need to understand these two non-institutional credit agencies.

Features, Operations of Merchant

Merchant are those whose business is to borrow money for interest. Merchant do not constitute one homogenous category. Broadly they are of two types.

1. Professional merchant whose main activity is money borrow.
2. Non-professional merchant whose main source of income is not money borrowing. Professional merchant generally hold licenses for money borrowing. In India there are specific communities which have traditionally been associated with money borrowing. Banians, Vysyas, Mahajans, Shahukars, Seths, Chettiars have generation after generation been involved with professional money borrowing business. The primary source of income of non-professional merchant is trading or farming. They include landlords, large farmers, merchants, goldsmiths, jobbers, contractors etc.

Merchant are a heterogeneous group. However we may identify some common features and types of operations they undertake. They are :

1. Merchant have flexible lending policies. Terms of lending are negotiated between the parties.
2. Interest on loans is a major source of income for the Merchant, and for many it is a source of livelihood.
3. They sanction loans to customers against personal security for personal consumption. Thus, loans may be sanctioned for unproductive purposes also.
4. Operations of Merchant are very informal and do not involve complicated procedures and rules. They are prompt and flexible.
5. Merchant rely mostly on the information they collect about the borrower, for decision making purpose.
6. Source of finance for merchant is mostly their own funds.
7. They maintain social contracts with their clients, which helps them exercise social control over borrowers while recovering the loans. Social control may take the form of caste disapproval, social boycotting, pressure from local government or authorities. This minimizes the chances of default.

Defects of Merchant

Merchant resort to various undesirable, unethical and repressive practices, which has made them very unpopular. they are :

1. Charging exorbitant rates of interest, deducting interest charged in advance which is disadvantageous to the borrower, deceiving the innocent, illiterate borrower through manipulation of accounts.
2. Where the borrower commits default, the money lender does not hesitate to exact free service from him, which amount to bonded labour. Loans are disbursed in installments. The very purpose of borrowing may be defecated, as a consequence.
3. Demanding gifts and donations, which may add to the debt burden of the poor.
4. Confiscating land, house or other property belonging to the borrower in settlement of the debt.
5. Merchant often do not use the legal methods for recovery of loans in case of default. They may resort to violence, defaming the borrower and other undesirable methods to receive their loan.