Before microcredit began, moneylenders would charge unfair interest rates to to the poor, rates so high that they were impossible to pay off. Instead, microcredit charged fairer interest rates, and also used peer groups and counselors to insure that the borrowers paid back their loans.
Instead, the moneylenders have flourished in India. Some moneylenders have even adopted the practices of micro-credit lenders, blurring the differences to the would be borrower. A few borrowers have even used the moneylenders to help pay of their microcredit loans.
From the Wall Street Journal, writer Ketaki Gpkhale gives us a couple of examples and a counter point from microcredit.
Here in Mahabubnagar, a city of migrant workers that has one of the highest concentrations of microfinance in Andhra Pradesh -- and one of the highest concentrations of moneylenders -- M. Murlidhar owns a traditional moneylending business. He says people are "repaying their loans faster," and that the "overall rotation of money in society has been increased" by the advent of microfinance and government lending programs.
The city has 50 registered moneylenders, and an unknown number of unregistered lenders. On the town's main drag stand prominent offices for virtually every kind of lender from moneylenders and microfinance companies to chit funds, a sort of savings club that auctions its funds to the highest bidder. Locals say lending is so frothy that it is possible to get day loans in the vegetable market that provide 100 rupees in the morning that have to be repaid with 10 rupees interest by dusk. More than 80% of registered moneylenders in Jadcherla, the nearby lending center for the district, launched their businesses after 2000, when the number of microfinance lenders began to skyrocket.
One lender, who wished to remain anonymous because his business is unregistered, gives borrowers short-term, collateral-free loans "as quickly as an ATM gives money," he boasts. Interest sometimes has to be paid on a daily basis and works out to an annual rate of 48%.
The poor use his loans as a stopgap when they can't make their weekly microfinance repayments because their income was less than expected, he says.
In Hanuman Nagar, a slum nestled under a highway, the moneylenders are virtually indistinguishable from the microlenders. They distribute knock-off versions of the microlenders' passbooks. Some use the same weekly repayment structure and door-to-door service as the microlenders do.
The difference, however, is that the moneylenders give loans faster, without asking the women to form groups and serve as each other's guarantors, as microfinance lenders do in order to ensure a higher repayment rate. They also charge significantly more than the four microlenders serving the neighborhood.
Baleshwari, 23 years old, and her sister Balamani, 40, started taking microcredit two years ago when their father, the sole breadwinner, died. Between the two of them, they have taken loans from four different microlenders and owe payments totaling 4,430 rupees, about $95, each month. During the monsoons, when their combined monthly income, drawn from selling bamboo baskets and catering food, dips to about $65, they turn to the local pawn broker for short-term loans to cover their microfinance debt. The interest rates she pays to pawn brokers range from 36% to 48%, she says, and she had to put up gold jewelry as collateral. Her microfinance loans have interest rates of 18% and 24%.
"Group pressure makes us go to moneylenders" to cover their microfinance loans, says Baleshwari, who goes by only one name, as does her sister. "We get small loans for 15 days to fill the gaps when we can't pay. If you lag behind, the rest of the group members can't get new loans."
This dynamic is why some analysts believe the village moneylenders are actually floating the microfinance lenders.
Microlenders disagree. They say the boom in traditional moneylending has been fueled by an increase in demand for credit, and that the share of debt owed to moneylenders is up because microfinance has yet to hit maximum penetration. Some doubt that microfinance is spurring moneylender growth. Although "microfinance institutions and moneylenders offer different products, and it would be quite possible for them to work side-by-side," it doesn't imply a causal relationship, says Rachel Glennerster, executive director of the Poverty Action Lab. She suggested some borrowers may not be paying one loan with another, but using additional funds to expand businesses.