The Hindu Business Line : `Financial apartheid' in informal sector: Study

Haven't we heard dozens of such stories? Rags-to-riches stories never fail to fascinate, but in all that glory we often fail to see that singular ability of that successful entrepreneur — ability to access finance. That's what distinguishes those stories from rags-to-rags tales of woes.

Dig out the buried lesson, viz., create access to funds, and you have a model for a prosperous economy.

This is the idea behind all the recent talk about increasing `financial inclusion.'

Now, a recent study on the informal sector has come up with some statistics that underline the need for financial inclusion.

Conducted by Scientific Research Association for Economics and Finance (SRA), a Chennai-based think-tank, the study that covered 1,786 small businesses in the city, has found out that 34 per cent of the businesses went to moneylenders for funds. Another 6.5 per cent went to pawn brokers.

One need not think hard to guess that the interest rates they face are huge.

According to the study, the rates, even when reckoned liberally, exceed 76 per cent, although the borrowers themselves believe they pay only 10 per cent.

Respondents

The respondents were businesses engaged in activities such as fruit and vegetable vendors, laundry services, provision stores, petty shops and tea stalls.

As much as 97 per cent of them do not depend upon the banking system for funds.

"Not because they do not want credit from banking sources," but because banks do not want to lend to these entrepreneurs, says the study. It calls the situation, `financial apartheid.'

The Chairman of SRA, Dr A.M. Swaminathan, notes in a summary of the study that if the economy grew at 6.5 per cent there would be 46 million jobless.

If it grew at eight per cent, there would be 40 million jobless. "This gap can be filled by the informal sector."

"Informal market with its several dimensions is a potential area of unexplored research and a fertile ground for research scholars. More research is needed to identify policy measures and institutional support," says Dr Swaminathan.

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