The Hindu Business Line : Small borrowers still prefer informal route

New Delhi, Aug. 15 Despite Government efforts to route all credit transactions through the banking channel, a very large number of individuals appear to prefer informal sources over banks for small retail loans, according to a nationwide survey carried out by IIMS Dataworks, an associate of Investment India Economic Foundation.

The survey, which covers two years — 2005 and 2006 — has found that approximately 71 million people took small retail loans during this period and have used the money either for consumption purpose or for buying consumer durable items.

According to the survey, “of the 71 million individuals across urban and rural areas who took a loan over the last two years, one in every three sourced the loan from friends and relatives while 31 per cent of this population opted for money lenders.

The banking sector, on the other hand, emerges as a distant third choice by having provided only 19.3 per cent of the individual loans taken by the paid workforce.”

The survey has identified four main reasons that had led to the low share of the banking sector.

First, a very large number of the 321 million paid workforce do not have bank accounts and thus do not have access to bank credit. Second, banking loans involve too much procedural requirements whereas loans from informal sources are characterised by ease of transaction.

Third, majority of self-employed people have an informal support group on which they can fall back in case of emergency where as bank loans take time.

Fourth is the issue of privacy.

This is particularly important in rural areas where the social circle is small and borrowings from banks need witness and guarantor whereas borrowings from a moneylender or from a friend and relative remains a private transaction, one of the persons conducting the survey said.

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