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NEWS & ADVICE : PERSONAL LOAN
Banks getting tough competition from informal lenders
By Vaibhav Aggarwal
Nov 20, 2007
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New Delhi: Despite all their hard work, 'special schemes', low interest rates, and jazzy packaging, Banks in India are still not able to completely outshine the informal lenders. Last years borrowing figures suggest that these informal lenders are still holding their ground and corner a major share of the loans in India. According to a survey conducted by Invest India Foundation, of the 33 million bank customers who borrowed in the past two years, only 43 percent got them from banks.

Various other sources were used by borrower's to fund their needs. Borrowing from relatives and friends, moneylenders, co-operative societies, microfinance institutions, self help groups and chit funds all had their share of customers.

Here is a break up of the market share of informal lending segment according to this survey:

SourcePercentage
Relatives and Friends47%
Moneylenders32%
Co-operative Societies12%
Self-help groups8%
Microfinance institutions2%
Chit Funds2%


This high popularity of informal lending segment according to the survey was largely because more than two-thirds of the loans were taken by rural borrowers, who had a very limited access to formal banking. Despite the high charges by conventional lending and informal sectors (some-times even up to seven times higher) they are still thriving due to the low penetration of mainstream banking services into the rural sector.

Even in the urban areas where the banks have a good presence the borrowing scenario didn't change much. Money lenders, here also call the shots and they have around Rs. 14,000 crores of the total loans distributed during the past two years. Strikingly, the informal lenders catered to almost every borrowing segment including the home loans.

Financial emergencies and medical expenses are two major reasons, which account for people borrowing from non-banking sources. Quick disbursal and no requirement of collateral give the non-banking lenders a clear edge.


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