types of unregulated credit markets
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Unregulated Credit Markets in India!
A myriad of private credit agencies operate in the country, unlike banks their forms of organization and methods of working are not standardised. Instead, there is great diversity in their organizations, methods, functional areas of operation, sources of funds, effective rates of interest charged on their loans, etc. Their common characteristic is that they are not regulated by any authority.
The credit markets in which they operate are ‘unorganized’ or segmented and not integrated with each other. They are not linked with the organized sector of the credit market either, represented by banks and term-lending institutions.
The rates of interest charged by them differ over a wide range. Reliable and complete information is not available about their operations, because there is no official or unofficial central agency to which unregulated financiers report their operations. This represents a big gap in our knowledge about the finance industry in India and hampers credit policy formulation.
The study and knowledge of unregulated credit markets is important because they meet a large part of the working capital needs of several segments of the Indian economy such as. wholesale trade(e.g. in cloth, food grains, jute, etc.), several manufacturing industries (e.g., Power looms and handlooms, pharmaceuticals, biri-making, etc.), export trade, retail trade, film production, construction, restaurants, etc. Speaking roughly, up to 30 per cent of total credit used in the urban economy is said to be provided by these markets. In rural areas, moneylenders are still the largest single source of credit for agriculture and village artisans.
Unregulated credit agencies play a role which is both competitive with and complementary to that of banks. They compete with banks by attracting loanable funds from surplus units, a sizeable part of which would have otherwise flowed to banks. Gujarati and Marwari indigenous bankers also compete with banks in their lending operations and remittance facilities.
But, in most cases, the loan operations of unregulated credit agencies are complementary to those of banks, because they provide credit generally for such uses and to such users as cannot be accommodated by banks. Therein also lays the rub. The allocation of unregulated credit does not conform to social priorities. In parts at least, it often runs counter to the credit control objectives and measures of the monetary authority.
This reduces the overall effectiveness of credit planning and selective credit controls of the RBI. How much damage is done to the objective of socially-ordered allocation of credit will depend obviously on the size of unregulated credit relative to that of regulated credit and the degree of distortion in the allocation of the former. A broad judgment can be made only after we know what the unregulated credit markets are, how they function, etc.
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