[Reader-list] Changing Culture of Business: Informal Sector and the Finance Business

[Ananth]

The Culture of Business: The Informal Sector and the Finance Business – 
April Monthly Research Report
Submitted By S.Ananth, Vijayawada

This monthly report outlines the nature of dispute settlement / arbitration 
processes in the finance business and the role played by the State. The 
research looked at the role of various aspects of dispute settlement 
(including the role of the state) and how the whole system of ‘arbitration’ 
works in the settlement of disputes. It also highlights some aspects of 
legality. This aspect of the business is one of the important areas looked 
into in this research. One can clearly discern various types of mechanisms 
in the settlement of disputes.

A person who borrows money from a financier (either a company or an 
individual money lender) is asked to sign a promissory note or the relevant 
documents. A formal finance company normally asks the borrower to sign a 
large number of pledge or related documents. Among these documents may 
include promissory note(s) and in certain instances they even take 
post-dated cheques. An individual money lender may demand (and usually 
gets) promissory notes and blank, signed cheques. As per the law, in all 
these documents and all the columns should be duly completed. In a 
promissory note, the important columns to be duly filled are the interest 
rates and amount borrowed. In case of cheque, the date and the amount 
borrowed are to be completed as part of the loan related agreement. There 
is no law governing the amount of interest rate that may be charged for 
personal or domestic uses of the money borrowed. However the interest rates 
charged are not to be usurious. In case of agriculture related loans, the 
interest rate that may be charged cannot exceed twelve percent. The 
interesting aspect of the finance business (including most of the formal 
players and all the informal players) is that these rules are rarely 
followed. An informal finance player always insists on blank promissory 
note(s) and blank cheque(s). The number of cheques or promissory notes 
depends on the amount of money lent. In case of hire-purchase, the 
financiers are in an advantageous position vis-à-vis the law as the 
mortgages / pledges are clearly indicated and the courts would be 
favourably disposed provided the ‘due process of law’ is followed.

In case of disputes, which till recently were few and far in between, very 
few would approach the court of law. Till the process of globalisation / 
liberalisation, or more precisely till about 1995, very few of the 
borrowers dared to quarrel with the financiers. This was because of the 
scarcity of the lenders, as banks did not indulge in retail lending on a 
significant scale. The second reason why it was prudent not to pick up a 
quarrel with the financier was the constant increase in the prices of old 
vehicles. Such an increase in prices gave the owners an incentive to repay 
their loans and procure more vehicles. A third reason is the culture of 
business that exists in Vijayawada – it was in nobody’s interest to take up 
a confrontationist attitude, which was seen as being bad for business. The 
financiers were at an advantage as they could always cash in on the 
‘symbolic capital’ that they had accumulated over a period of time. At the 
same time, the need for socially acceptance of business practices meant the 
financier could not do as he wished. This is not to say that there are no 
disputes. These disputes have increased markedly since 1995. A remarkable 
feature has been the continuation of the arbitration process over a period 
of time. It is considered to be a remarkable feature because the proponents 
of globalisation claim that there is a process of ‘modernisation’ / 
‘changes in mindset’ due to the influence of global players. Often one 
hears that the process of globalisation has inaugurated a series of changes 
that have revolutionised the way the Indian companies work, think and 
undertake business.

The arbitration process involves a system that is referred to as 
‘settlements’ or ‘panchayats’ where the services of ‘peddamanushulu’ are 
used. Literally, peddamanushulu means ‘big people’ or respectable people, 
often people from various walks of life. An interesting question that needs 
to be asked is who constitutes a ‘peddamanushi’ (big man). In cases of 
arbitrage, one would normally expect the mediators to include people with 
expertise in law / jurisprudence or people who would arbitrate in an 
impersonal, ‘neutral’ and judicious manner. In the recent past it is 
interesting to note that peddamanushulu often comprise of people with 
muscle power or people who are well connected to those with influence and 
muscle power. There have been instances when lower level police officials 
have also acted as arbitrators. Each side would marshal their contacts or 
acquaintances. The net result would be that the peddamanushulu of both 
sides would sit and ultimately arrive at a mutually accepted decision. In 
reality the financiers would be at an advantage since they can marshal 
people with influential and always draw on the connections of their peers 
in the association. Hence it is ‘normal’ for a borrower to wring out minor 
write offs / reductions in interest or dues and never complete cancellation 
of the debt. Financiers opine that a client does not have the ‘moral’ 
ground to ask for the cancellation of the principle. They can only ask for 
a reduction of the penal interest and in exceptional circumstances, a 
reduction of the interest. If an aggrieved party is not ‘satisfied’ then 
they can approach a court of law, but this will only draw the ire of all 
the peddamanushulu (on both sides) as it will be considered to be an 
affront on their credibility and ability to settle the problem.

It is relevant to note that these ‘settlements’ would always look into and 
take cognisance of the defaulters past history, present problems, social 
and economic status before arriving at a decision. It is significant that 
the decision would be influenced by the perceived ‘reliability’ and 
‘ability’ of the person to keep his end of the bargain. The intervention of 
the Financiers’ Association is rarely challenged (however there are few 
exceptions to this and it will be explained a little later). In the case of 
informal financiers, the local musclemen are most often the ‘peddamanushulu’.

An interesting event will better explain the influence of local practices. 
In 2003 Kotak Mahindra Finance (henceforth KMF) faced a problem with a 
client over repayments. Unlike, the local companies, the national and 
international companies think the easiest way to recover the loan is to 
repossess the vehicle at the earliest. The client (names are not disclosed 
at the request of the sources) had a history of prompt payment and he was 
stated to be facing short-term cash flow problems due the expenses linked 
to his daughter’s marriage. KMF in its characteristic style repossessed the 
vehicle. The lorry owner complained to the Krishna District Lorry Owners’ 
Association (another very powerful body). In this case, the Lorry Owners’ 
Association supported the owner as this was considered to be ‘unjust’ in 
the given circumstances. The confrontation between KMF and the lorry owner 
rattled both the Financiers’ Association and the Lorry Owners’ Association. 
In the ensuing ‘settlement’, KMF remained obstinate because ‘they had to 
follow the company rules’. The Financiers’ Association talked to the Vice 
President of the Company in Mumbai and forced them to accept the decision 
of the ‘peddamanushulu’ – in the interests of the business.

This system of settlement has continued in Vijayawada since the early 
1980’s. The instruments of the State rarely intervened formally. If at all 
they did intervene this was usually on behalf of formal financiers. In case 
of the informal lenders, it could take years for the dispute to be settled 
by the courts. Hence most of the times, the private settlements by local 
leaders or muscle men ‘solved’ the problems. In case of large amounts the 
leaders who had undertaken the ‘settlement’ are given a portion of the 
disputed amount. In fact the criminal gangs of the city have had a field 
day by way of these ‘settlements’. At times, these gangs (led by local 
politicians) clash because of competition to ‘settle’ the problem. Usually 
this happens only when large amounts are involved.

The only instance when these ‘settlement’ equations were drastically 
altered was when N.V. Surendra Babu was appointed as the Commissioner of 
Police for Vijayawada in 2002. As soon as he assumed office, he declared 
that the illegal activities of the financiers would have to be stopped and 
he would crack down on practices such as ‘settlements’, taking blank 
cheques and blank promissory notes. The formal players were asked to follow 
all the rules while undertaking repossession of vehicles and follow all the 
rules, failing which criminal charges would be initiated. Immediately there 
was a flood of complaints about the harassment by money lenders and 
financiers. Krishna District Auto Financiers’ Association (whose business 
model risked collapse) immediately sought a meeting to put forth its view 
on the matter. It was clearly told that it would have to play by the rule 
book. Surendra Babu’s tenure as Commissioner of Police drew attention to 
the intricacies and illegalities of the finance business in the city.