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

[Ananth]

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

During the month a concentrated effort has been made to cover the formal 
players in the finance business in the region.  The research activity in 
the month included tracing the historical roots of the finance sector in 
the region. Historical roots are being reconstructed using oral historical 
sources as the basis. A brief outline is provided below.

The first Vijayawada based finance company was Navayuga Finance established 
by Adusumilli Jitendra Nath and three other partners in 1972. Till then 
there were very few Vijayawada based financiers. At time of setting up the 
company, it has been estimated that there were only two other finance 
companies (both owned by Marwari Moneylenders). The only other local person 
in the business was Yerneni Govindu, who operated from a nearby village. 
Marwari moneylenders were based in Madras and used to make periodic trips 
to Vijayawada and operated from of their hotel rooms. Gradually they 
appointed their agents in the One Town area of Vijayawada. The vehicles 
were mostly bought from military auctions in Madras, which increased after 
the 1962 war with China.

By the late 1970s and the early 1980's the finance sector was dominated was 
three types of players. The first consisted of players who operated on a 
large regional or national level, players like Sundaram Finance, Laxmi 
General Finance and Tata Finance. The second category included local 
individuals who came together and established small finance companies 
(referred to as 'partnerships' in local parlance) and private individuals. 
The partnerships were the largest financers till the early 1990's. The 
third category of players was the Marwaris who had largely been 
marginalised in terms of the market share. By the 1970's these Marwari 
lenders had moved into general finance, where they still dominate.

The partnerships were very careful till this time in their lending 
practices. They would lend only about 50% of the cost of the vehicle and 
very rarely this would go up to 75%. This was the case for lending either 
for new vehicles or old vehicles. The interest rates per annum before 1996 
ranged from 14% flat to about 22% flat. It was about 3 to 5% higher for 
second hand vehicles. The actual interest cost could thus be anywhere 
between 30% to about 48% annualised. Till about 1996 the transport and the 
finance businesses were doing extremely well. It has been estimated that 
there are more than 600 financiers in Vijayawada involved in the business 
of hire purchase.

The hire purchase business changed drastically with the entry of the large 
multinational players and large national corporates. As mentioned above, 
the first entrant was GE Capital, which entered Vijayawada, using the 
network and the services of SRF Finance (which it had just taken over in 
India). Around this time Apple Finance entered the field. These two 
companies were largely responsible for altering the fortunes of the older 
players. In order to gain a foothold in the market they drastically cut the 
interest rate and offered attractive terms. The post 1996 changes in the 
regulatory environment too affected the smaller players as a number of 
prudential guidelines restricted the partnerships from accessing 
deposits.  Till then it was common for the partnerships to raise deposits 
using the promissory note system.

WORK DONE IN THE MONTH OF FEBRUARY:

1.      Further collection of printed material and other documents from the 
office of the largest of the unofficial stock exchanges in Vijayawada.
2.      Processing/Organizing of the material: A selection of the material 
has been scanned for the use of Sarai as well as for my own use. 
Approximately about one hundred documents have been scanned relating to 
different aspects of the local economy, the erstwhile unofficial stock 
exchanges of Vijayawada and newspaper cutting related to the finance sector 
in Vijayawada. These scanned documents will be submitted to the Sarai media 
archive.
3.      Interviews with players in the informal as well as formal sectors. 
This is a very important section of the research. These interviews are 
deemed essential in order to gain first hand insights into the nature and 
dynamics of the field. These interviews are also turning out to be the most 
problematic part of the research. Most of the people interviewed are not 
willing to allow their interview to be taped. In case of persistent 
requests, the information divulged is not useful. The moment the interview 
is off the record extra-ordinary aspects of the business are being given 
out. People interviewed include Polavarapu Koteswara Rao (a former broker 
and badla financier in the largest unofficial stock exchange in 
Vijayawada  Vijayawada Share Brokers Welfare Association); Rama Koteswara 
Rao (former badla financier who was instrumental in filing the court case 
against the Vijayawada Share Brokers Welfare Association);
In the finance sector the interviews conducted include, K.V.P.Basaveswara 
Rao, Founder-Secretary of Krishna District Auto Financiers Association; 
V.G.K. Prasad, Managing Director, IKF Finance Limited (one of the largest 
and oldest finance companies in Vijayawada); Subba Rao (a large pawnshop 
owner who is largely into financing against gold  name has been changed on 
request), Jagan Mohan Rao, Partner in Raja Financiers, involved in the 
finance business in for the past 35 years. Jagan Mohan Rao is also an 
important BJP leader. The interview is on tape and a copy of the same will 
be submitted to Sarai Media Archive; Subramanyam (Name has been changed in 
order to protect the identity of the person on request), a former private 
financer who suffered large scale losses and has since exited the business; 
Pavan, a collection agent for the local muscle man who is also actively 
involved in daily finance; Raju (Name has been changed in order to protect 
the identity of the person on request) one of the largest private 
financiers in Vijayawada. His grand father is reputed to be the earliest 
local financier. Unlike most of the financiers of the region who operate a 
company Raju's family never operated/operates a company. They lend huge 
amounts (total family lending has been given at four crores an year).