[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 – 
March Monthly Research Report
Submitted By S.Ananth, Vijayawada

             The month of March is normally a bad time to elicit any 
information in the business arena. The year end accounts and related work 
means that most of the participants are unwilling to spend time on matters 
such as interviews for researchers. Hence the month was largely spent on 
organising the research work completed so far.

             A brief note on the origins of the finance business in 
Vijayawada after independence may form a good starting point. Historically, 
Vijayawada was the centre of finance business (including hire-purchase and 
leasing apart from conventional money lending). From 1947 to 1964, capital 
was provided by the branches of the NBFC’s like Sundaram Finance, Laxmi 
General Finance or MGF (Delhi based). They catered largely to the new 
vehicle market. The second hand vehicle market was in the hands of Madras 
based Marwari financiers, who either established branches in the town or 
operated here through their agents. The largest of these Marwari firms and 
individuals was M/S Pannalal & Co. A large section of the aspiring second 
hand vehicle owners would seek capital from them. These Madras based 
Marwari financiers would come to the town once a fortnight and would meet 
prospective borrowers. This changed in 1964 when a local man, Yerineni 
Govindiah established his finance company in Vijayawada town and in his 
native village, Pedana.

Till about 1973, there were only about thirty companies. In 1973, the 
Krishna District Auto Financiers Association was formed to protect the 
interests of the financiers. This association was the first of its kind. 
The business boomed during the 1970’s and 1980’s and by the early 1990’s 
the Krishna District Auto Financiers had nearly 650 members. (This 
association caters only to the formal hire-purchase and leasing firms). The 
mid 1990’s saw the entry of the national level players (some of them listed 
companies) like Apple Finance, SRF Finance, GE Capital and subsequently 
ICICI (now ICICI bank). The later part of the decade saw the entry of 
nearly all the other players who operate in India. These include HDFC Bank, 
Kotak Mahindra Finance, GE Transportation and Finance Limited, Citicorp 
Financial Services among others. These firms are part of the formal 
hire-purchase and leasing firms.

There are certain interesting aspects of the finance business in the region 
that deserve mention. This month’s report, therefore, covers these 
observations (and at times a brief analysis) of the nature and dynamics of 
the business. An important aspect of the research centred on how the 
financiers select which client may be given money (referred to as finance 
in local parlance) and which one ought to be rejected. Preliminary research 
indicates that the national and multinational players have only one 
advantage over the local players – cheap capital with which they undercut 
the local players. They have been able to select clients in a more 
profitable manner (meaning those with a better repaying capacity) than the 
largely players who have large amounts of capital at their disposal and who 
are ‘theoretically’ better placed to carry out the business.

Nearly all the financiers either local formal players, people lending money 
on a daily basis, people lending money to business establishments and other 
categories of informal finance players (often called ‘private financiers’) 
claimed that over the years they had been able to identity people as to who 
may be given money after talking to them for sometime. It may be inferred 
that there is no objective process that anybody follows in this regard. The 
large formal players claim they are ‘systems based companies’ where the 
head office lays down certain procedures. These ‘systems’ have to be 
followed. Quite often these ‘systems’ can very easily be sabotaged or 
bypassed as players like ICICI and HDFC seem to be finding out. A financier 
pointed, persistent questioning declared that he sees the keen-ness of the 
borrower and the rates at which they are willing to borrow as the barometer 
of their intentions. If a borrower is willing to borrow money at exorbitant 
rates and is not interested in bargaining on the rate of interest to be 
paid it either means that the borrower is desperate or is not going to 
repay the principle. Hence both these categories should be avoided.  GE 
Countrywide have a system, not followed by any other company. The company 
does not lend money to people residing in certain areas of the cities. Any 
prospective customer from these ‘grey’ and are to be straight away 
rejected. Incidentally the areas set apart from by GEC are areas largely 
resided by lower classes / ‘lower castes’.

             The nature of security pledged and the mode of collection is 
another interesting aspect of the business culture. A lender in the 
informal finance sector will never lend without a reference. This does not 
mean that mere reference will enable a person to raise money without any 
safeguards. B. Srinivas (interviewed this month) clearly mentioned that 
‘even after a person has a reference, they still see if the person is 
wearing a shirt and chappals’. A large number of them take a promissory 
note plus cheque and they take another promissory note from the wife. 
Promissory note from the wife is considered to be important because they 
cannot forsake wife but may forsake their friend or reference. It is common 
for the lenders to demand and take blank promissory notes plus cheques 
(both of which are prohibited under the law). These are considered to be 
insurance against future default. In case of daily financier who lend to 
vendors and so on, promissory notes with thumb impressions are the 
security. A large number of business establishments (including some very 
large retail outlets borrow money from informal lenders). These registered 
retail outlets borrow from the formal players as well as informal lenders.

             In case of a delayed payment, the informal financiers do not 
panic like some of the formal players. Nearly all the informal lenders and 
some of the local formal players (referred to as partnerships in local 
parlance as they had all graduated from sole proprietary concerns, 
partnerships, private limited status and then to limited company status as 
their business grew), tend to give a lot of time. A financier was candid 
when he remarked that a financier does not want his client to prepay the 
loan very quickly nor to completely default on the loan. As they charge a 
penal interest (which could range from twenty four per cent per annum to 
thirty six per cent per annum) in case of delayed payment, it is profitable 
for the lender to prolong the loan by sometime. In other words, the 
conventional image of a Shylock may not be the right image for the 
financiers. They would never like their golden goose to be strangulated by 
the burden as it would mean a complete loss. Death of the borrower is 
considered to be a catastrophe for the financiers. Unlike the large formal 
companies, an informal financiers would take any amount offered by the 
debtor and will come back any number of times to collect the interest. They 
will not hurry into repossession or fighting or grabbing what they can. The 
partnerships often wait for four months and even six months in to repossess 
a defaulter’s vehicle. They may be said to be constantly accumulating what 
Bourdieu called in another context ‘symbolic capital’.

All the local players (either the formal partnerships or the informal 
lenders) have an excellent understanding of the business environment and 
the culture of the region. A large number of people borrow from the private 
players because of the service they render. Once the relationship has been 
established, it is common for the parties to carry on their business for 
years. A shop owner who has been borrowing money from a local Marwari 
moneylender at 36 per cent interest for the past twelve years says that 
trust and speed of service is what keeps the business relationship alive. 
Once the Marwari lent him about five lakhs at 10 PM as some payments had to 
be made and he had to send money to Hyderabad on some business. This is 
something which no formal player can ever match, because they are all 
‘systems based companies’. A number of local hire-purchase firms are able 
to survive despite charging higher interest because the local players take 
care of all the paper work and at time deliver money at their door step. 
All disputes and problems are settled as quickly as possible without 
recourse to violence. All the financiers believe that litigation in courts 
and violence will not help them as it will only aggravate their problems 
and it is bad for business. This not to claim that all lenders behave in 
this manner. There have been instances when financiers have raided the 
homes of people and take away possession. Incidentally most of the 
financiers believe that this is the case only for those financiers who lend 
small amounts of less than five or ten thousand rupees. Financiers who lend 
substantial amounts will not go for this method for a very practical reason 
– most of the homes will not have items to cover their loans. If they were 
to fight for small amounts then they can never expect the borrower to repay 
the loan.

A borrower often has a sentiment about the financier and the attendant good 
luck or bad luck they bring. Certain financiers are considered to be lucky 
while others are always unlucky. Borrowing money from those considered 
unlucky is matter of mere exigency rather than free will. The research 
plans to analyse this aspect in greater detail in future.

WORK DONE IN THE MONTH OF MARCH:

    * 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 and newspaper cutting related to the 
finance sector in Vijayawada. These scanned documents will be submitted to 
Sarai.
    * Interviews with players in the informal as well as formal sectors. 
This is a very important section of the research. People interviewed 
include Bathina Srinivas (a financier who has been in the business since 
1994. Srinivas is a rarity in finance business in that he lends across 
different types / categories of the finance business.); Dasari Venkateswara 
Rao (who has worked in the finance sector from 1964 in different 
capacities. He started his career as a Clerk under Yerineni Govindiah, the 
first local financier and is now the owner of a sole proprietorship finance 
company). The interview is on tape and a copy of the same will be submitted 
to Sarai; Bharath (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; A. Jitendranath (a partner 
in the first finance company, Navayuga Finance); Ramesh (name changed to 
protect identity on request), an employee of the central government 
services and a partner in a chit fund company.