Availability and Differential Cost of Credit for Informal Sector Workers: Evidences from Madhya Pradesh

I. Introduction

The informal sector, in the Indian context, broadly refers to all workers not covered by existing labour laws. As per the National Commission for Enterprises in the Unorganised Sector (NCEUS), ‘the Unorganised Sector consists of all unincorporated private enterprises owned by individuals or households engaged in the sale and production of goods and services, operated on a proprietary or partnership basis, and with less than ten total workers’. The National Sample Survey Organisation (NSSO), which conducts surveys of unorganised enterprises at regular intervals, considers the following criteria for the identification of the unorganised or informal sector:

In case of manufacturing industries, the enterprises not covered under the Annual Survey of Industries (ASI)

In urban settings, the informal sector thus includes all manner of own account and marginally employed workers, and workers in small enterprises having less than 10 workers and not getting the benefit of social security. Unlike the workers in formal employment, these workers have no recognised employers, and are difficult to identify, protect, and target for benefits. Often paid below minimum wage, they are poor and vulnerable to economic shocks and required to hold down more than one job to make ends meet. Women and children in the family are also found working odd jobs to supplement family incomes.

Economic shocks for the poor people come from unforeseen events like sickness, accidents or loss of jobs. They also arise from socially mandated ‘obligatory’ expenses like births, weddings and deaths in the family and other social and religious expenditure, requiring major expenditure outlays. The expenditure in such cases is usually completely out of proportionate to earnings and lifetime savings, in part due to peer pressure and maintenance of ‘social status’ (Kaushik, 2018). Marriages of daughters in particular, with heavy dowry burdens often wipe out a family’s entire life’s savings; the poor therefore have been known to plan debt cycles around their daughters’ ages to spread the risk (Srivastava, 2019), forcing people to borrow money from non regulated lenders.

Since a greater percentage of informal workers are uneducated, ill-informed and lack proper addresses and documents for identification, they find it difficult to get loans from banks and other regulated lenders. Unsecured creditors or ‘sahukars’ are much easier to approach, but the interests charged are very high, often compounding on monthly basis. As per a study by Banerjee and Duflo (2007), lending rates from moneylenders were found to range from 11 per cent to 93 per cent across 13 developing countries. Even microcredit, to the limited extent available, is not cheap. Rates range from 24 to 36 per cent, much above the institutional rates. Servicing this debt often leads to erosion of assets, leading to cyclic debt traps, penury and destitution.

II. Materials and Methods

In order to study how informality of employment affects credit availability and cost, a sample of 450 informal sector workers was drawn from a range of occupations and job descriptions across five districts of Madhya Pradesh, India, including equal numbers of wage workers, self-employed and piece rated workers. A control group was selected from formal sector jobs—mostly from schools, factories and offices—taking care to include the lowest minimum wage paid workers to ensure parity. These workers differed from other wage workers by having identifiable employers for the purpose of coverage under EPF, ESIC and other labour acts and schemes. They earn about the same amount of money, differing only on account of having formal work relationships and relatively stable employment terms.

Both the categories were administered a questionnaire to collect basic socio-economic information, expenditure patterns and access to credit, as also education and awareness levels of the workers, and their perception and opinion of benefits. The respondents were asked to list major obligatory expenses they may have faced or anticipated, the expected outlay and source of funds, family debt along with source and cost. The expenditure reported was averaged for the group as a whole. The same questions were also asked in semi-structured group settings of 10–15 workers of each category wherever available and average expenditures obtained by consensus for obligatory expenses like marriages, death rituals, children’s ceremonies, and many others. These figures were used to corroborate individual expenses reported but not otherwise included in calculations.

The expense data as well as incidences and quantum of indebtedness, sources of funds and rates of interest reported by the informal sector workers was compared to that of formal workers in the control group to examine how management of money, credit availability and cost were affected by informality of employment, and examination of reasons for the same to draw conclusions.

III. Results and Conclusions

Low incomes and heavy burden of unforeseen expenses were reported by both the formal and informal sector employees, chiefly in the form of socially obligated expenses like marriages of daughters, religious ceremonies and customary reciprocal gifting. Over 60 per cent of people surveyed across sectors reported having no savings. However, compared to their formal sector counterparts, informal workers appeared to be at a greater disadvantage in managing their money, even though the average income in both cases were similar.

Absence of safe savings avenues as well as lack of education, knowledge and financial discipline among informal workers were found to be the major factors responsible. Lack of confidence in available savings instruments was in fact borne out by a study done by Wright and Mutesasira (2001), which found that majority of informal workers surveyed in Africa and Asia had lost some savings due to dubious schemes. Precarious and non-continuous nature of work and higher incidences of economic shocks faced by the workers were other factors found responsible. However, poor money management due to poorer cognitive function was found to be in reverse causal relationship to stresses of poverty in a study done by Dean et al. (2017) and could be a bigger contributing factor. On the other hand, formal activities were found to be more productive than informal, though not necessarily more efficient, by Sahoo (2019).

Overall, 79 per cent of the respondents reported having some form or amount of debt. Informal employees did not however have significantly higher debt as compared to the formal sector. The proportion of indebted people by category is given in Figure 1.

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Figure 1.

Source: Author’s field data.

As far as source of debt is concerned, some workers reported having been able to source loans from their employers or contractors, as informal salary advances, usually interest free. However, this was for smaller amounts and durations, and infrequently advanced. Formal workers were found more easily accessing loans from employers. Some workers might also borrow smaller amounts from relatives, neighbours or acquaintances.

The point of marked difference in borrowing between the formal and informal sectors however was with regard to unregulated or ‘market’ borrowing. Over 75 per cent of the informal workers reported unregulated debt at high rates of interest from unsecured creditor or ‘sahukars’. This was because they were unable to get loans from banks. Lack of proper addresses and identification papers, as well as collateral, made the banks reluctant to lend to them. They themselves were not educated, aware or confident enough to approach banks and fulfil the requirements. Formally employed workers reported sourcing most of their credit from banks at reasonable rates of 10 to 15 per cent annually as personal loans. This is illustrated in Figures 2 and 3.

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Figure 2.

Source: Author’s field data.

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Figure 3.

Source: Author’s field data.

‘Sahukars’ or unregistered money lenders, the main source of unregulated credit, were found charging exorbitant interest rates of 3 to 15 per cent monthly, translating in some cases into ‘over hundred per cent rate of interest annually’. Most of the borrowing however was at rates between 75 and 100 per cent. This finding is also consistent with the study of Banerjee and Duflo (2007) which found moneylending rates in developing countries to range from 11 to 93 per cent annually.

Despite high rates of interest, people took these loans out of ignorance or lack of choice, reportedly pledging land, houses, shops and other assets, resulting in indebtedness, loss of income-generating assets and destitution. Many people were not educated enough to realise the high interest rates they were being charged. Three to five per cent monthly interest did not seem excessive and they were surprised when this was pointed out. Many respondents reacted stoically when told, believing that they had no option but to pay the high rates. Regarding future outlook and the question of how they were going to pay back the loans, people held on to fatalistic views and of God providing for them and taking care of their future. Often debt was reported to pass down the generations with only the interest rates being paid back and further accumulating.

Given these findings, it was felt by the researcher that there was an urgent requirement of easily accessible microfinance at reasonable rates for the urban poor to ensure their financial well-being. The success of Grameen Bank in Bangladesh has shown that replicable models can be created and implemented. Limited experience with microfinance in India has also yielded positive outcomes in most places, even though the lending rates have remained controversially high. The experience with Spandana in Hyderabad, India, has shown that availability leads to higher take up and positive effects on entrepreneurial activity and income. The government can look incentivising microcredit societies and cooperatives to lend to the poor; imparting subsidised institutional loans as well as financial literacy is the grass root level work to lift people out of the vicious cycles of poverty and debt traps that many find themselves under.

This study was limited by constraints of time, resources and budgets, hence a larger geographical area or a larger number of respondents could not be included. Only the larger occupation groups could be included, and the study was limited to urban areas alone. Informal workers in rural areas were excluded from the purview.