FINANCIAL SERVICES OF UIBS: AN ALTERNATIVE MEANS FOR FINANCIAL INCLUSION IN MANIPUR
DR. KSHETRIMAYUM RANJAN SINGHFaculty of Accounting and Management Department of Computer Science Manipur University, Imphal, India.
ABSTRACT
Financial inclusion is inclusion of those excluded from the payments system or from formal credit markets. Even after more than forty years of nationalization of banks in India, more than 40 per cent of the adult population in India has no access to formal banking and financial services. Credit and financial needs of the people of the state cannot be fulfilled only by the services of financial institutions in the organized financial sector. The role being played by unorganized financial sector in achieving financial inclusion in the state can not be overlooked.
UIBs work as a supplementary to the banks in Manipur. In Imphal West and East districts 61 UIBs have registered and operating along with 43 commercial bank branches. Nature of services provided by UIBs are quite different from the banks operating in the state as they have daily collection, weekly collection and monthly collection loans along with service loan for government employees, gold mortgage loan, pension loan for the pensioners, etc.
The present paper “Financial Services of UIBs: An Alternative Means for Financial Inclusion in Manipur” will be dealing mainly on defining UIBs, their registration and regulation, financial services provided by them, financial inclusion through UIBs, findings and suggestions.
Key Words: Financial Inclusion, Unincorporated Bodies engaged in financial activities(UIBs), Financial Services, Informal Financial Sector.
A Journal of Radix International Educational and Research Consortium
RIJEBM
RADIX INTERNATIONAL JOURNAL OF ECONOMICS & BUSINESS MANAGEMENT
INTRODUCTION
In the present monetized economy, people need financial services either from organized or unorganized sector. Credit and financial needs of the people of the state can not be fulfilled only by the services of financial institutions in the organized financial sector. The role being played by unorganized financial sector in achieving financial inclusion in the state can not be overlooked. Indian Financial System consists both these sectors/systems, i.e., formal (organized) financial system and the informal (unorganized) financial system. The formal financial system comes under the purview of the Ministry of Finance (MoF), the Reserve Bank of India (RBI), the Securities and Exchange Board of India (SEBI), and other regulatory bodies. The informal financial system consists of:
1. Individual money lenders such as neighbours, relatives, landlords, traders, and storeowners.
2. Groups of persons operating as ‘funds’ or ‘associations’. These groups function under a system of their own rules and use names such as ‘fixed fund’, ‘association’, and ‘saving club’.
3. Partnership firms consisting of local brokers, pawnbrokers, and non-banking financial intermediaries such as finance, investment, and chit-fund companies.
Though our country, India, is proud of having a strong banking network consisting of Scheduled commercial banks – public sector banks - State Bank group, Nationalized banks; private sector banks - old private banks, new private banks; Foreign banks, Regional rural banks, Non-scheduled commercial banks and Cooperative banks along with a number of term lending national and state level financial institutions and investment institutions, still a larger population remained excluded from basic banking and credit facilities. This gap is being filled by the credit purveyors in the informal (unorganized) financial system. In the state of Manipur, unincorporated bodies engaged in financial services (registered moneylenders) are taking an important role in order to fill the credit gap as well as in the socio-economic development of the state. It is an agreed fact that UIBs have been contributing to the efforts to make financial inclusion a dream come true.
DEFINING UNINCORPORATED BODIES (UIBs)
According to Reserve Bank of India Act, 1934 UIBs are individuals, firms or associations of individuals which are not incorporated/registered under Companies Act, 1956 whose business either wholly or partly includes any of the activities of financing, or acquisition of securities, letting or delivering of goods under hire-purchase agreement, managing, conducting or supervising, as foreman of chits or kuries or whose principal business is that of receiving deposits or lending in any manner.
“The UIBs are partnership concerns whose paid up capital is less than Rs.1 lakh. Major source of their funds is fixed deposits from the public. Such UIBs are spread throughout the length and breadth of the country and their number is reported to be very large. They carry the name like “. . . Finance and Investments” or “. . . . . . . Finance Corporation” or “. . . Pvt. Ltd.” or “. . . .& Co.” and thus gives a picture of an incorporated body in the minds of the innocent depositors. Though these institutions were in
existence since 1960s, they made rapid progress after 1991. The Banking Commission (1972) and all the subsequent committees have noticed that these institutions are heavily concentrated in states like Gujarat and Karnataka. These UIBs are registered with Registrar of Societies. In 1997 when the NBFIs started collapsing after the CRB fiasco, these UIBs also tumbled down. Most of these institutions were of the nature of ‘fly-by-night’ operators.”1
The Unincorporated Bodies (UIBs) dealing with financial services which are also termed as ‘Petty Finance Corporations’2 play a significant role in the economic development of our country by meeting the credit requirement of millions of people at the door steps on demand without insisting on procedural formalities unlike commercial banks, regional rural banks and co-operative banks. They are accessible at any time without any formalities according to the convenience of the needy of credit.
“There is a financial sector outside the banking sector generally known as the Non-Banking Financial Companies (NBFCs). NBFCs are the financial institutions that provide banking services, but do not hold banking licenses. Those Bodies that are not registered under the Companies Act are referred as the Unincorporated Bodies (UIBs).”3 Since these Bodies have greater flexibility in their operations, they are able to reach small investors in attracting their surplus funds by way of public deposits and offering various incentives and better returns to them. Moreover, the constrains faced by the formal financial system in reaching rural /poor households and small business in a flexible and hassle free manner led almost as a natural consequence to emergence of various types of these bodies, which range from fairly size NBFCs to much smaller Unincorporated Bodies. The UIBs have now become an important component of our financial sector. The easy procedure in their credit facilities and their offer of attractive rates of interest on public deposit enables their sharp growth over the years. The mushroom growth of these Bodies in the last decade brought about some unsavoury elements to the sector and fly by night operators started betraying the confidence of the depositors that had placed on them.
REGISTRATION OF UIBs:
After a series of collapse of UIBs and loss of deposits by the public, the Reserve Bank of India Act was amended in 1997. Section 45’S’ of the RBI Act 1934, relating to the acceptance of deposits by UIBs was amended. The amended provisions have come into effect from April 1, 1997. Thus, RBI, by prohibiting UIBs from accepting deposits from general public except from relatives has reduced their status to the money lender.
“Money lenders in India come under control of the Money Lenders Act, promulgated by each of the different states. The Act essentially sets out the appointment of a Registrar-General of Money-Lenders who maintains a Register of Money-lenders in their jurisdiction. The Registrar provides for a license to money lenders to
1
Krishna, Impact of Non-Banking Financial Intermediaries on Commercial Banks, Mangalore University, Unpublished Ph.D. Thesis, 2006.
2
Ibid 3
carry out their business, regulates the terms and conditions under which a loan is provided to borrowers, and arbitrates in disputes between money-lenders and borrowers in cases of default or other aspects. Compliance with the Act is rare however, and majority of the money-lenders do not obtain such a license to operate.”4 To regulate and control the mushroom growth of UIBs (Money lenders), Finance Department, Government of Manipur had introduced an Act under section 3 of the Bombay Money Lenders’ Act, 1946 as it being extended to Manipur. The State Government had appointed the Registrar of Co-operative Societies, Manipur, Additional Registrar of Co-operative Societies, Manipur and Assistant Registrar of Co-operative Societies (G&B), Manipur as Registrar General of Money Lenders, Registrar of Money Lenders and Assistant Registrar of Money Lenders respectively. With the registration requirement under this Act, all the UIBs of the state must have to act as money lenders providing money lending or credit lending on various schemes with the interest rate ceiling of 3 per cent per month without accepting deposit from the public. A large range of people including government employees, businessmen, small vegetable vendors and security personnel are directly or indirectly benefitting from their financial services.
At present there are 61 such registered UIBs which are treated as money lenders under Bombay Money Lenders’ Act, 1946 in Manipur. Of these registered UIBs 17 of them were registered in 2005, 16 were in 2006, 9 of them were registered during the year 2007, 8 of them were registered during 2008 and 11 were registered during 2009 and there is no more registration till now.
SERVICES OF UIBs IN MANIPUR
At the early stages of the establishment and development of these UIBs, they used to provide various services of varied nature. Some of them can be listed as follows – (a) Stop payment lottery in which the member who wins stop to pay further contribution (b) Hire-Purchase System and (c) Installment System. The most popular service of those days was the Stop Payment System which provides the members to win various items and assets of their choice.
During 1991 to 1993, when there was a stage of mushroom growth of UIBs, they have even started taking deposits from the general public through – (a) Savings Deposit, (b) Term/Fixed Deposit, and (c) Recurring Deposit. This was the stage when these UIBs started providing services of various financial institutions under one roof. But with the intervention of state government under the guidance of Reserve Bank, their functions have been restricted to a great extent and become very narrow and streamlined up to some extent.
At present, these UIBs provide very few services which are of money lending nature. They are being discussed below:
4
I. Business Loan:
This particular type of service of lending nature is known by different names by different UIBs like Daily collection, Weekly collection, Monthly collection, short-term loan, etc. As the name itself suggests, this business loan is given particularly to a wide range of business persons in the areas covered by their operation. These loans are given mainly to shopkeepers, vegetable vendors of Khwairamband Ima Keithels, workshops, other small retail shops and business persons.
The amount of loan given under this type of loan is at the range of Rs. 2,000 – Rs. 50,000. The rate of interest charged by the UIBs in such loans is 3 per cent per month. The period of maturity of these loans also differs from UIB to UIB, but most of them are at the range of 1-6 months. This amount of loan is collected daily, weekly, monthly, etc. in installment system and at the end of the period, the UIBs can collect the whole amount of loan including the principal amount and interest on it.
II. Service Loan:
It is also one of the most important and popular type of financial services provided by these UIBs. This type of loan is given only to the government employees. The amount of the loan is collected with interest every month at the time of receipt of salary by the employees from the Cashier or Drawing and Dispersing Officer (DDO) of the concerned department where the loanee is working. At present as the salaries are being paid in the bank accounts, the pass books of the loanees are kept in the custody of UIBs.
The rate of interest charged on this type of loan is 3 per cent per month. This type of loan is given mostly for longer period and the maturity period is 1-20 months. In most of the UIBs, the loan amount given to service loan is much greater than that of Business loan. The amount of loan of the service loan ranges from Rs. 10,000 to Rs. 1, 00,000. These service loans are provided to the government employees for their various purposes.
III. Pension Loan:
Pension loan is a type of loan provided by these UIBs particularly to the pensioners of government employees. In this type of loan, the pensioners have to surrender their pension passbooks for a certain period till the maturity of the period of the loan. The UIBs will collect the amount of pension monthly in the place of pensioners. After collecting the whole amount of the loan with the interest, the pension passbook will be handed over to the pensioners. The rate of interest charged by the UIBs on pension loan is 3 per cent per month as that of other types of loan. The period of maturity of this type of loan is 1-20 months.
IV. Gold Mortgage:
Gold Mortgage is another way of lending money by UIBs to its customers. Whenever any person wants to seek financial assistance from such financial institutions, they can keep their gold ornaments with the UIBs and can get financial assistance up to the amount allowed by the UIB in accordance with the value of the Gold ornament. The rate of interest charged for this is 3 percent per month. Whenever the loanee does not repay back the loan amount with interest, the UIB will sell out the gold ornament and recover their amount
of loan. In case, they return the loan amount with interest in time, the gold ornament kept with the UIB will be returned back to the loanee.
UIBs and Financial Inclusion:
Financial inclusion is inclusion of those excluded from the payments system or from formal credit markets. Even after more than forty years of nationalization of banks in India, more than 40 per cent of the adult population in India has no access to formal banking and financial services. This exclusion could be on the grounds that the individual has either no savings/assets and hence no savings/current account in the bank. Besides, he also may not have access to any financial advice and perceives the cost of the financial services as not affordable.
Financial inclusion is to be undertaken in three steps – (i) providing access to financial products and services; (ii) availability of financial products and services in a fair and equitable manner; and (iii) credit counseling which includes providing sound services to arrest deterioration of incomes, restructuring of debt solution to overcome debt burden and improve money management skills.
In order to bring financial inclusion in India, Reserve Bank of India has asked the banks to (i) open ‘No frills’ accounts through simplified know your customer (KYC) procedures and also to offer a small overdraft/General Credit Card not exceeding Rs. 25,000 to their customers. For self-help groups, a line of credit could be considered; (ii) provide other financial products like life/asset/health care insurance and mutual fund products; (iii) open accounts in villages/wards allocated to them; and (iv) provide financial counseling services and introduce a specific credit guarantee scheme under the DICGC Act for farmers.
Even these efforts, still the way to successful financial inclusion is very far. Along with the efforts from the organized sector of the financial system, there is also need for equal effort and contribution from the players in the unorganized sector of the Indian Financial System. Unincorporated bodies engaged in financial services in the state are also providing financial services and credit facilities to various customers from various backgrounds. Many of the customers of these UIBs are excluded customers of the formal banking system in the state. They are unable to access to the banking services in the state due to various reasons. Many of them are women vegetable vendors and unemployed poor trying to provide themselves self employment. They have denied by the banking services of the state. Due to lack of number of bank branches in the state, there is high density of customers in these banks and many State Bank branches are found to be overcrowded and there are long queue in front of the banks and ATM booths in the state. In such situation initiative of banks to make financial inclusion successful in the state is not found to be quite positive. There are 61 UIBs (registered money lenders) in the state operating mainly in different parts of Imphal east and west districts of the state. These UIBs are having 300-500 customers at an average which are enjoying credit facilities. It clearly shows the role of UIBs to make financial inclusion a dream come true in the state. Their contribution in this effort can not be ignored at all and recognition should be given to them on their credit.
REGULATORY INITIATIVE OF STATE GOVERNMENT AND RBI
The UIBs (registered Money lenders) in India come under the control of the Money Lenders Act, promulgated by each of the different states. In Manipur also these UIBs are compelled to register under Bombay Money Lenders Act, 1946 as extended to Manipur. At the time of issue of license to UIBs to work as money lender under Bombay Money Lenders’ Act, 1946, the State Government of Manipur put the following terms and conditions to UIBs through the Registrar of Money Lenders, Manipur:
1. This license shall be exhibited in prominent place on the premises where the business of money lending is carried on.
2. A signboard showing –
Name in which the business of money lending is carried on and The license number and date of registration shall also be exhibited.
3. The Cash Book, Ledger and Statement of Receipt and Expenditure shall be either in Form No. 4 and 7 or No. 5, 6, 7, 8, 9 and 10 respectively.
4. A Capital Account in Form No. 11 shall be opened.
5. The Statement of Account shall be furnished within 30 (thirty) days after closing the year for which the account of the money lending are ordinarily maintained.
6. Change of principal place of business shall be intimated within 7 (seven) days. 7. The rate of interest shall be limited @ 3 per cent per month.
Under the guidance of Reserve Bank, state government has formed a specially dedicated police unit under the name Economic Offence Wing headed by an officer not less than the rank of a Police Commissioner so as to effectively investigate/deal with the cases relating to ‘non-banking financial companies and unincorporated financial institutions’ which collected money on deposits and thereafter defaulted to repay the same on maturity.
Following the steps taken up by the Tamil Nadu government in order to protect the interest of depositors in financial establishments under the law ‘The Tamil Nadu Protection of Interests of Depositors (in Financial Establishments) Act, 1997’, the state Finance Department has prepared ‘The Manipur Protection of Interest of Depositors (in Financial Establishment) Bill’ and since it falls under the Concurrent List of Indian Constitution, it has been sent to Government of India for its prior approval in 2005 but still awaiting its approval.
With the amendment of RBI Act in 1997, the Section 45’S’ of the RBI Act, 1934, relating to the acceptance of deposits by UIBs was amended and it came into effect from April 1, 1997. Thus, RBI, UIBs are prohibited from accepting deposits from the public except from relatives given under it. The UIBs which accept deposits in violation of the provisions of Chapter – III C of the RBI Act are liable to prosecution under the provisions of the Act. The state governments are being empowered concurrently to prosecute the offenders. The time limit for repayment of public deposits, except from those permitted sources (relatives) by the RBI Act, 1934, held
by all UIBs engaged in financial business expired on March 31, 2000. Accordingly, RBI cautioned UIBs engaged in the financial business to neither accept nor issue advertisements soliciting deposits. Concomitantly, members of the public were also cautioned about the risk of depositing money with such UIBs.
Besides the above initiatives, the Reserve Bank has conducted a number of seminars and awareness programmes in collaboration with the state finance department (institutional finance). Advertisement has also been put in the local newspapers cautioning the public from keeping deposits with the UIBs.
GENERAL FINDINGS/OBSERVATIONS
UIBs work as a supplementary to the banks in Manipur. In Imphal West and East districts 61 UIBs have registered and operating along with 43 commercial bank branches.
Nature of services provided by UIBs are quite different from the banks operating in the state as they have daily collection, weekly collection and monthly collection loans along with service loan for government employees, gold mortgage loan, pension loan for the pensioners, etc.
Besides the credit facilities these UIBs are providing directly and indirectly employment opportunities to educated unemployed youths in the state.
Contribution from promoters, employees’ contribution in the form of security deposits and winning amount of ROSCAs (Marup and Tender in local term) conducted by the UIBs are important sources of fund.
UIBs are investing capital at the range of 10 to 50 lakh rupees and some of them have the investment in terms of crores.
Some of the bankers felt that due to many reasons like easy accessibility, simpler documentation and procedure, absence of collateral securities and guarantor, etc. UIBs attract more customers to borrow.
Most of the beneficiaries of UIBs are government employees, businessmen and unemployed persons. A large number of beneficiaries of UIBs are in association with them for a period of 1-5 years and very
few of them are in association with UIBs for a period of more than 10 years.
Most of the customers of the UIBs are excluded poor from the formal banking system in the state. Most of the UIBs are having customers at the range of 300-500. Their role in financial inclusion is
inevitable. SUGGESTIONS
The following few suggestions are being recommended to enhance the pace of financial inclusion through the activities and initiatives of UIBs in the state and for the growth of UIBs in the state.
1. Financial assistance should be provided to the UIBs by the financial institutions like SIDBI and NABARD and nationalized banks operating in the state similar to the financial assistance provided to Microfinance institutes.
2. State government should also be supportive to UIBs by making certain regulations to safeguard UIBs’ interest and their depositors’ interest equally.
3. UIBs should also be encouraged to merge themselves so that they can work competitively with nationalized, cooperative and rural banks and with sound financial strength and widely spread network of branches in the state.
4. These UIBs should also be compelled to get registered themselves under Companies Act and to come under the supervision and control of RBI as a Non-Banking Financial Company so that more financial discipline can be developed in themselves.
5. Training and awareness programmes should also be arranged for the staffs of UIBs and their customers so that mutual growth and benefit can be achieved.
6. Due to the financial assistance given to microfinance institutions in the state, many UIBs are intended to convert themselves into microfinance institutes.
CONCLUSION
It cannot be ignored that UIBs are playing an important role in the financial inclusion and socio-economic development of the state in particular and the whole country in general. Along with the measures to regulate UIBs and to protect the interest of public depositors, certain measures should also be taken by the RBI and the state governments in order to develop these UIBs.
REFERENCES
1. Bharati, V. Pathak. (2008), The Indian Financial System: Markets, Institutions and Services, Second Edition, Pearson Education, New Delhi, p.535-536.
2. Chakraborty, K. C. (2006), ‘Financial Inclusion: Reaching the Unreached; Chartered Financial Analyst, November 2006, p.56-57.
3. ICM, ‘A Typology of Informal Credit Suppliers: Money lenders,
http://www.gdrc.org/icm/suppliers/ml.html.
4. Krishna (2006), Impact of Non-Banking Financial Intermediaries on Commercial Banks, Mangalore University, Unpublished Ph.D. Thesis.
5. Ram Mohan, T.T. (2006), Inclusion: A business imperative; The Economic Times, November 30, 2006, p.8.
6. Seminar’s Handout on ‘Regulation for NBFCs and UIBs’ organized by State Finance Department (Institutional Finance) and RBI, Guwahati at State Guest House, Imphal, Manipur, 16th November 2009.
