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Lenders Will Always Prosper in a Cash Hungry Society

Any visitor to the money market operating in Manipur would be shocked at the operations of the informal money market in the state. The existence of a very strong ‘marup ‘system and the high demand for cash and the unthinkable rate of interest are few of the aspects one would notice. In a society like the Meities where cash determines any form of relationship, where religion, whether be it the pre-Vashnavite practices or the Vashnavite version or any other for that matter, also sets the system of linkages, one sometimes wonders whether Karl Marx had formulated his Das Capital based on the Manipur milieu. Any occasion in Manipur is expressed in terms of cash. Beginning with the humble marriage ceremony, to ‘Chura Koron ‘to Shradha ceremony of the dead to inauguration of a new house are all expressed in a language of cash. There is also the system which has emerged fairly recently of washing the ‘face of the audience’ (bhabok mai taba). It is not enough that cash is distributed to the singers but also to the audience who line up the front portion.

Marx had based his theory, amongst others, on the cash nexus, meaning thereby cash relationship and religion being, what he called, as the opium of society. Looking at the scene at Manipur today where cash determines relationship, based again on religious practices what more is there to prove his formulations. This is totally sad.

There is therefore a huge demand for cash and any means by which cash is generated is always welcome. Thus, the high rate of interest being offered by new age finance company operators like Salai. What one has to always recall is that the interest rate is a factor of the cost of funds. What would be the cost of money that one is lending if one were to borrow the money. Thus, the cost of money would determine the lending rate. For the banks, there is the prime lending rate based on the interbank overnight money market. This is done when banks are required to put in what is known as the ‘Statuary Liquidity Ratio and the Cash Reserve Ratio’. The existing Statutory Liquidity Ratio stands at 21.5% of the total time and demand liabilities, while the cash reserve ratio stands at 4% of the total time and demand liabilities. For a financial institution, deposits are liabilities while loans are assets. Demand liabilities consist of savings, while time liabilities consist of fixed deposits, among others. For the State Bank of India the existing PLR stands at 5.5%.

In order to fulfil this requirement banks borrow from each other on an overnight basis. This taken on a weekly average, as on the last Friday decided the Prime Lending Rate. However, it was later decided that this does not reflect the actual cost of funds and hence the concept of base rate is introduced. There is yet another factor which comes to play that is the Repro and Reverse Repro. In simple terms it simply means the rate at which the Reserve Bank of India, RBI, lends money to the banks and the rate at which RBI borrows money, respectively. This is also known as the Bank Rate. The Bank Rate, as on now stands at 6.25%. This is the rate at which the RBI lends to commercial banks.

In a state such as Manipur, what is the cost of fund. Being a special category state 90% of our fund requirement is borne by the Government of India. The revenue generated by the state is barely adequate to meet its expenses. Over and above this we have a population which constitutes around 35% of the total population who are exempted from income tax. Under the circumstances the cost of money is practically nil.

There is another source where money is generated and that is what is known as speed money. Assume that one is to obtain a copy of land records. Apart from what is officially required, there is the speed money which has to be shelled out. We also find that the general population is very generous with speed money.

All the add up to the cost of funds amounting to nil or nothing. Hence any rate of interest is welcome to the ‘investor’. High rate of interest is applied when funding of fast-moving items is required. During the late 1970s there was the crisis of the then Sanchaita Investment Company, who even went on a door to door delivery of the interest income. This was done as they were financing perishable goods and the film industry. Both of which required quick turnovers. It did not take long for that company to fail, and when it failed, it failed the people who put their money and suffered the same fate as what is probably happening in the present case.

The present situation is a result of low cost of fund, high demand, religious and social practices gaining higher status as compared to other practices and essentially a very gullible public. Thus, when the demand is high and when financial institutions in the formal sector is not able to meet the demand, the informal sector jumped in.

Incidentally, the All India Debt and Investment Survey had observed that high demand for cash has led to the birth of a new generation of money lenders. The traditional image of a money lender sitting with a box is gradually disappearing and in its place the office head or any other in the set up has become not merely the head of office or office worker but also the money lender and there is absolutely no control over the rate of interest charged.

In the midst of all these, when life time savings are likely to be lost and families are suffering, as responsible citizens what is to be done? In the present case we understand that the NIA is looking into the matter, yet, that could be from the terror funding point of view. From the point of plain and simple finance what can be done? One cannot simply sit and watch as widows are going hungry in the evening and children’s school fees are not paid. One has to see what legal remedies are possible.

The State Govt of Assam had passed an Act called ‘The Assam Protection of Interest of Depositors (in Financial Establishments) Act 2000 further amended in 2013, which gives adequate safeguard to the depositors. Pending adoption of a similar Act in this state of Manipur, the Assam Act could be adopted. What therefore is called for is to check the religious/social practices which generates high demand for cash and adopt such practices which could curtail the cash nexus.

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