Microfinance Focus, June 16, 2010: Despite being a constant subject of criticism, Moneylenders continue to be the lenders of last resort for the poor. Their matchless flexibility of lending big amounts at the oddest hours, gives them an unbeatable edge over microfinance and commercial banks. With no collaterals, no joint liability groups and no compulsions of weekly repayments; moneylenders do give poor an easy access to credit like none other.

In an exclusive interview with one such moneylender, Satish Shetty, who is operating in Yelahanka, Bangalore, Microfinance Focus learnt how this business is being run and what are some of the practices which contribute to their insurmountable presence. For an enhanced understanding, Microfinance Focus will delve further into this model of moneylending and will bring a series of interviews with moneylenders.

Microfinance Focus: When did you start moneylending and why?

Satish Shetty: I started eight years back. I had just suffered some losses in my bakery business, so I decided to enter this business.

Microfinance Focus: How many customers do you have?

Satish Shetty: Around 15-20 borrow money from me every month.

Microfinance Focus: How do you market your service? Why do your clients choose to borrow from you?

Satish Shetty: Mostly through word-of-mouth. I don’t run ads or anything of the sort. My clients come to me because my practices are similar to regulated norms. I don’t charge them astronomical rates.

Microfinance Focus: So how this  money lending work? What interest rate do you charge? What type of interest is it? What collateral do your borrowers offer?

Satish Shetty: Well, I took training with some government officials before I started and run my business according to the practices I have learnt. I charge an interest rate of 3% per month. It’s usually charged at diminishing returns. While familiarity with the person plays a role, I sign a legal document with the borrower that amounts to a contract. Also as a surety, the borrower gives me a blank cheque with his signature. If he doesn’t pay the monthly interest rate for the entire period, then I cash the cheque, after taking interest rate into account. If the cheque bounces three times, I go to court. Similar to a bank, I hold their assets like mortgage.

Microfinance Focus: What is the average amount of money that you loan out? What is the fee that you charge?

Satish Shetty: I loan out anywhere between Rs. 10000 to Rs. 25000 per person, depending on what they want it for. And I don’t charge any one time fees.

Microfinance Focus: What is your repayment policy? And what is your repayment rate?

Satish Shetty: I either have weekly collections or monthly collections depending on the borrower’s job. If he’s running a vegetable shop, or an auto-rickshaw then I charge weekly. If he’s working in a government job or some other place where he gets a paycheck only once a month, I collect monthly. The borrowers drop by my office regularly. When they don’t I check on them. Usually most of the people I lend out to repay me within the specified time period. When they don’t I take legal action. Sometimes they run away from the city, say if the auto had an accident for example, then there’s nothing I can do.

Suppose a guy owes me 10000 rupees for a period of 2 years. I charge him 3% interest, so he has to pay 300 rupees interest per month. He can keep making payments of 300 rupees every month. If he pays back 2000 rupees of principal say, then from the next month on, I charge 3% of 8000 rupees, so then monthly he has to pay 240 rupees interest. So interest amount keeps on decreasing like that. If he makes regular payments, then I am flexible with time period of 2 years.

Microfinance Focus: What is your relationship with the people you lend to, professional or personal? What about the other lenders in the area?

Satish Shetty: It’s a bit of both really. At least once we enter into a transaction, I get to know them well. I don’t really have much contact with other lenders.

Microfinance Focus: Is this your main business, or do you have other businesses?

Satish Shetty: I have other businesses. This is only one of the things I’m involved in. In the moneylending business, I usually have a decent margin of profits, but if a couple of defaults happen in quick succession, and then I suffer losses. That happened a couple of years back.

Microfinance Focus: Are you satisfied with this money lending business?

Satish Shetty: It’s a business. But it helps people develop a means of sustenance, and it is under the purview of the government. So yes, I think I am doing a good job.