Money lending in India is an ancient practice that has now become structured and secure. Compared to the older times, it is also more convenient. Let’s walk through how the practice has evolved over time.
History of Money Lending in India
This business can be traced back to the Vedic periods. Earlier, considered to be immoral, the practice of usury was shunned and generally looked down upon. However, in the late 2nd century CE, money lending or usury, started getting recognition as an acceptable mode of wealth creation, and was recorded in Manusmriti as such. It was called “kusidin” in the Manusmriti texts. The Sutras and Jatakas recorded money lending practices as well.
A systematic structure of money lending emerged during the Mauryan age, where Kautilya mentioned different forms of loan deeds in his texts. The different forms of loan deeds were- RNapatra, RNapanna, or RNalekhaya. This was in 321 – 185 BCE. A rudimentary form of the modern Bill of Exchange also emerged in the Mauryan era, where an instrument called as adesha ordered a banker to pay the required sum on the note to a third party. Letters of Credit were also a frequent occurrence amongst the merchants. The Mughal era saw another form of money lending, known as dastawez, which were of two types, one which was payable on demand, that is the dastawez-e-indultalab, and the other payable after a period, that is the datawez-e-miadi. There were two other prominent money lending tools- barattes, that is payment orders given by the royal treasuries, and Hundi, which was used during credit transactions, much like the modern-day credit card.
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Money Lending Business in India: The British Raj
With the arrival of the British, this business went through a paradigm shift. Banking became more structured and uniform. The first bank of India came into existence during the British rule- The Union Bank of Calcutta. In 1885, Allahabad Bank came into existence, is still functional till this date. The first, completely Indian bank to establish was the Oudh Commercial Bank, which was followed by Punjab National Bank in 1894, after its early demise. The Swadeshi movement brought about the establishment of quite a few banks in the period between 1906 to 1911. The Cradle of Indian Banking, also known as the unified Dakshina Kannada District started four nationalised banks and a private sector bank.
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Money Lending in India: Post-Independence
Indian banking industry saw a leap in time during the period between 1946 to 1983. The partition of 1947 affected the banks adversely and the economies of both- West Bengal, and Punjab were demolished. The Government created the Reserve Bank of India to counter the economic challenges, as well as to boost economic relations with other countries. With the creation of the Reserve Bank of India, India could now lend or borrow money from other countries, which was accomplished during the 1991 economic crisis, where RBI pledged 46.91 tons of Gold to the Bank of England. In 1949, Banking Regulation Act was implemented by the Reserve Bank of India to regulate and control the interest rates on bank loans by Indian banks.
Globalisation and its Effects on Money Lending Practices
New generation private banks came into the picture after India opened itself to the global economy. ICICI, HDFC, and IndusInd are a few popular banks which entered the Indian Banking economy during this period. Due to immense globalisation, and technological advancements, the face of this business changed once again. State-of-the-art money lending and borrowing instruments were made available to customers. New credit instruments were introduced in the Indian market. Credit cards came into existence, bringing in the concept of “buying now, paying later, with no interest rates* (terms and conditions applied)” to the Indian customers.
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Modern Day Money Lending Tools
Contemporary money lending in India has seen a radical shift, wherein customers do not need to physically appear in banks to apply for loans, or credits. Terms like credit scores and ceiling rates were introduced to the common public. Internet banking and Mobile banking enabled customers of the banks to apply for loans from anywhere in the world, digitally. Sending and receiving money could be done electronically as well. Credit cards with magnetic chips were introduced, wherein an individual doesn’t even need to enter the security pin to make a transaction. With increased global competition, banks started scrambling to outdo the others, and hence integrated the latest technologies, introduced competitive interest rates and payback options to their customers, enabling them to apply for loans at a single click of their mouse, or even better, through their smartphones.
The advent of peer-to-peer lending, Artificial Intelligence and Machine Learning, cryptocurrencies, blockchain, and UPI transactions, this business was completely disrupted.
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AI-Powered Unsecured Loan Disbursement
With such disruptive technologies in existence, traditional banks started facing immense customer-base losses, and saw that their process flows had become redundant. New apps came into the picture which would offer instant cash loans to their customers. The interest rates are almost negligible with only 1.08 – 2.03% per month. People can take minor loans ranging from INR 3000 to INR 5 lakhs. There are quite a few companies utilising AI to parse and correlate customer data from loan applications and their digital footprint to pinpoint the repayment capacity of the customer.
Some disruptive companies have started disbursing personal, unsecured loans to its customers, as well as education loans for high school education, and smaller business loans for sole proprietors. These are usually short-term loans going up to only 180 days. The default rates have proven to be lesser than bigger, and more established banks, and the FinTechs pursue aggressive AI-powered technology to achieve this result.
Peer-to-peer lending is also known as P2P lending in business terms. Verified borrowers can seek out investors looking for higher returns on unsecured personal loans. Investors usually check the credentials of the borrowers applying for an unsecured loan, and can even partially loan small sums to more than one borrower to diversify their portfolio and reduce the average risk of return. It is a form of crowdfunding. P2P Lending financial institutions need to have INR 20 million or higher to partake in the lending business. Such companies can only act as intermediaries between the lender and the borrower, and cannot lend on its own. international lending and borrowing is closed off as of now due to increased risks.
The companies are expected to conduct a thorough risk assessment and check the credit-worthiness of their borrowers. A borrower is not allowed to borrow more than INR 10 lakh, and a lender is not allowed to invest more than INR 50 lakh. The loans must be repaid within a period of 36 months. A single lender and borrower cannot have a mutual transaction exceeding INR 50000. Escrow account mechanisms will be implemented to transfer funds, and cash transactions are strictly prohibited. There are currently 15 P2P platform companies registered with the RBI. With such disruptive changes, the financial and investment opportunities have increased tenfold. It also gives more leeway to those with innovative ideas, but with no means to secure high interest bank loans. Money lending has been an ancient practice, and it continues to play an integral part in the growth of India.