Two Indian states are witnessing a different kind of call money market.
Investopedia, an Internet financial dictionary, describes call money as money loaned by a bank that must be repaid on demand. Unlike a term loan, which has a set maturity and payment schedule, call money does not have to follow a fixed schedule.
In the interbank call money market, one bank borrows from another to meet its short-term asset-liability mismatches or regulatory requirements such as cash reserve ratio, whereby a commercial bank is required to keep a portion of its deposits with the Reserve Bank of India (RBI). Such loans are not backed by any security and, typically in India, the call money is an overnight market except for transactions done on a Friday, which spill over to the next week.
Mumbai is the home of the interbank call money market. The interest rate of call money generally varies between the RBI’s repo rate or the rate at which the central bank gives money to commercial banks (6.75% now) and reverse repo rate or the rate at which it sucks out money from the banking system (5.75%). In exceptional circumstances, the overnight call money rates shoot up when there is a sudden scarcity of money or a crisis of confidence, which happened, for instance, in the aftermath of the collapse of the US investment bank Lehman Brothers Holdings Inc.
The call money interest rates in two southern states—Andhra Pradesh and Telangana—are anywhere between 120% and 200%, and the amount could be a few thousand or even a few lakh, given by money lenders. Why are such loans called call money? Because they are available over a call from the borrowers, and the lenders can demand the return of the money over a call anytime, anywhere. Typically, the lender comes to the borrower’s home with promissory notes and other documents; money is disbursed on the spot after the documents are signed and post-dated cheques are issued by those borrowers who have bank accounts. When demanded, if the borrower is not able to repay, properties are seized.
Hundreds of women have been threatened, coerced and even dragged into sex work because they could not pay back money on time. Many cases have been registered for criminal conspiracy, cheating, sexual harassment, rape, extortion and defamation, and hundreds of people from various political parties have been arrested. The ruling Telugu Desam Party in Andhra Pradesh and the YSR Congress, which is in opposition in the state assembly, have been trading charges; the state government has ordered a judicial probe into the so-called call money racket that came to light when a woman in Vijayawada, a city on the banks of the Krishna river, complained to the police that she was forced to repay Rs.6 lakh, four times the money she had borrowed. Finally, the crackdown led to the passage of the Andhra Pradesh Money Lenders Bill, 2015, by the state legislative assembly in December.
In the wake of incidents like microfinance institutions (MFIs) using unethical practices to recover the loans that apparently led to suicides by the borrowers, allegations of multiple borrowing and charging high interest rates had forced the Andhra Pradesh government to promulgate an ordinance in October 2010 to save the borrowers, prohibiting MFIs from collecting repayments from borrowers’ homes or workplaces and directing them to collect money at public places on a monthly basis instead of weekly centre meetings where MFIs usually used to collect money.
When the ordinance became an Act, it also required MFIs to take the government’s approval for each and every new loan; the use of forceful practices to recover loans was made illegal.
The Telugu Desam Party, led by Chandrababu Naidu, at that time went around the state saying borrowers from MFIs should have been given a loan waiver and asked the people to call the party’s workers in case any MFI came for recoveries. The message that was received by the borrowers was they are not required to repay their debt and, in any case, the state government and the opposition parties were vying with each other to protect them. The recovery rate plummeted from 99% to 10%.
An analysis by M-CRIL, a financial rater of MFIs, indicates that the crisis left MFIs in India with the worst loan portfolio in the world. Loans at risk of default surged from 0.67% (March 2010) to 25.5% in 2011. Loans at risk are those that have not been serviced for 30 days.
The operations of all MFIs in the state came to a grinding halt. The ripples from the crisis were felt in almost every state. Bad loans piled up as borrowers refused to service their debts and banks stopped lending money to MFIs. About 9.2 million loans by an estimated 6.5 million borrowers in Andhra Pradesh, whose population was just about 48 million in 2010, defaulted on loans given by MFIs, the largest number of defaulters in any single location in the world.
The MFI industry’s total exposure to Andhra Pradesh was around Rs.7,200 crore in 2010, but it was able to collect only 10% of this money from the borrowers. Even those MFIs that did not have direct exposure to Andhra Pradesh were shunned by banks. The outstanding loan book of the industry, Rs.30,000 crore in October 2010, had shrunk to half that size in a year.
Even after the MFIs shut shop in Andhra Pradesh in 2011, money continued to flow—through self-help groups or SHGs, which have a history in the state and political backing. However, as the credit culture got spoilt, borrowers started defaulting to the SHGs too, and by 2013, the loan sharks were out on the streets. The emergence of the call money market was inevitable, but interestingly, this market is more visible in urban pockets than in rural areas, and the borrowers are mostly small traders. Subsidized agricultural loans and distribution of the Kisan Credit Card have, to some extent, been able to insulate the rural borrowers from this phenomenon.
