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They are classified as households in savings as well as lending data. The share of the household sector in bank credit has come down to 47% from 58% between 1990 and 2004 while the sectors share in trade, transport, construction, restaurants, and other services has been growing at more that 8% CAGR. Here, households include agricultural households and, to that extent, the fall is very significant. Put another way, the growth rate of the last decade is not related to the credit mechanisms of the banking sector. This is banking with significant structural distortions. The share of the private corporate sector in national income is around 12-15% but it takes away nearly 40% of the credit provided by the banking sector. The fastest growing non-corporate sector gets a lesser share, which suggests that the noninstitutional financial sector is playing an important role in credit delivery. We find that 43% of rural household and 25% of urban household debt relates to moneylenders . So, where does the unorganised sector get the funds? According to our absurd laws, moneylenders cannot borrow, but can only lend. The huge amount of black money generated by nearly 30% of government employees (the previous CVC, Pratyush Sinha, suggested a 30% corruption rate) is probably used in the unorganised credit market. Given the regulations pertaining to KYC (know your customer) norms, it is difficult to save with banks or mutual funds. So the entire black money is finding avenues in the unorganised market where interest rates are very attractive. The crime news in many towns is about violence between small-time moneylenders and enforcers. One can infer that policemen are entering the market both as lenders and collection agents. This has implications for our governance system since the duty of the cop is definitely not to support unorganised banking. How do we deal with it? Since we are a relationship-based society, it is not possible to surgically remove the cancer of corruption. If we do that, our growth will suffer in the short term. The best way is to integrate the unorganised sector with the general financial architecture and enlarge the availability of credit and funding to all instead of restricting it to corporate thieftains. We have to think beyond the 15% of our corporate economy to understand economic growth. Balancing the need for probity with growth of the economy is the big challenge of the coming decade. In other words, crooks do help in economic growth but society has to decide what price we are paying for this and strive to balance growth with probity and order.
The author is professor of finance and control, IIM-B. Views expressed are personal.