Question

Explain the structure of unorganized sector of money market in India

Answer 1

Money market is a market for lending and borrowing of short term funds. The money market in India is dichotomous by nature. It comprises of both, the organised sector and the unorganised sector. The activities of the unorganised sector are largely confined to the rural areas.

The unorganised sector includes the following:

1. Indigesnous Bankers: These are financial intermediaries that function similar to banks. Indigenous bankers are mostly limited to certain social strata. They generally deal in indigenous short-term credit instruments such as hundi. The rate of interest differs from one market to another. They are vital source of funds in unbanked areas. They directly provide loans to agriculture, trade and industry.

2. Money Lenders: Money lenders mostly operate in the villages and charge high rate of interest. Agricultural labourers, small and marginal farmers, artisans, small traders etc. usually borrow money from them. The loans provided by them are for both, productive and unproductive purpose. At present, the activities of money lenders have been restricted by RBI on account of their tendency to exploit poor borrowers.

3. Unregulated Non-Bank Financial Intermediaries: 

1. Chit funds: Here, members make regular contribution to the fund and bids/ draws are made based on some criteria mutually agreed upon by members. Accordingly, the collected fund is given to the chosen member. Chit funds mostly operate in Kerala and Tamil Nadu.
2. Nidhi: It is also type of mutual benefit fund where members make regular contribution. Loans are provided to members at reasonable rates of interest.
3. Loan companies: These are finance companies which provide loans to traders, small-scale industries and selfemployed persons. Being unregulated, they charge a high rate of interest on loans.