It is often the case, therefore, that rural borrowers are able to obtain funds to finance investment as a result of interlinked credit transactions with the informal moneylenders which would not be possible with more formal institutions.
The phrase interlinked credit transactions is trying to illustrate the point that the majority moneylenders do not primarily pursue usury but that credit transactions tend to be with their associates. The point is that needs to be established is that landlords often extend credit to their tenants and traders often lend to those from whom they also purchase grain.The interlinkage in credit transactions is therefore, useful as it helps to remove the risk of default because the lender has a greater knowledge of the borrower’s activities as well as an increased ability to enforce repayment of any loan through ‘interlinked threats’. E. g.
tenancy shall be removed or grain will not be bought etc. One of the reasons why the informal moneylender is frowned upon is as a result of these interlinked credit transactions and collateral.This is because it may be the case that the moneylender forwards a loan in the hope that he / she may benefit from the borrower being forced to default, e. g.a large landowner who agrees to accept a neighbouring plot as collateral for a loan. In short other factors may be more important than the repayment of the loan. It is clear therefore, that such interlinked relationships resulting from informal credit transactions can have a negative effect on the economy, thus hindering development by creating unequal distribution of power and wealth.At the same time, however, it is clear that this form of moneylending may be the result of increased competition in the credit market as a result of the expansion of formal credit markets and financial institutions, which may be beneficial for the economy.
In India, therefore, from 1951 – 1961 the inroads made by institutions into rural lending we fairly limited. Since then over the next two decades although it may be argued that ‘the agriculturist moneylender has suffered a fall from dominance at the hands of, first the cooperatives, and then the commercial banks, which were nationalised in 1969″2, evidence suggests that this is not the case. Instead, “trade and (interlinked) moneylending flourish with advancing commercialism”2.Although it would be wrong to suggest that informal moneylending was of no importance for the economic development of Germany, the major contrast with India and its eventual economic development was the success of the financial institutions and universal banks. One of the major differences is, however, not merely these institutions but the influence that German firms were able to have over them and vice versa.
As a result of extensive cartellization and concentration, specific firms were very successful in lobbying the governmental and financial institutions for favourable terms under which they could prosper.In short firms were able to dominate the banks. An example of such a successful lobbying group can be found in the Central Federation of German Industrialists, which was established in 1876 and constituted leading firms from the important industries of cotton and iron. In contrast, such lobbying has not been so widespread and dominant in India. Closely related to the lobbying power of cartellized and concentrated firms is the very active role that financial institutions were able to have in the allocation of investment funds in Germany.In India, the allocation of investment funds has primarily been the responsibility of the government and central planning committees in the form of ‘Five Year Plans’.
In Germany, however, there are many examples of where the universal banks had direct roles in the prosperous sectors of the economy, most notably that of railway construction and also often in the form of bank representation on the supervisory boards of joint-stock companies.In conclusion, this essay has tried to illustrate that there have been many differences in the experiences of India and Germany in the method by which financial savings have been mobilised and allocated to investment projects. The essay has stressed the contemporary dominance of analysis of the informal credit markets in modern day LDC’s such as India, which require attention alongside the centrally planned investment from governmental and formal financial institutions.In short the aim has often been to increase the availability of funds for investment projects for small firms and individuals. The essay, however, has also shown that the experience of Germany was significantly different, with the financial institutions being subject to significant lobbying from large cartellized firms.
In the words of Tilly (1986) Germany provides an example of where there was “development help for the strong”.