Unorganized Sector In India

The unorganized sector, sometimes called the informal sector, encompasses all unincorporated private enterprises owned by individuals or households engaged in the sale and production of goods and services operated on a proprietary or partnership basis. This sector was quite an important constituent of the Indian economy.

• Employment: Again, the significant fact is that about 93% of the total workforce in India is working in the unorganized sector, as per NCEUS, the National Commission for Enterprises in the Unorganized Sector [1].
• Contribution to GDP: It contributes roughly to the extent of 50% of India's GDP. The contribution of this much share by a particular sector with such enormity in its size and scale is significant.
• Wages and Conditions: Low wages, job insecurity, and poor working conditions often characterize this sector. The average daily wage in the unorganized sector is usually much lower than in the principal one.

Kanthu Vatti: An Overview

Definition: "Kanthu Vatti" is high-interest lending of money at extremely high interest, and in most cases, the terms of repayment are daily. It is a practice commonly found in some parts of India, especially in rural areas. The term "Kanthu Vatti" is derived from Tamil, where "Kanthu" means "daily" and "Vatti" means "interest."

The practice prevails throughout rural and urban areas where official credit is beyond access. Kandhu Vatti is a significant issue in many regions where formal banking services are inadequate. Addressing this problem requires a multi-dimensional approach, including reforms in the laws, awareness programs, and efforts to enhance financial inclusion, etc. Only through vital measures, the cycle of exploitation and financial distress associated with Kandhu Vatti can be broken.

Impact:

• Fall into Debt Trap: Many a time, a borrower falls into a debt trap with high rates of interest coupled with daily repayment.
• Economic Distress: This would result in acute economic hardship on account of the huge financial burden, thereby affecting the entire well-being of individuals and families.
• Social Problems: At times, the pressure of return is so strong that it can be associated with cruel social problems, suicide by the debtor due to heavy debt, etc.

The Unorganized Sector And Kanthu Vatti Go Hand In Hand:

1. Inaccessibility to Formal Credit: Most laborers in the unorganized sector do not have access to formal banking services. This is because they do not possess any documents, credit history, or collateral to show. This compels them to seek help from informal money lenders who charge very high rates of interest.
2. Irregularity of Income: Irregularity and uncertainty of income characterize the unorganized sector. This irregularity makes people ineligible to avail themselves of loans from formal institutions.
3. Financial Illiteracy: Unorganized sector illiterate about the availability of formal sources of credit and high cost of interest.

Statistics And References:

1. Kanthu Vatti Extent: According to the survey by the National Sample Survey Office [2], in India, almost 30% of rural household credit demand is serviced through informal sources, i.e., money lenders.
2. Interest Rates: The interest rates of the informal lender range from 36% to 120%, depending upon the region and urgency of need.
3. Case Study: In Tamil Nadu, Prohibition of Charging Exorbitant Interest Act, 2003 [3], was legislated to prevent the kanthu vatti aims to regulate money lending practices and protect borrowers from usurious interest rates. However, enforcement of such laws can be quite challenging due to the informal nature of such transactions. The borrowers are also reluctant to report such practices out of fear of retribution. Nevertheless, owing to its poor implementation and the deeply entrenched network of informal lending, the practice prevails.

Role Of Banks In Kanthu Vatti

Formal, fair, accessible financial services can be availed to one and all through banks, hence playing a very important role in abolishing the practice of Kanthu Vatti. Several strategies through which the banks can contribute are enumerated below:

• Easy Availability of Credit:
  • It can, therefore, offer micro-loans and small credit facilities at reasonable interest rates to the people. Particularly, the schemes offering credit catering to the needs of the low-income group of people will wean them away from the clutches of the money lenders who fleece them by charging exorbitant interest rates.
  • Inclusive Banking Initiatives: Banks can implement inclusive banking initiatives such as the Pradhan Mantri Jan Dhan Yojana to ensure access to affordable banking services for unbanked people. This would involve various facilities like an overdraft, which makes available credit even to people with low financial resources.
• Financial Literacy Programs:
  • Education Campaigns: Banks' financial literacy programs on high-interest loan risks and benefits of formal banking can go a long way. This may prove most effective in the rural areas where Kanthu Vatti is more prevalent.
  • NGO and Government Partnerships: Collaborations with NGOs and government agencies for delivery in terms of financial literacy programs may help in scaling up the outreach and impact.
• Digital Banking and Technology:
  • Mobile Banking Solutions: Leveraging the usage potential of mobile technology to extend banking services in remote and rural areas of the country will enable people to easily get access to formal financial services and reduce dependence on informal lenders.
  • Simplified Account Opening Procedures: Offer simple and hassle-free account opening facilities, with digital KYC procedures.
• Regulatory Support and Enforcement:
  • Collaboration with Authorities: Much closer collaboration between banks and the regulatory authorities can be done in getting the laws on high-interest lending practices enforced. Suspect activities can be reported, and legal actions against the exploitative money lenders can be supported to help rein in the practice.
  • Community Banking Models: Community banking models in which banks are well represented at local levels and are attuned to local conditions will give people confidence in their services and reduce the burden of informal lenders.
• Customized Financial Products:
  • Agricultural Loans and Credit: Products in the form of specialized agriculture loans would help meet the demand from the farmers. Such loans often succumb to the money lenders' predatoriness. This may also involve flexible repayment options with crop cycles.
  • Emergency Loans: Products in the form of emergency loans will be designed to meet unexpected expenses like a medical emergency so that at that moment of crisis, they do not fall into the clutches of high-interest lenders.
• Examples:
  • Self-Help Groups: Banks have made some headway in the use of SHGs to advance micro-credit. This approach has been very instrumental in helping ennoble women and rural societies from dependence on informal lenders. SHGs can serve as a medium to advance credit to the needy in place of banks.
  • Microfinance Institutions: The bank-MFIs partnership would help extend credit facilities to the most vulnerable populations through the provision of very small loans at manageable interest rates and with workable conditions of repayment.

Conclusion:
Kanthu Vatti is a deeply rooted practice in a few regions of India, for example, Tamil Nadu, arising from the lack of accessible formal credit. Kanthu Vatti's dependency can be drastically reduced if the financial needs of the unorganized sector are met with an easily accessible and affordable formal credit option, an enhanced level of financial literacy, and strict enforcement of regulations against usury.

More importantly, banks can play a crucial role in eliminating Kanthu Vatti by improving access to formal financial services, enhancing education for financial management, applying technology appropriately, streamlining regulatory frameworks, and introducing suitable products. These interventions would help immensely in watering people, who are presently unorganized, into the folds of mainstream formal finance so that such exploitative lends are avoided. This needs to come through with effort from the government, financial institutions, and civil society.

End Notes:

• National Commission for Enterprises in the Unorganized Sector (NCEUS): Employment in the unorganized sector and contribution to GDP
• National Sample Survey Office: Surveys on household indebtedness and reliance on informal credit.
• Tamil Nadu Prohibition of Charging Exorbitant Interest Act, 2003
• Pradhan Mantri Jan Dhan Yojana: https://pmjdy.gov.in/