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Treatment of Informal Sector

Financial Activities including

Own Money Lenders in the SNA

2

Treatment of activities of money lenders is not clear in 1993 SNA

para 6.134 ... ‘lending own funds in not production’

para 25 (Annex I)... ‘money lenders who make loans from their own resources are also considered producers of financial services provided their services can be measured’

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6.134. Some money lenders lend only their own funds. The activity of such small- scale money lenders, including many village money lenders, is not financial intermediation as they do not channel funds from one group of institutional units to another. Lending as such is not a process of production and the interest received from the lending of own funds cannot be identified with the value of any services produced

...Leads to underestimation of GDP in developing countries, where the money lenders who make loans from their own resources are quite prevalent

4

In most Asian and African countries the size of the informal financial activities is not insignificant It is quite substantial and already underestimated due to non-availability of accurate statistics on them

In India informal financial activity as a percentage of total banking activity is about ten per cent

5

Workforce engaged in financial informal activities basically do the money lending adopting several informal techniques ... pawn shop, chit funds, sahukar, several local names

Many times even employ people to help in organizing the job, keeping records and for realizing back the money lent

Remuneration paid by own money lender to such people ... a component of value added generated

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In such a situation the recommendation at

para 6.134 ... ‘Lending as such is not a process of production and the interest received from the lending of own funds cannot be identified with the value of any services produced’

....seems in-fructuous

7

It is s not just the money lending activity from own / borrowed funds but the associated services that the user of the service (borrower) gets at his site /village at the time when he/she needs

The user pays for the services in the name of interest (along with the hidden huge service charges)

Such activities rarely exist in developed countries

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As per 1993 SNA,

The unincorporated financial intermediaries including informal activities are to be included as formal financial intermediaries (SNA para 6.133 )

But, if the money lender did not formally borrow money, the activity is not a production (SNA para 6.134)

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In developing countries in regard to activities of financial informal sector,

– It is never clear that the money lender did or did not borrow money for pursuing his activity

– It could also be argued that the money lender used money of his relations (of course in the same household)

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To overcome the problem, The options are 1. to consider the activity as financial

intermediary service, or 2. to consider activities of the financial

unorganized (informal) sector as just financial auxiliary service

In option (2) the service charge can be estimated as amount paid by the user minus the actual return to money capital

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Points for consideration of the AEG:

• Do the members of AEG agree that the activities of the own-money lenders be considered as producers of financial auxiliary services?

• Do the members agree that these money lenders be classified as unincorporated enterprises in the household sector?

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Thank You