New India Manifesto –  Chapter 26: Sociological Lending and Borrowing Model

Introduction

Has lending money to a family member or friend ever affected your personal relationship with the person? Lending and borrowing are more than economics and finance. This model aims to maintain personal relationships intact and utilise necessary aspects of law, economics, finance and technology.

Consider the Following Scenarios

Individuals A and B have been close friends since childhood. Individual B placed a high level of trust in Individual A. Individual A borrowed Rs. 100K from Individual B. Individual A promised to return the money within six months. Unfortunately, due to the financial circumstances of individual A, the money could not be repaid in 6 months. Individual A now suddenly start to ignore the phone calls of Individual B. Individual A tries to evade places where Individual B has the probability of visiting. Individual A may ask for a six-month extension. Since Individual B has limited options and will wait for another six months. However, the strong bond of friendship suddenly starts to sour at this time. Even if money is returned after that period, individual B will lose the intimate friendship with Individual A. The next time Individual A asks for money from Individual B, Individual B will ignore his request.

Individuals C and D are brothers. Individual C is in dire need of Rs. 500K and promises D that he will return the money when the ancestral property is split. Furthermore, when it is split, C promises an additional share to D in the property. However, after two years, when parents decided to split property among two brothers, Individual C did not want to give additional shares to Individual D. The verbal conflict later converted into a court case, and Individual D could not prove that Individual C took money as the transactions were not digital. As a result, the parent’s relationship with their children and the relationship among brothers is affected. All of this happened because individual C did not keep his word.

Individual E and F are neighbours. The son of Individual F is getting married, and to meet the marriage expenses, Individual F borrows Rs. 35k from Individual E. Individual E is a local moneylender who charges high-interest rates. After six months, individual F returns 70k in principal amount and interest. However, E claims that F needs to give an additional 10k as interest. Since E is connected with local politicians and thugs, F gives an extra 10k to F out of fear. To pay this 10k, Individual F will take money from another moneylender, which lands F in a vicious loop.

Individual H meets Individual J through a mutual friend. Individual J proposes a business model to Individual H and promises a particular percentage of returns on investment. Individual H pays the money to J by cash in hand and by account. Later Individual H realises that Individual J is a conman and has conned many people. Individual H loses the money and, due to fear of shame and loss of status in public, H avoid filing a police case.

All these scenarios show how relations are destroyed, and trust is broken when transactions go south.

How moneylending affects the lender?

Depth of the Purse

Depending on the depth of the purse, the lender will be worried about the amount lent. For example, a wealthy person lending a small amount like 5K will not create enormous worries for the lender. However, a poor person lending 5k out of their purse will think about the borrower frequently as the amount is significant for the person. Therefore, it affects the peace of mind of the lender.

Direct Loss of Friendship and Trust

When the amount is not timely repaid or when not repaid at all, the relationship is affected between the concerned parties.

Scrutinise Borrowers’ Life

In case of a delay in repayment, the lender will start scrutinising the borrower. Any action, like a borrower buying a car or property, will be criticised privately and publicly by the lender.

The lender will ask questions like this, “Look, he has money to buy a car. But he does not have money to give me.” The lender develops this mindset and behaviour only due to the situation the lender was put into.

Suspicion Towards Everyone

Suppose an individual T fails to return money to Individual S. In that case, Individual S will start to suspect Individuals U, V, W, and everyone they meet and avoid lending money. It happens even if U, V and W have not committed anything that violates trust towards S.

Loss of Name Inside Family and Friend Circle

The lender’s family relations will be affected. For example, the lender’s spouse may frequently taunt and criticise the lender over this issue.

Increase the Complexity of Problems Between Relationships

A lends money to B. A borrows money from C to lend to B. So A is responsible for paying C due to B. If B fails to pay back money to A, then A must pay C from one’s pocket. Due to financial constraints, A is finding it difficult to pay from pocket. In such a situation, A loses a relationship with B and C due to B not paying back A.

Leading to Life-Changing Decisions and a Chain Reaction

If the money lent was kept for health treatment, the person who lent money may even commit suicide if the borrower does not return the money.

If the lender cannot get back money from the borrower, it may affect the next steps of the lender. For example, it may stop their children’s education and other similar repercussions.

Lender Converting to a Borrower

To cover up the loss created by the borrower who has not returned the money, the lender may become a borrower. It may lead lenders to a moneylender trap.

Psychological Issues

The lender may develop anger, anxiety, depression and other health issues, which the lender cannot recover even if the borrower returns the money.

Entangled in the Legal System

The lender must file a case if the lender has been conned or cannot recover the paid amount. The case will drag the person for many years, and the lender is entangled in the legal system. The lender is likelier to lose the case if there are no transaction records.

How Moneylending Affects the Borrower?

Direct Loss of Friendly Relations

The borrower will lose friendly relations with the lender if the amount is not repaid.

Evade Appearance from Lender

Due to shame generated by the inability to pay back or lack of interest in paying back, the borrower evades the sight of the lender.

Impacted by Gossip, Rumours

The lender will spread negative and false information along with the lending issue about the borrower. As a result, the borrower will be sidelined by many people in society.

Verbal and Physical Threat

The borrower will have to face verbal and physical threats from the lender. The borrower and their family may live in fear till the money is repaid.

Legal Threats

The borrower may already be in dire financial status. In addition, the police case and court expenses will further deteriorate the borrower’s financial position.

Deeper Moneylender Trap

To pay one lender, the borrower may take a loan from another, which will place the borrower into an infinite loop of moneylenders.

Psychological and Health Issues

The inability to pay money may create severe psychological issues such as increased anxiety and may lead to depression.

Life Changing Decisions

Many farmer suicides in India are mainly due to the inability to pay back the money to moneylenders.

Being Judged in Every Action

The borrower, until repaying the amount, is judged for any decision they make. For example, if the borrower’s child wants to pursue a premium course, the lender will criticise such actions. It does enormous emotional damage to the borrower.

Develops a Habit of Cheating People

Some people borrow money and are not interested in returning the money. But, unfortunately, it is a habit for them, and many may have fallen into their traps. If a system makes them accountable, they will have to reform themselves.

Sociological Lending and Borrowing Model

A model for this issue must act beyond economics and encompass various social science aspects. This model should work for both the lender and the borrower. The social harmony between borrower and lender should remain intact, which is this model’s primary purpose. This model should be mandatorily introduced by the government and not voluntarily. If this model is voluntary, then close friends and family members will skip it as they will consider the person who is paying money does not trust them. A guilty feeling is generated inside the lender if they ask the borrower to signup for this technology.

When the government makes borrowing and lending via a technological route the only legal method, then both lender and borrower will have to join compulsorily. But, of course, it also helps borrowers from the clutch of people like “Shylock.” Once this is implemented, the borrower will not be legally obligated to return borrowed money to the lender in case of cash transactions outside this online system without legal documentation.

Implementing Model

Create a website where moneylenders and borrowers can sign up. Categorise the lenders/borrowers into

(A) Friends-family

(B) Moneylending

(C) Investment amount

(D) Business lending and borrowing

“Banking counter movement” should be activated before introducing this. Instead of going to banks, bank officials will go to them to help Z get money from Y. This is required only if a cash transaction is involved. In case the whole transaction is digital, countermovement is not needed. In smaller amounts, EAC centres can be utilised to complete the transaction.

There should be a time limit for every lending process. The time should be agreed upon and accepted by both parties.

(A) Friends-family

Transaction and service taxes should be nil for people who classify as friends-family. Only if both individuals do not lose money will people signup for this. A zero-interest rate rule will be applied for this transfer. The borrower needs to pay back only the borrowed principal amount. There will be zero transaction charges for any lent amount and repaid amount.

Loan recovery should be applicable in case of non-payment by the borrower. There should be an additional 60 waiting days in which no extra amount is charged before initiating personal loan default procedures. After 60 waiting days, the government will automatically mark the amount as loan default in the borrower’s credit report. Property confiscation will not usually be applicable, and the lender can choose the legal method to get back the amount. However, if it is specified initially, property confiscation can be applied.

(B) Moneylending 

In this category, the lender can charge a particular percentage of interest rate that the government allows. Then, when the borrower returns the money, the government can charge 20 per cent of the interest amount received in the transaction as an intermediaries commission.

Assets can be appropriated in case of non-repayment. However, the recovery will only apply to the principal amount, not the interest amount charged.

The borrower should only pay back to the lender via this online platform, and any other means of payment is null and void for A, B and D categories.

(C) Investment Amount

The government can charge a 5% transaction tax from individuals on the total value of the transaction. Individual N, while transferring the amount to Individual M, the government can guarantee to prosecute M in case of any cheating to fulfil the agreed contract. The government will file the lawsuit on behalf of the N and bear the legal expenses in case of a dispute regarding profit sharing or cheating. Investors in small businesses will gain confidence if this is implemented. There is no need for repayment via this website; people can continue transactions outside this system digitally. Free legal support is the benefit of this system for investors.

(D) Business Lending and Borrowing

Many businessmen give products to other businessmen or customers, hoping to get payment in the future. In the same way, during house construction, labourers and short-term contractors do the job in the hope of getting paid. However, after work is completed, some people scam the product provider or work provider. Moreover, some people delay payment, and some never pay the money. As a result, large amounts are written off in India by business people, contractors and labourers.

A limited-terms contract from the available options on the website can be signed via software between individuals or businessmen after delivering goods and services. This will ensure the legal liability of the engaged individuals, who will now become responsible for paying back promptly on the agreed time.

In case of non-repayment in the mentioned time, asset recovery can be initiated against the borrower. The first recovery will be from the bank account balance, and it will change to other assets such as stocks and finally to physical assets such as houses. In the case of smaller amounts below 10,000, only unsecured loan proceedings, such as adding to CIBIL history, will be applicable.

What are the Benefits of Sociological Lending and Borrowing Model?

Lenders and borrowers have legal measures to ensure the transaction is safe, and both parties know what would happen as the process is detailed and is publicly available even before the transaction happens between them.

The friendship and personal relations between individuals will have a higher probability of being intact as government machinery is involved, and the borrower will attempt to ensure repayment. Furthermore, issues like breaking trust and cheating will not arise as the government documents everything from time to amount details. Therefore, this model can limit emotional pain and related social consequences.

People who get conned for specific pyramid schemes can at least be sure their principal amount can be recovered. Also, since there is documentation of investment details, it can be used in court for other claims. Cases related to lending and repayment without proper evidence can be avoided, thereby reducing the load of the judiciary.

There should also be a significant legal change once this model is implemented. All cases filed for cheating in the name of non-repayment of the lent amount made non-digitally or without a legally registered agreement will be discarded. All transactions without a digital or legal document trail hinder formalising the nation. This law is essential to eliminate black money from significant sectors such as real estate and businesses.