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April 2014

UNDERGROUND LENDINGSubmerging Emerging Asia?

Apanard (Penny) Prabha and Minoli Ratnatunga

Apanard (Penny) Prabha and Minoli Ratnatunga

April 2014

UNDERGROUND LENDINGSubmerging Emerging Asia?

ACKNOWLEDGMENTSThe authors are grateful to James R. Barth, Chan Heng Wing, Ross DeVol, Laura Deal Lacey, Stephen Lin, and Perry Wong for their helpful comments. Thanks are also due to Wanda Lau for her astute editing.

ABOUT THE MILKEN INSTITUTEA nonprofit, nonpartisan economic think tank, the Milken Institute works to improve lives around the world by advancing innovative economic and policy solutions that create jobs, widen access to capital, and enhance health. We produce rigorous, independent economic research—and maximize its impact by convening global leaders from the worlds of business, finance, government, and philanthropy. By fostering collaboration between the public and private sectors, we transform great ideas into action.

© 2014 Milken InstituteThis work is made available under the terms of the Creative Commons Attribution-NonCommercial-NoDerivs 3.0 Unported License, available at creativecommons.org/licenses/by-nc-nd/3.0/

TABLE OF CONTENTS

INTRODUCTION.................................................................................... 1

WHAT IS UNDERGROUND, OR INFORMAL, LENDING? ........................2

IN EMERGING ASIA, A LACK OF ACCESS TO FORMAL FINANCE.......................................................................... 4

UNDERGROUND LENDING MARKETS IN CHINA, INDIA, AND THAILAND ......................................................................... 6

POLICY APPROACHES AND MAKING PROGRESS ..............................10

CONCLUSION ....................................................................................... 16

ENDNOTES ..........................................................................................18

APPENDIX .......................................................................................... 20

REFERENCES ..................................................................................... 23

ABOUT THE AUTHORS ........................................................................ 25

» The underground lending sector is large in some emerging Asian economies and is often the only source of capital for households with poor credit or that lack credit records.

» Several supply-and-demand factors can make serving underground lending clients costly and challenging for traditional commercial banks.

» The financial costs of borrowing from informal or underground sources are high and can carry social and economic repercussions.

» We offer four market-based approaches to mitigating the negative aspects of underground lending practices.

RESEARCH HIGHLIGHTS

1

INTRODUCTION

This incident, which occurred in Thailand, was one of several cases in emerging Asian countries that resulted partly from a lack of formal financial access. When households and businesses in need of capital are unable to borrow from banks, they turn to private moneylenders, loan sharks or pawnshops—known as informal or underground lenders—which may charge extremely high interest rates and use coercive collection methods. According to one news source, rates charged by loan sharks can run as high as 3 percent per day, or 1,095 percent per year in simple interest.1

Serving poor households and small enterprises can be a high-risk, high-cost business for banks as such borrowers have neither stable income streams nor certain repayment capabilities. In addition, these borrowers usually do not have sufficient collateral and their credit information is absent, increasing the default risk of lending to them for traditional banks. Poverty, especially rural poverty, and growing household demand for credit thus account for a relatively large part of the need for an underground lending sector in many low- and middle-income Asian countries.

While there are no official estimates on the size of underground lending activities, our estimates, drawing upon information from several sources, indicate that the underground lending sector could be as large as 36 percent of GDP in India and 47 percent of GDP in Thailand. When compared with credit provided through the formal banking sector, which is equivalent to 52 percent of GDP for India and 118 percent for Thailand, it is clear that the informal lending sector in both countries is relatively large. For China, the size of the shadow banking sector, which includes underground lending, is estimated to be 46 to 48 percent of GDP in 2012 (Federal Reserve Bank of San Francisco 2013; World Bank 2013).2 China’s underground lending activities are much smaller, however. We estimated it to be 9 percent of the country’s GDP. Credit provided by the formal banking sector in China was 135 percent of GDP as of 2012.

In this study, we discuss several factors that lead to fairly large underground lending markets in selected Asian countries. We assess whether they can potentially disrupt economic development or, on the contrary, benefit the countries by providing access to capital to households and enterprises that do not have access through formal means. In our view, underground lending markets often trap households and entrepreneurs in a cycle of debt with high interest rates and predatory lending practices, leading to social problems and criminal activity. This assessment is based on the collection of information on underground lending activities in selected emerging Asian countries—China, India and Thailand—and a number of news reports. We offer key policy solutions that aim to enhance access to formal funding sources while lessening the negative consequences from informal lending practices.

“Because a woman has missed payments on an informal loan for two days, the loan shark sent in his thugs: Armed with machetes and metal pipes, they raided the woman’s house….”

The Economist, September 19, 2013

2

WHAT IS UNDERGROUND, OR INFORMAL, LENDING?

Households and business enterprises can access credit through one of three channels: formal banking, non-bank entities and underground lenders (Figure 1).

FIGURE

1 Funding channels and institutional providers

Source: Authors.

Funding providers toindividuals and firms

SHADOW BANKING

Informal(underground)

channel

Non-bankchannel

• Stock markets• Bond markets• Hedge funds• Investment firms• Structured investment vehicles • Wealth management products• Trust companies• Securitization

• Money lenders• Loan sharks • Pawnshops• Trade credits• Quick cash• Curbside• Shopkeepers• Friends/relatives

Formalchannel

Traditionalcommercial

banks

Other creditinstitutions

• Credit unions• Credit cooperatives• Microfinance institutions• Rural banks• Self-help groups

FORMAL BANKINGFormal banking refers to the traditional banking activities conducted by commercial banks—deposit-taking and lending. In many developing countries, credit institutions such as credit cooperatives and microfinance institutions also play an important role in providing financial services. Their business is to serve local members and customers, often in remote, rural areas. Loans provided by these credit institutions are usually small and short-term. We place both traditional banks and microcredit institutions within the “formal” category of credit providers because the activities conducted by these entities are generally licensed and supervised by a central regulatory or supervisory authority.

UNDERGROUND LENDING: SUBMERGING EMERGING ASIA?

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NON-BANK FINANCIAL INSTITUTIONSBorrowers can also access credit outside banks, or through the “non-bank” channel (a form of shadow banking). “Non-bank” refers broadly to either non-bank financial institutions or capital markets. In Asian countries such as China and India, credit extension outside of banks is provided largely by non-bank financial institutions. Specifically, about two-thirds of shadow banking credit, estimated to be RMB 31 trillion ($5.1 trillion) in 2013, is extended by non-bank institutions (in the form of trust loans, entrusted loans and informal, small corporate loans) (Goldman Sachs 2013). In countries with more developed capital markets, such as the United States, intermediation services through the non-bank channel are conducted largely by market entities such as hedge funds and brokers. Financial activities such as securitization and structured investment vehicles are included in the list of non-bank or shadow banking activities (Claessens and Ratnovski 2013).3

INFORMAL LENDINGShadow banking also includes informal or underground lending activities. However, they are not commonly thought of or mentioned as shadow banking activities in recent national and international financial regulatory reform efforts, perhaps because they are not widely viewed as likely to create global systemic risks. Nonetheless, in several developing countries, the informal or underground lending sector is an essential part of the financial sector that households and entrepreneurs regularly depend upon to access credit when needed. With a rising cost of living, households may need to borrow to pay for necessities or improve their living conditions. In an uncertain macroeconomic environment, a small business may need to borrow working capital to fulfill its obligations. Some of these borrowers may even prefer to borrow from underground lenders over other sources, as they may find that the loan approval process is much easier. The entities recognized as underground lenders include, for example, private moneylenders, loan sharks and pawnshops (Hong Kong Institute of Certified Public Accountants 2011).

It should be noted that most underground banking operations are not prohibited or illegal. The exception is that for a country with an interest rate ceiling, charging a rate above the limit is prohibited. Also, in China—yet to become a fully free market economy—the legal status of soliciting money from private savers to create investment funds to lend to small and medium-sized firms without government approval is in a gray area. There have been several recent high-profile prosecutions in China for “illegal fundraising,” demonstrating that it can be categorized as serious criminal activity by the central government. 4

4

IN EMERGING ASIA, A LACK OF ACCESS TO FORMAL FINANCE

A large number of people in low- and middle-income Asian economies live in poverty. The poor account for more than half of the population in Bangladesh, India and Pakistan and are roughly one-third of the population in China, Indonesia and the Philippines (Table 1). Since many poor people do not have predictable income streams or collateral assets, they are often excluded from traditional banking services. Yet there is demand from the poor for loans, illustrated by their willingness to pay high interest rates to gain access to capital (see next section).

The demand for credit is increasing in low- and middle-income Asian economies, as demonstrated by rising household debt burdens. In Thailand, the household-debt-to-GDP ratio stood at 77.1 percent of GDP in 2012, an increase from 55.6 percent in 2008 (Standard & Poor’s 2013). Though increasing household-debt-to-GDP levels can be viewed as a sign of the boom in consumption in Asia and probably reflect easier access to bank credit, the startling pace of the buildup of household debt has increasingly become a concern (though the household-debt-to-GDP levels in Asia remain lower than those of many advanced economies such as the U.S. and the U.K.). A recent study by Standard & Poor’s (2013) points out that deterioration in the health of the household sector is one of the main factors that can weigh down credit conditions of banks in some Asian countries (particularly in Malaysia and Thailand). The increase in indebtedness reduces households’ ability to repay loans; therefore, banks may refuse to lend to the poor out of concern over weakening their own credit quality. Small business enterprises in many low- and middle-income countries also lack assets and do not meet the lending criteria set out by banks.

TABLE

1 Selected economic data for low- and middle-income Asian countries (2012)

Note: n.a. = not available.

Sources: World Bank. Household-debt-to-GDP ratios are from Standard & Poor’s (2013).

COUNTRY INCOME LEVEL GDP PER CAPITA

(NOMINAL, $)POVERTY RATE

(% OF POPULATION)†HOUSEHOLD DEBT

(% OF GDP)

Bangladesh Low income 747 77 n.a.

China Upper middle income 6,188 27 30.7

India Lower middle income 1,489 69 8.6

Indonesia Lower middle income 3,557 43 9.7

Pakistan Lower middle income 1,290 60 n.a.

Philippines Lower middle income 2,587 42 5.5

Thailand Upper middle income 5,480 4 77.1

† Poverty rate (or poverty headcount ratio) is the percentage of the population living on $2 a day or less. The reported figures are based on the latest available data.


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Lending to the poor, who typically live in remote areas, incurs high transaction costs and is likely to be unprofitable for banks. Table 2 summarizes demand- and supply-driven factors that explain the lack of access to formal finance. Likewise, these also help explain the increasing reliance on underground lending markets in these Asian countries.5

TABLE

2 Key factors explaining the difficulty in gaining access to formal finance

Source: Authors.

DEMAND-DRIVEN FACTORS SUPPLY-DRIVEN FACTORS

• Borrowers live in a geographically remote area from formal financial institutions.

• No collateral available.• No reliable income stream available.• No credit information available for formal financial institutions

to use to assess risk.

• Loan size is too small to be worth transaction costs.• Loan term is too short to justify transaction costs.• Interest rate caps and other restrictions on formal lenders make

it impossible for high transaction costs to be recouped.

The evidence of a lack of access to formal finance in low- and middle-income Asian countries can be illustrated even further. In Figure 2, the two selected measures of financial outreach—the number of commercial bank branches and ATMs per 100,000 adults—indicate that the financial infrastructure serving a large part of the population in many Asian countries is less developed than the world average and lags significantly behind that of advanced countries.

Commercial bank branches per 100,000 adults ATMs per 100,000 adults

8

5 511

19

36 3843

84

135

8 89 10

11 12

19

35

0

10

20

30

40

G-7

World

Thailan

dIndia

Indonesia

Pakist

an

Philippines

Banglad

eshChina

0

150

30

60

90

120

G-7

Thailan

dWorld

China

Indonesia

Philippines

India

Pakist

an

Banglad

esh

FIGURE

2 Financial outreach in selected low- and middle-income Asian countries (2012)

Note: Data for the world averages are based on 176 countries (left) and 166 countries (right).

Sources: International Monetary Fund Financial Access Survey, Milken Institute.

6

UNDERGROUND LENDING MARKETS IN CHINA, INDIA, AND THAILAND

OBTAINING STATISTICS ON UNDERGROUND LENDING ACTIVITIESUnderground lending activities may impede a country’s economic development if a large part of its population relies on private lenders who charge extremely high interest rates and use coercion to collect repayments; these practices lead to incrementally larger household debt and massive social disruption. To assess whether this is indeed the case, we need an estimate of the size of underground lending markets, interest rates charged on loans and other related data. Immediate and long-term policy solutions can therefore be identified based on an assessment of the seriousness of the problem.

Unfortunately, there are no official statistics on underground lending activities. This is simply because the nature of the activities is informal, and loan size and loan terms are determined through private mutual agreements between borrowers and lenders. To obtain estimates for underground lending transactions, we used the following strategy.

First, we searched LexisNexis Academic, a database of news stories from newspapers, magazines and other publications worldwide. The local news occasionally reported underground lending activities based on, for example, interviews with local stores, loan sharks’ customers and local law enforcement. Some publications also reported findings based on survey studies. We used the following search terms: “underground or informal” with “lenders or banks or banking or finance or financing or lending market or loan shark” in news sources over the previous five years. We focused on three countries: China, India and Thailand. This search strategy yielded 769 articles for China, 129 articles for India and 112 articles for Thailand.

Next, we narrowed down the search by including only articles with content directly related to underground lending. Specifically, each article must report some statistics on underground lending activities and/or have recent information on the issue, policy actions taken or policy recommendations. We ended up with 40 articles each for China and Thailand and 20 articles for India (a list of these news articles is in the Appendix). The range of estimates on the size and interest rates in underground lending activities reported below is drawn from the information in these articles.


7

SIZE OF UNDERGROUND LENDING MARKETS Estimates from our news search suggest that the size of underground lending activities is about 7 percent of the total credit in China, 50 to 70 percent in India and 40 percent in Thailand. For comparison, we converted these figures to the proportion of underground lending activities in each country relative to that country’s GDP (see Table 3). The data for credit provided by the formal banking sector are reported as well.

We find that the size of the underground lending markets (relative to GDP) is larger in India and Thailand than in China, and is relatively large compared with those countries’ formal banking sectors. In India, the underground lending sector is very large when compared with the formal sector (26 to 36 percent of GDP for the underground sector vs. 52 percent of GDP for the formal sector). In Thailand, credit extension in the underground lending sector is estimated to be about one-third that of the formal banking sector (47 percent of GDP for the underground sector vs. 118 percent of GDP for the formal sector).

For China, while the size of underground banking is relatively small when compared with the size of the country (about 9 percent of GDP), the overall size of shadow banking activities is much larger. Total shadow banking assets in China are estimated to be 46 to 48 percent of China’s GDP. This can be considered large when compared with the total credit provided by the formal banking sector, which is equivalent to 135 percent of GDP in China. As noted earlier, the recent growth of shadow banking in China has been driven by the growth of non-banking financial institutions. Informal or underground lending activities according to our definition (see Figure 1) are much smaller.

Source: Figures for private credit provided by banks and percent of GDP are from International Financial Statistics, IMF.

UNDERGROUND LENDING (% OF TOTAL CREDIT)†

SIZE OF UNDERGROUND LENDING PRIVATE CREDIT BY BANKS

$ BILLIONS % OF GDP $ BILLIONS % OF GDP

China 7% of total credit 780 9†† 11,145 135

India 50% of total credit(70% in rural areas)

471 26-36 942 52

Thailand 40% of total credit 172 47 430 118

† Information for China is from “China’s entrepreneurs brace for credit crunch,” Associated Press, August 28, 2013; for India from “In villages, credit is still all about moneylenders,” Economic Times, May 13, 2013, and “Saradha fraud: Blame the RBI for the repressed formal financial sector,” Economic Times, April 26, 2013; and for Thailand from “Farmers’ debt rises despite govt aid,” The Nation, August 17, 2012.

†† Underground lending is part of shadow banking activities. In China, the size of shadow banking is estimated to be about 46 to 48 percent of GDP.

TABLE

3 Estimates of the size of underground lending (2012)

8

UNDERGROUND LENDING MARKETS IN CHINA, INDIA, AND THAILAND

INTEREST RATES CHARGED ON UNDERGROUND LOANS One common characteristic of underground lenders’ businesses is that they charge extraordinarily high interest rates. Table 4 shows the range of interest rates charged in the underground lending markets in China, India and Thailand. Interest rates unofficially reported in news sources are typically quoted on a monthly basis, as private lenders grant small, shorter-term loans. According to our selected news sources, the interest rates charged on underground loans are much higher in Thailand than in China and India, with one article citing interest rates charged by loan sharks in Thailand to be as high as 3 percent per day, or 1,095 percent per year in simple interest. For China and India, the underground lending interest rates are as high as 180 percent per year.

Several factors of growth in the underground lending markets mentioned earlier can also explain why the interest rates charged are so high. Borrowers usually have little wealth. Lending to this group of borrowers requires high administration costs to secure repayment. In addition, since the loan amounts are small, high enough interest rates must be charged to cover fixed overhead costs. An incrementally high interest rate may also be the result of a vicious cycle—when interest payments are very high, borrowers are more likely to default on loans, leading to increasing rates of default. Lenders then have to push interest rates up further to compensate for potential losses. These factors, and borrowers’ lack of access to formal finance sources, allow informal lenders to charge high interest rates without experiencing pressures to drive down their rates from competition from the traditional banking or microfinance sectors.

Note: See Appendix for the full references of news sources.

Source: Compiled by authors based on news search through the LexisNexis Academic database.

TABLE

4 Interest rates charged in borrowing underground

BORROWERS FROM UNDERGROUND LENDERS WILL PAY INTEREST RATES OF:

China 60%-180% per year

India 24%-180% per year

Thailand 60%-1,095% per year

NEWS SOURCES INTEREST RATE CHARGED (AS CITED)

China Associated Press 6/28/13 Up to 70% per year

Shenzhen Daily 11/26/12 Up to 100% per year

EJ Insight 1/21/13 About 10% per month

New York Times 8/16/13 Up to 125% per year

Financial Times 7/21/11 6%-15% per month

India Free Press Journal 5/20/13 24%-60% per year

ASSOCHAM Studies 1/31/12 >36% per year

Financial Express 2/15/11 Average 48% per year

Economic Times 8/6/10 Average 57% per year

Mint, New Delhi 1/18/11 15% per month

Thailand The Nation 12/2/09 5%-15% per month

The Banker 12/1/12 5%-20% per month

Bangkok Post 5/17/10 30%-40% per month

Bangkok Post 7/6/10 40%-50% per month

Bangkok Post 12/18/12 3% per day (1,095% per year)


9

SOCIAL AND ECONOMIC IMPACTSPolicymakers’ concern over underground lending and lack of access to formal finance stems from their effects on households, the economy and society. It is true that underground lenders sometimes fill a genuine need for access to capital among their business clients and can help households invest in the future (for example, by funding education for children or purchasing seeds and fertilizer) or deal with an unexpected expense. However, underground lenders’ collection methods, high interest rates and limited screening of clients may leave borrowers unable to repay their loans.

Indebtedness to moneylenders and loan sharks has been cited as a major contributing factor to suicides among farmers in India,6 who, facing a poor harvest after a failed monsoon, are unable to pay back the high-interest loans they took out to cover upfront costs. In Wenzhou—known as the heart of the underground banking industry in Zhejiang province in China—several entrepreneurs committed suicide or were “disappeared” after defaulting on loans. According to one article, within a four-month period in late 2011 there were more than 80 suicides or bankruptcies by indebted businessmen.7 In Thailand, the violence meted out by loan sharks after a borrower’s repayments fell two days behind was captured on video and became national news, sparking several investigations.8

The need for access to capital is supported by studies that find the lack of access to credit and financial outreach to be an obstacle to economic growth and development. For example, using a sample of 162 countries, Honohan (2008) finds a strong relationship between poverty and the lack of financial access. Beck and Demirgüç-Kunt (2006) identify lack of access to credit as one of the major constraints for entrepreneurial activities in developing countries. That informal finance is second best is shown by Ayyagari, Demirgüç-Kunt and Maksimovic (2010), who provide additional analysis by distinguishing the impacts on economic growth between formal and informal finance using firm-specific data in China. They find that formal finance plays a greater role in enhancing productivity and economic growth than does informal finance.

10

POLICY APPROACHES AND MAKING PROGRESS

In an attempt to address the economic and social challenges posed by underground lending, regulators and elected officials in low- and middle-income Asian countries have implemented or proposed a number of policies. We review policies that have been undertaken in three selected Asian countries, and offer broad policy recommendations aimed at addressing the negative aspects of underground lending (e.g., increasing access to formal finance, lowering the cost of serving target populations, and increasing transparency and competition to drive down interest rates to market rates). It should be noted that these recommended approaches—both the market economy approach and regulatory and legal approaches—are intended to be a framework that can address the fundamental issue of lack of access to formal finance. The extent of the problem, the role of government and the range of sophistication in the financial systems vary across Asian economies, and country-specific solutions require further research.

Nonetheless, we further demonstrate that these policies have encountered varying levels of success. Some of them have had unintended consequences and could lead to the persistence of informal finance. For instance, some proposals aimed at formalizing underground lending entities may increase the amount of oversight and bureaucracy involved in serving target markets, consequently raising rather than lowering the cost for formal providers to make loans because of the increased administrative burden. Under interest rate caps, lending to customers who live in remote areas becomes an unprofitable business for banks. As a result, formal lending institutions may cut back their loans, and underserved borrowers will have to continue to rely on the underground lending markets.9

We focus on market economy approaches to addressing informal lending, which aim to attract formal lending institutions to the market so that low-income customers can borrow conveniently and not have to turn to loan sharks and other underground lenders.

1. Increase Access to Formal Funding Sources

Asian countries have pursued several approaches and programs that allow easier access to formal funding sources, in particular for low-income earners. Expanding microcredit institutions has been a prominent solution in recent years. Other approaches include promoting the use of electronic and mobile banking and encouraging commercial banks to design new lending products and programs to support the poor.

1.1 Microfinancing through Microcredit Institutions

Microcredit institutions make small loans to individual entrepreneurs, or to groups of individuals whereby the group as a whole is responsible for the repayment of loans taken out by its members (introducing social pressures and support to avoid defaults). In many cases, the loan sizes and target populations overlap with those of informal lenders (i.e., the poor and rural populations).


11

Microcredit institutions have missions that include empowering women, facilitating entrepreneurship, alleviating poverty, improving education and economic growth and expanding access to credit. They usually charge higher interest rates than do traditional commercial banks due to their higher operating costs and risks of lending. Granting many small loans, particularly to the borrowers who live in remote locations, incurs high transaction costs, while repayments are often made more frequently than at commercial banks.10 An interest rate risk premium is also charged because borrowers may not have a steady income stream and loans are often made without collateral. At well-governed institutions, these rates are still lower than those offered by moneylenders and loans do not come with the risk of incurring criminal intimidation if payments are late (see Figure 3 for comparison of interest rates charged and loan size of formal and informal lending institutions).

FIGURE

3 Interest rates vs. loan size of formal and informal lending institutions

Note: Formal lending institutions are marked in blue. Informal or underground lending institutions are marked in orange. The difference in interest rates charged by and loan size of each type of institution is based on the cost of administering the loan, the estimated risk of default, the capital available, contract enforcement options, competition from other sources and the shared social capital between borrower and lender. The latter can lead to zero-interest-rate and small loans between family members, for example.

Source: Authors.

Moneylenders/Loan sharks

Pawnshops

Trade credit

Microcredit

Interest rate ceiling affects only formal sources (in blue)

Credit unions Traditionalcommercialbanks

Friends and relatives

Size of loan

Inte

rest

rat

e

There are several remarkable cases frequently cited as examples of how the development of microfinancing has brought broad access to credit to the poor who previously could borrow only from loan sharks (e.g., the cases of BRAC [Building Resources Across Communities] and Grameen Bank in Bangladesh).11 Although the rapid worldwide expansion of microcredit institutions points to a growing interest in the model, given its broad set of goals, it is unsurprising that it falls short of achieving every one of them.12 In a randomized controlled trial conducted in Hyderabad, India, Banerjee et al. (2013) show that the activities of the microfinance institution Spandana led to some substitution of moneylender debt with loans from microfinance institutions. However, the overall adoption of microfinance loans was low and was not shown to have a significant effect on the number of entrepreneurs in the areas studied.

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1.2 Microfinancing through Other Lending Programs

Policymakers in Asia have tried several other ways to increase access to formal finance, striking different balances between the mission to broaden the pool of loan recipients and the desire for sustainable lending programs. “Rural lending programs” are an example of strategies that target rural populations that have traditionally lacked access to formal finance. The programs can be implemented either by traditional formal banks or through microfinance institutions, and they often receive support from, or are financed by, governments.

In India, regional rural banks have targeted 60 percent of their lending to borrowers from the priority sector such as agriculture, education and housing.13 They make microcredit loans, which come with additional regulatory restrictions regarding interest penalties and fees charged, as well as small-enterprise loans. Different categories of loans have different target turnaround times between the submission of a complete application and the disbursement of funds. However, even the two-week lag14 for the smallest loans (Rs. 25,000 and less) compares unfavorably to the wait for loans from moneylenders, who can often make loans immediately.

In Thailand, the Village and Urban Revolving Fund is financed by the central government and aims to improve access to credit in rural and poor areas. The broad reach of the program limits competition from other lenders, and there have been concerns that people are borrowing from loan sharks in order to stay on top of their loan payments and maintain their participation in the program without social sanctions.15, 16

2. Increase Competition by Reducing Government Intervention

Several low- and middle-income Asian countries still have relatively repressed banking systems—with credit allocation controls and interest rate controls—when compared with the developed world. With the controls, the public sector, large firms, favored industries and established clients tend to receive credit at favorable terms and with a lower rate of interest, while small-scale investors have to obtain funds in relatively expensive informal credit markets. Several scholars point out the negative consequences of financial repression, including discouraged savings and misallocation of credit (e.g., McKinnon 1973) and increased instability of the financial systems (Angkinand et al. 2010). In other words, economic and financial benefits can result from relaxing financial controls and increasing market competition.

2.1 Competition through Reduced Restrictions on Credit Controls

Credit controls refer to a policy that requires lenders (usually state-owned banks) to grant loans to borrowers based on imposed quotas. The purpose is to allocate funds primarily to achieve broader economic, social and sometimes political goals. However, this policy can lead to formal lenders’ carrying large proportions of non-performing loans, since loans are granted according to quotas instead of lending criteria (such as proof of income and credit history). Policy lending by the Chinese Rural Community Cooperatives faced such problems before the reforms of the last decade.17 In general, these programs cannot be maintained in the long term because they represent a continuous drain on resources due to unpaid loans and do not yield the desired economic outcomes because there is insufficient vetting of prospective borrowers.

The Reserve Bank of India has set guidelines for lending to a “priority sector” by banks and put requirements in place for foreign18 and domestic banks to lend to underserved populations. The “priority sector” includes agriculture, micro and small enterprises, education, housing, export credit and “other.”19 The “other” category covers loans to low-income households without specified requirements regarding the use of the loan, along with loans to “distressed persons” that would allow them to prepay their debt to non-institutional informal lenders. For non-microfinance institutions, the “all-inclusive interest rate” for borrowers is capped at “the base rate of the investing bank plus eight percent per annum.”


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Since lending practices that are focused purely on return limit access for underserved populations, some mission-related considerations are valuable. Finding the right balance between mission and return requires good oversight and clear motives.

2.2 Competition through Reduced Restrictions on Interest Rate Controls

Interest rate controls or ceilings aim to limit the cost of borrowing. Lending institutions are required to charge lower interest rates, or rates below a government-imposed interest rate cap, which is usually set below a market rate. By charging required low rates, lenders may find that granting risky, small loans—to those clients who are expensive to serve—is unprofitable, and may decide to cut lending. Consequently, this policy can result in reduced competition in the microfinancing markets and may allow moneylenders in the informal sector to heighten interest rates further (because interest rate ceilings are binding only to lenders that operate within the banking law; those are marked in blue in Figure 3). In addition, the policy may also reduce price transparency as lenders switch from interest rates to fees to recoup costs. The limit on interest rates also lowers the interest rates on deposits that depository institutions can offer, and is likely to force depositors and creditors of those institutions to search for more profitable investment alternatives, creating a more speculative investment environment within a country.

In sum, interest rate controls, though aimed at curbing high borrowing costs, particularly those faced by borrowers in the informal lending sector, do not help address the problem as intended. Rather, such a policy leads to the reduction in the availability of funds offered by formal lending institutions to rural or poor clients. Borrowers therefore have to turn to underground lenders. This conclusion is based on evidence of significantly different interest rates charged by formal lending institutions and underground lenders. In Thailand, for example, by law the annual maximum interest rates charged cannot exceed 15 percent for general loans, 20 percent for credit card loans (up to 15 percent and fees equal to an additional 5 percent) and 28 percent for personal loans (up to 15 percent and service charge to 13 percent).20 The annual interest rates charged on underground loans range from 60 percent to 1,095 percent.

The evidence of the unintended consequences of government controls on interest rates and credit allocations can also be illustrated by the difficulty for small and medium-sized enterprises (SMEs) in accessing formal credit. In China, only 10 percent of SMEs have access to formal bank loans. This means that the rest of the SMEs have to seek out loans from informal lenders or other credit channels, where funding costs and therefore default risk are much higher. Such a situation can have an adverse impact on the overall economy. Small and medium-sized enterprises account for 80 percent of the total number of jobs in China and 60 percent of China’s GDP (Figure 4).

14


0

20

40

60

80

100

Percent

Access to bank loansProportion of employeesProportion of enterprises GDP

10

90

20

80

40

60

99

1

Small and medium-sized enterprises Large enterprises

FIGURE

4 Comparison between SMEs and large enterprises in China

Sources: “China’s soft landing at risk as SMEs struggle for loans,” Straits Times (Singapore), July 27, 2013; “Growth of Chinese SME loans outpaces credit to large firms: central bank,” Xinhuanet.com, February 5, 2011; and letter by Li Zibin, president of the China Association of Small and Medium Enterprises, June 17, 2013.

3. Improve Availability of Financial Records to Lower the Cost of Serving Target Populations

Making reliable credit information available can help lower the risk in lending to populations traditionally underserved by formal lending. These data on repayment histories, unpaid debts or outstanding credit can be collected and made available to formal lending institutions by public credit registries and private credit bureaus. According to the World Bank’s Doing Business project, the percentage of the adult population covered by public and private credit agencies in several Asian countries is limited, compared with near-universal coverage in the United States (see Figure 5).

More basic information about borrowers can also help lower their risk profile. Improving the availability of records—for example, by computerizing the storage of and access to land records—was one of the measures identified by the Indian Ministry of Agriculture’s Task Force on Credit Related Issues of Farmers report as a means to improve rural access to credit through formal channels.21 In the absence of access to reliable land records, farmers are unable to prove their ownership of land and have difficulty using it as collateral when applying for a formal loan.

FIGURE

5 Percentage of adults covered by public and private credit agencies (2012)

100

000000

2836

157

29

44

9

26

01

Public credit registry coverage Private credit bureau coverage

0

25

50

75

100Percent

USAWorldThailandPhilippinesPakistanIndiaIndonesiaChinaBangladesh

Source: Doing Business project of the World Bank Group.


15

4. Increase Transparency and Competition among Providers

Instead of requiring formal and microfinance lenders to levy lower interest rates by fiat, policymakers can use increased competition to motivate the market to find opportunities to lower costs through improved efficiencies and innovative services. Improved transparency on the cost of loans is necessary to facilitate a competitive market by enabling customers to compare different loans and make informed choices of provider.22 Obtuse reporting of rates and fees makes this difficult. By requiring lenders to report the total cost of a loan to potential borrowers in an open, consistent and easy-to-understand manner, regulators can help address this challenge and create a more competitive market. Such disclosure may also reduce the delinquency rate, as people can more easily understand the cost of a loan and weigh the benefits they expect through their intended use of the loan against this cost when making a borrowing decision. Transparency is of particular importance in microfinance. A study in India showed that a large proportion (87 percent) of microfinance customers did not know the interest rates they were paying on their loans, compared with 15 percent of formal bank loan customers (Shukla, Ghosh and Sharma 2011).

5. Regulatory and Legal Approaches

In addition to such general, market-based approaches, emerging economies in Asia have implemented regulatory and legal policies to address the challenges presented by informal lending.

5.1 Formalizing the Informal Lending Market

In India, moneylenders are required to register based on each state’s regulation of moneylending, a responsibility the states hold according to the Indian Constitution.23 Registering is intended to give moneylenders and their customers access to legal recourse when agreements are broken. Stringent enforcement of moneylender registration, with sanctions for failing to register, twinned with enhanced access to the legal system to recover delinquent loans could reduce some of the more extreme social and criminal effects of informal borrowing. Sanctions for operating a moneylending business without registering vary depending on the state, from low fines to up to three years of imprisonment.24

In China, the Wenzhou Index was launched in December 2012 to increase transparency around the private capital market and make it easier to compare and monitor the interest rates charged on informal loans registered with the Wenzhou financing service centers.25

5.2 Legal Solutions

In Thailand, in response to concerns about violence and intimidation from moneylenders, the Thai Central Investigation Bureau set up a center for cracking down on informal lenders.26 This signals a shift in perception of informal lending as petty crime in view of the long-term effects on economies and communities.

16

CONCLUSION

Credit is one of the important economic services for poor households to overcome poverty and for entrepreneurs to grow their businesses, in turn contributing to a country’s economic growth and development. The credit may be provided either by formal banking institutions or by informal or underground funding sources. However, because of various factors and circumstances in serving these groups of customers, the formal banking institutions have fallen short in providing financial services to them, forcing the poor and small enterprises to borrow from loan sharks and other underground lenders and pay extremely high interest rates.

In this study we examined underground lending markets and discussed the social and economic impacts on selected emerging Asian countries—China, India and Thailand. We also illustrated that on various occasions, governments have tried to provide financial access to the poor by implementing different measures, though some policies may instead cause an increase in underground lending activities, partly because of mounting administrative burdens and heightened costs of lending for traditional banking institutions.

Our analysis and recommendations were drawn upon our compilation of data on underground lending activities. We also discussed the economic consequences of reliance on borrowing underground; the main concerns, we believe, are social risks and impacts. Since underground lending activities are usually conducted among a small group of borrowers and lenders, the systemic economic and financial risks from the failure of the sector are unlikely to be sizable. However, without policy actions to limit underground lending markets, the negative social impacts on individuals could potentially cause political unrest, which may in turn trigger economic and financial problems.

We offer a specific list of market economy approaches, highlighted below, as well as legal and regulatory approaches. Of course, there are other policy dimensions that can help lessen negative consequences of underground lending. These include economic development approaches, which involve social policies such as addressing the rising cost of living, indebtedness and income gaps. Providing education to the public on such matters as loan contracts is also essential.

» Increase access to formal funding sources, including microcredit institutions charging interest rates that make continued operation sustainable—balancing mission and return.

» Reduce restrictions on interest rate controls to make cost recovery on smaller, unsecured, shorter-term or higher-risk loans possible for formal lenders, increasing competition for informal or underground lenders.

» Improve the availability of financial records to lower the cost to formal banking institutions of serving target populations. For example, make land records available electronically so that ownership can more easily be proved when borrowers seek to use land as collateral.

» Increase transparency and competition among formal loan providers by standardizing the advertised total cost of loans to allow for easier comparisons of providers and highlighting the gulf between formal rates and those offered by informal lenders.

MARKET-BASED POLICY RECOMMENDATIONS

18

ENDNOTES

1. “Debt & Poverty: Trapped by loan sharks,” Bangkok Post, December 19, 2012.

2. The Federal Reserve Bank of San Francisco (2013) and the World Bank (2013) refer to the estimates of the size of China’s shadow banking system from a wide range of studies conducted by Citi Research, JPMorgan Chase, Hua Tai Securities and others. The 46-to-48-percent-of-GDP figure is the median of the estimates reported in these two studies.

3. It should be noted that the non-bank banks or shadow banks have grown rapidly over the past few decades worldwide. According to the Financial Stability Board, the total assets of global shadow banks grew 173 percent between 2002 and 2012. As of 2012, global shadow banking assets were $71.2 trillion. (Global commercial banking assets were $136 trillion.)

4. See Tsai (2004) for legal requirements for underground entities for China and India. For an example of recent prosecutions for illegal fundraising in China, see “Investor Scheme Leads to Death Sentence,” Wall Street Journal, May 17, 2013.

5. As noted earlier, some observers suggest that borrowing from private moneylenders can be a matter of preference. Individuals or small enterprises may prefer to borrow there because loans are available quickly with minimal or no paperwork and are available locally.

6. See, for example, “Harassed by moneylender, farmer commits suicide” in the Hindustan Times on May 2, 2013, accessed at http://www.hindustantimes.com/india-news/bhopal/harassed-by-moneylender-farmer-commits-suicide/article1-1053720.aspx, and “Maharashtra government admits to rising farm suicides” in The Hindu of July 29, 2013, accessed at http://www.thehindu.com/todays-paper/tp-national/maharashtra-government-admits-to-rising-farm-suicides/article4965002.ece

7. “Financial system rules for U.S. investors in China; Committee: Senate U.S.-China Economic and Security Review Commission.” CQ Congressional Testimony, March 7, 2013.

8. http://www.nationmultimedia.com/national/Loan-sharks-attack-home-of-debtor-over-failed-paym-30213803.html

9. In addition, Tsai (2004) points out that formal and informal finance are imperfect substitutes. In some communities, the scale of informal finance actually increases regardless of efforts to limit informal finance activities.

10. See Helms and Reille (2004), who discuss the role of microfinance and the issue of high interest rates based on evidence from several developing and transition economies.


19

11. https://www.smu.edu.sg/perspectives/2012/06/26/tale-two-ngos-bangladeshs-grameen-bank-and-brac

12. See also Karlan and Appel (2011).

13. Reserve Bank of India (2013a).

14. Ibid.

15. http://www.thaigov.go.th/en/news-room/item/78871-government-to-promote-sustainable-strength-of-villages-and-communities.html

16. http://www.economist.com/blogs/schumpeter/2013/01/microfinance-thailand

17. Federal Reserve Bank of San Francisco (2010).

18. http://www.nytimes.com/2013/11/07/business/india-gives-foreign-banks-a-new-door-into-local-market.html

19. Reserve Bank of India (2013b).

20. http://www.bot.or.th/Thai/FinancialInstitutions/PopularConner/Fraudalert/Documents/beware.pdf (in Thai).

21. Sarangi, U. C. (2010).

22. See Helms and Reille (2004).

23. Gupta (2007).

24. Ibid.

25. Several centers were announced, focused on private lending, SMEs, auction trading, private capital management and overseas investment.

26. Ngamkham, Wassayos. “Police target predatory lenders,” Bangkok Post, July 23, 2012.

20

APPENDIX

Selected articles on underground lending in China, India, and Thailand

DATE SOURCE ARTICLE

China

1 December 29, 2013 Wall Street Journal "Loan Sharks Smell Blood in China Waters."

2 September 2, 2013 Xinhua General News Service "Xinhua Insight: Private lending market highlights China's household finance dilemma.”

3 August 27, 2013 Marketwired "China Commercial Credit Issues Outlook for Coming Year; Projects 'Improved Revenue and Profit Growth.’ "

4 August 20, 2013 South China Morning Post "Credit flood down the drain; Five years after Beijing's launch of a huge loans package amid the global financial crisis, there are mountains of bad debt that may never be repaid."

5 August 19, 2013 Business Mirror "Teamaker's woe signals fund deficit for China's entrepreneurs."

6 August 19, 2013 South China Morning Post "Wenzhou private lending reforms fail; Borrowing costs high despite Beijing move to legalise underground banks."

7 August 16, 2013 New York Times "Easy Credit Dries Up, Choking Growth in China."

8 July 27, 2013 Straits Times (Singapore) "China's soft landing at risk as SMEs struggle for loans; They provide 80% of new jobs but are seen as a credit risk by banks."

9 July 19, 2013 The Economist "Two cheers for reform."

10 July 18, 2013 EJ Insight "Is China losing monetary control?"

11 July 10, 2013 National Post's Financial Post & FP Investing (Canada)

"Confessions of a shadow banker; Artificially low interest rates, not off-the-grid lenders, are the problem in China."

12 July 1, 2013 South China Morning Post "A shadow banker's tale; Joe Zhang reckons there is too much focus on asset quality of the mainland's informal banking sector which, he says, helps small businesses."

13 June 28, 2013 Associated Press "China's entrepreneurs brace for credit crunch."

14 June 27, 2013 Australian Financial Review Maximilian Walsh: "It's the credit squeeze that China had to have."

15 June 24, 2013 New York Times "Shadow Banking at Fault in China, State News Says."

16 May 20, 2013 Associated Press "China sentences underground bank operator to death."

17 May 20, 2013 New York Times “On China's Border, Underground Banking Flourishes.”

18 May 16, 2013 Radio Free Asia "Death Sentence for Zhejiang Woman Who Played Markets."

19 May 14, 2013 South China Morning Post "Shadow banking expansion to brake; Underground lending on mainland to remain crucial despite slower growth, says Moody's."

20 May 13, 2013 South China Morning Post “ ‘Shadow banking’ extends to HK firms; Mainland bosses unable to secure loans from banks at home turn to Hong Kong brokers, agree to pay high rates of interest.”

21 April 29, 2013 Bangkok Post "China hands down death sentences in finance crackdown."

22 April 16, 2013 EJ Insight "Policy Watch: Wenzhou financial reform to curb illegal lending."

23 April 7, 2013 South China Morning Post “Small enterprises ‘are lacking financial support.’ “

24 March 14, 2013 China Daily European Ed. "Wenzhou mayor seeks central govt help for reforms."

25 March 7, 2013 CQ Congressional Testimony "Financial system rules for U.S. investors in China; Committee: Senate U.S.-China Economic and Security Review Commission."

26 March 6, 2013 South China Morning Post "Focus falls on shadow banking; For the first time, premier highlights the dangers of default in unregulated financial sector."

27 February 28, 2013 South China Morning Post "Interest rate liberalisation the focus of bankers at NPC; Recent steps suggest it won't be too long before PBOC lets market set loan and savings rates."

28 February 5, 2013 Irish Times "Developers turn to shadow banks as Chinese property market slows."

29 January 29, 2013 South China Morning Post "Beijing urged to take quick action on shadow banking; Analysts warn in wake of Huaxia scandal of the threat to country's financial stability from underground lending."


21

DATE SOURCE ARTICLE

30 January 21, 2013 EJ Insight "Focus: Growth of social financing to outpace new loans."

31 January 4, 2013 Straits Times (Singapore) “ ‘Shadow banking’ risks loom in China; Spike in defaults on risky investment products may hit economic stability.”

32 December 12, 2012 Asiamoney "China's interest rate liberalisation needs to happen before reforms."

33 December 4, 2012 Business Spectator "Storm clouds descend on China's shadow banking."

34 November 26, 2012 Shenzhen Daily "Wenzhou unveils credit reform plans."

35 October 10, 2012 Morning Whistle "IMF Warns of China’s Shadow Banking.”

36 July 25, 2012 Business Insider "Bad Loans In Wenzhou Surge to 10-Year High."

37 May 26, 2012 The Economist “Shades of grey: Wenzhou’s shadow banking system has taken a knock.”

38 October 14, 2011 Los Angeles Times “Shaky underground banking system raises fears in China.”

39 July 21, 2011 Financial Times “Underground banks squeeze business.”

40 December 28, 2010 China Daily “Banking goes underground on tightening.”

India

1 June 22, 2013 Times of India "Poor still depend on SHGs and moneylenders, claims CSES study."

2 May 20, 2013 Free Press Journal "Monetary policy: Common man's perspective."

3 May 16, 2013 Economic Times "In villages, credit is still all about moneylenders."

4 April 26, 2013 Economic Times "Saradha fraud: Blame the RBI for the repressed formal financial sector."

5 April 24, 2013 Economic Times “Ponzi schemes show failure of formal banking."

6 December 5, 2012 Assam Tribune "Rural finance: a critical review." (India)

7 May 5, 2012 Economic & Political Weekly

"Assessing the Role of Government-led Microcredit."

8 January 31, 2012 ASSOCHAM Studies and Surveys

"Financial Markets: Time for Next Generation Reforms: Conclusion."

9 November 3, 2011 New Indian Express "Managing the money market."

10 October 21, 2011 Mint, New Delhi "An incomplete story from the micro finance world."

11 July 26, 2011 Microfinance Focus "The Microfinance Crisis: The Developpement International Desjardins Point of View."

12 March 22, 2011 Economic Times "Stunted Banking."

13 February 15, 2011 Financial Express "Don't malign the MFIs."

14 January 18, 2011 Mint, New Delhi "Moneylenders push up interest rates in Andhra Pradesh."

15 January 2, 2011 Indian Express "So much they don't know."

16 November 2, 2010 Mint, New Delhi "Big concerns over small loans."

17 September 11, 2010 Economic Times "Farm credit surges, so does moneylenders' hegemony."

18 August 4, 2010 Economic Times "Go beyond theory for lending right."

19 August 6, 2010 Financial Express "A fundamental problem."

20 March 26, 2010 Financial Daily "Extending financial outreach in rural areas."

Thailand

1 September 10, 2013 Bangkok Post “Microfinance rate may top 28%; Lender licensing to stamp out loan sharks.”

2 September 19, 2013 The Economist “Rural debt in Thailand: Turning the tide.”

3 August 13, 2013 The Nation “Loan sharks attack home of debtor over failed payments.”

4 June 27, 2013 Thai News Service "Thailand: UTCC survey finds workers' debt burden at highest level."

5 February 1, 2013 The Nation "One year on, CFG Services slows lending to fresh-market vendors."

6 January 12, 2013 The Nation "Improved access to credit urged.”

7 December 21, 2012 Bangkok Post "BoT takes more personal approach in development."

8 December 18, 2012 Bangkok Post “Loan sharks charging up to 1,095%.”

9 December 18, 2012 The Nation "Loan sharks now preying on salaried workers.”

10 December 12, 2012 Bangkok Post “Debt & Poverty: Trapped by loan sharks.”

22

APPENDIX

DATE SOURCE ARTICLE

11 December 11, 2012 Thai News Service "Thailand: Government aims to get loan sharks to lower interest rates."

12 December 1, 2012 The Banker "Global and regional award winners."

13 December 1, 2012 The Banker "CFG Services company limited - Krungsri's CFG Services Company Limited - The first to reach out to the forgotten, unbanked sector in Thailand."

14 August 17, 2012 The Nation "Farmers' debt rises despite govt aid."

15 May 18, 2012 Bangkok Post "SMEs still face financing hardships ahead of AEC."

16 May 23, 2011 Thai News Service "Thailand: Loan sharks defy crackdown."

17 December 9, 2010 Thai News Service "Thailand: The bank for the poor."

18 August 31, 2010 Bangkok Post "Thailand Post may provide microfinance centres."

19 August 18, 2010 The Nation "Train people where skills are needed."

20 August 18, 2010 Thai News Service "Thailand: PM launches 2nd phase of informal debt relief program."

21 August 18, 2010 Thai News Service "Thailand: Debt privilege cards handed out."

22 August 9, 2010 Thai News Service "Thailand: Government Savings Bank ready for new round of Govt debt relief."

23 July 6, 2010 Bangkok Post "Korn: 'Every single borrower' in informal system should get help."

24 July 2, 2010 The Nation "Re-lending scheme."

25 July 6, 2010 Thai News Service "Thailand: Finance minister vows to help borrowers with debts to loan sharks."

26 May 17, 2010 Bangkok Post "650,000 eligible for state help."

27 March 9, 2010 Thai News Service "Thailand: Finance Ministry looks to improve debt restructuring programmes."

28 December 29, 2009 Thai News Service "Thailand: National Statistical Office publishes survey on Thai economy."

29 December 7, 2009 Thai News Service "Thailand: NESDB warns of danger in rise of high-interest express loans."

30 December 2, 2009 The Nation “Underground creditors assured of no punishment.”

31 November 23, 2009 Bangkok Post “Microfinance response cool.”

32 November 19, 2009 Bangkok Post “Joint efforts on illegal debt.”

33 November 16, 2009 Thai News Service "Thailand: Authorities see potential for Thailand Post to handle microfinance."

34 November 16, 2009 Bangkok Post “Shark repellent.”

35 November 16, 2009 The Nation “Thailand Post could be microfinance player.”

36 November 3, 2009 Thai News Service "Thailand: Finance Ministry resolves to address informal debts."

37 October 20, 2009 The Nation "Help for debtors."

38 September 22, 2009 Thai News Service "Thailand: Taming the loan sharks."

39 August 10, 2009 Thai News Service "Thailand: Finance minister cites benefits of further financial liberalization."

40 June 30, 2009 Bangkok Post "BAAC set for rural microfinancing role."

Source: Authors’ compilation from LexisNexis Academic.

23

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Banerjee, A., E. Duflo, R. Glennerster and C. Kinnan. 2013. The Miracle of Microfinance? Evidence from a Randomized Evaluation. Working Paper, Institute for Financial Management and Research Centre for Micro Finance, April.

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Gupta, S. (Chairman). 2007. Report of the Technical Group Set up to Review Legislations on Money Lending, Reserve Bank of India, July.

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24

Karlan, D., and J. Appel. 2011. More Than Good Intentions: Improving the Ways the World’s Poor Borrow, Save, Farm, Learn, and Stay Healthy. New York: Dutton.

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25

ABOUT THE AUTHORS

APANARD (PENNY) PRABHA is a senior economist at the Milken Institute. Her research expertise is in the areas of financial institutions and international finance. Prabha’s recent Milken Institute publications tackle current banking and monetary policy issues relating to the causes and consequences of the global financial crisis. Her recent Institute studies include “Breaking (Banks) Up Is Hard to Do: New Perspective on ‘Too Big to Fail’ ” and “The Fed’s Rough Road Ahead.” Her research work has also been published in many peer-reviewed scholarly journals and presented at international economic and finance conferences. They are published in the Journal of International Money and Finance, Journal of Banking Regulations, International Review of Finance, Open Economies Review, Journal of International Financial Markets, Institutions & Money and Journal of Financial Economic Policy, among others. Her recent publications include “Implicit Guarantees, Business Models and Banks’ Risk-taking through the Crisis: Global and European Perspectives” in Journal of Economics and Business and “An Analysis of Resolving Too-Big-to-Fail Banks throughout the Various Regions of the United States” in Journal of Regional Analysis and Policy. Prior to joining the Institute, Prabha was an assistant professor of economics at the University of Illinois at Springfield. While completing her Ph.D., she also was a visiting scholar at the Claremont Institute for Economic Policy Studies and the Freeman Program in Asian Political Economy at the Claremont Colleges as well as a lecturer of economics at Pitzer College and the University of Redlands.

MINOLI RATNATUNGA is an economist at the Milken Institute focused on regional economic development and regional competitiveness. Before joining the Institute, she worked for eight years at the Allegheny Conference on Community Development, a regional economic development organization focused on improving the competitiveness and quality of life in the Pittsburgh region. At the Allegheny Conference, Ratnatunga focused her research on energy policy, transportation and infrastructure funding, and state tax competitiveness, working with civic and business leaders to help key decision-makers make better policy choices. She also led the economic impact study practice, managing the production of research reports that captured the importance of strategic industries and projects to the Pennsylvania economy. Ratnatunga has a master’s degree in public policy and management from Carnegie Mellon University and a bachelor’s degree in philosophy and economics from the London School of Economics.

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