By Moin Qazi
Moin Qazi is a PhD in Economics and the author of the bestselling book, Village Diary of a Heretic Banker.
A recent report by IndiaSpend states that professional moneylenders, who can charge up to four times more interest than the government’s banking system, hold more rural debt than ever, from 19.6 percent in 2002 to 28.2 percent in 2013. According to a 2017 study by Stanford University’s Center on Global Poverty and Development, farmers take loans from informal sources at high rates of interest to meet the overall shortfall. They use the Kisan Credit Card loans, which are interest-free if repaid in time, to repay the moneylender’s loan. They repay the KCC loan on time to avoid the penalty by using the moneylender’s loan. This vicious and cruel cycle can be broken only if farmers get adequate credit from institutional sources.
The tight grip of moneylenders
Almost every farmer in India’s massive rural swathes is tethered, in one way or the other, to the sahukar or the moneylender, the ubiquitous, ravenous loan shark. For centuries, moneylenders have monopolised rural Indian credit markets. Families have lost land and their bare assets, farmers have been asked to forfeit the jewellery of their wives or to prostitute them to pay off debts, and, when all else fails, they tie the noose to end their misery. An inescapable cycle of debt continues to grip rural India, particularly its farming class. The rapacious moneylender, who plugs the huge gaps in credit supply in a hassle-free process, is an integral part of a rural family. He is the first port of call in a distress situation and is also the man they can turn to in times of need. They are such an essential part of the rural economy that the banks have become secondary, or even redundant, for a small farmer.
Moneylenders have been around for generations, but their business has boomed ever since India’s economic priorities shifted, with globalisation, from agriculture to industry. According to an ancient Indian proverb, a village can be formed wherever there come together “a river, a priest, and a moneylender.”
The dependency and vicious circle
According to the All India Debt Investment Survey 2012, nearly 48 percent farmers across the country took loans from informal sources such as moneylenders and landlords. The number had risen from 36 percent in 1991 to 43 percent in 2001. Moneylenders provided 69.7 percent of total rural credit in 1951. This fell to 16.9 percent in 1981 before surging again. The latest survey shows that among farmers who owned land parcels smaller than 0.1 hectares, 85 percent had pending loans from such informal finance sources.
Farmers borrow loans from moneylenders at insane rates of interest. The peasants hope for a better yield in times to come, but this never happens, and they find themselves in a debt trap. Unable to pay the interest, let alone the principal, they borrow more and get onto a treadmill, driven recklessly by the cruel money-lenders, who are no better than sharks.
Growth of neo-moneylenders
Farming distress has attracted a class of neo moneylenders–anyone with some disposable cash. From shopkeepers and the input dealer government officials to the policemen and village teachers now lend money in the hope that they make a killing. They are willing to extend credit, but at highly extortionate rates; sometimes exceeding 50 percent, which keeps borrowers in lifelong poverty. Farmers who fall into the money lending trap find themselves locked in a white-knuckle gamble.
A current of dread runs through the country’s suicide-ravaged farmlands as their debts pass from husband to widow, from father to children. Most villages are locked in a bond with village moneylenders; an intimate bond, and sometimes a menacing one. Popular cinema and classic literature provide many pathos-filled narratives of India’s poor caught in that karmic cycle of poverty. Those stories inevitably end in tragedy.
Studying the role of moneylenders
The authors of a landmark study of the system of credit and household indebtedness published by the Reserve Bank of India (RBI) in the early 1950s, the All-India Rural Credit Survey, scrutinised the role and operations of the moneylender, who then enjoyed a dominant position as a source of finance. They did so on the premise that, in India, agricultural credit presented a “twofold problem of inadequacy and unsuitability.”
They envisaged only a minor place for him in their proposed solution, which took the form of a system of cooperatives covering all villages: “The moneylender can be allotted no part in the scheme (of cooperatives) … It would be a complete reversal of the policies we have been advocating … when the whole object of … that structure is to provide a positive institutional alternative to the moneylender himself, something which will compete with him, remove him from the forefront and put him in his place.”
Efforts in vain
The authors of the Survey did not, of course, lay out a formal model of India’s rural credit system as it then existed, nor did they provide a formal analysis of the effects of introducing a system of cooperatives upon its workings. The authors were strongly convinced that the moneylender possessed considerable market power, the exercise of which was made very profitable by peasants’ pressing needs.
The picture which Nobel Laureate Gunnar Myrdal presented in his memoir Asian Drama almost five decades ago remains the same despite enormous efforts from both the private and public sector in bringing large swathes of people into the folds of formal finance. “When the moneylender sees that he can benefit from the default of a debtor he becomes an enemy of the village economy,” Myrdal wrote. “By charging exorbitant interest rates or by inducing the peasant to accept larger credits than he can manage, the moneylender can hasten the process by which the peasant is dispossessed.”
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