The return of India’s moneylenders

In general, the rural moneylender as a species has proved surprisingly resilient, even in countries such as India and Indonesia where it has been a declared objective of state intervention in financial markets to suppress him. — Hulme and Mosley, Finance Against Poverty

While the government is set to forgive billions of dollars of loans of Indian farmers, the actually distressed class among them will have no respite from their misery .They owe their debts to moneylenders whereas the government waiver applies only to formal credit.

Almost every farmer in India's massive rural swathes is tethered, in one way or another, to the sahukar, the Indian variety of 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 has failed, they have tied the noose to end their misery.

An inescapable cycle of debt continues to grip rural India, particularly its farming class. Yet the public image of menacing debt collectors does not reflect the actual plight of India's three million farmers. The rapacious moneylender, who plugs the huge gaps in credit supply in a hassle free process, is an inalienable 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. For most villagers there is no life without him. According to S Parasuraman, director of the Tata Institute of Social Sciences, India's prestigious development university, "Moneylenders are now an inextricable part of the rural economy so much so the bank has 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 arrival of high-cost seeds and pesticides and the attraction of bumper harvests have added to the debts. Adams and Delbert Fitchett dedicated a 1992 book they edited on informal finance to "the much maligned moneylender because of her ability to walk barefoot where bankers fear to tread."

According to the All India Debt Investment Survey 2012, nearly 48% of farmers across the country   took loans from informal sources such as moneylenders and landlords. The number had risen from 36% in 1991 and 43% in 2001. Moneylenders provided 69.7% of total rural credit in 1951. This fell to 16.9% in 1981 before climbing up again. The latest survey shows that among farmers who owned land parcels smaller than 0.1 hectares, 85% had pending loans from such informal finance sources.

It was expected that in socialist India banks would become an extremely popular port of call for clients seeking loans. In fact, these financial institutions recorded a surge in the social banking era of the 1970s. The expansion of bank branches in rural areas was particularly noteworthy. The figure rose from 8,261 in 1969 to a whopping 65,521 in 2000. The share of households accessing institutional credit rose by 32 percentage points to 61.2% between 1971 and 1981. But the populist policies left a cruel legacy of dud loans.

This sour experience made bankers very wary and they turned off the spigots, high default rates in the range of 40% during the 1980s led India to eventually abandoning the branch expansion programme. Aggregate debt figures from National Sample Survey Office (NSSO) surveys show that the share of households accessing institutional credit in rural India moved up only by 2 percentage points over a decade to 59.8% in 2012 Institutional credit is now mired in thickets of red tape blocked by bankers who are bedevilled by a highly contaminated credit culture. Hence moneylenders continue to thrive.

While these small farmers pay exorbitant interest, affluent farmers get subsidised credit. The government's interest subvention (subsidy) scheme for farmers provides credit at a subsidised interest rate of 7 per cent and for prompt re-payers at 4 percent. With institutional credit drying up for farmers, local sharks have taken the place of banks. They charge an arm and a leg and are creating a debt-trap for the farmers who rely on crop success — and prayers — for loan repayments. But a suicide does not absolve the rest of the family from paying back a loan. Unlike a bank loan which is squared by the government's waiver package, the moneylender's loan has to be atoned by the distraught family.

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 get onto a treadmill   recklessly driven by the cruel moneylenders, who are no better than sharks. Shylock demanded only a pound of flesh. But the moneylenders bay for blood. Crushing debts are pushing farmers into the darkest of pits.

There is a story that has now become a farmland fable. A man ploughing the field was so distressed that at first he sold his kidney to an organ mafia — which included doctors and hospitals and which sold the organ to a desperate patient for an insane amount. When the farmer found that the price of his kidney could take him only this far, he had no choice but to tie a noose around his neck.

Moneylenders operate in a variety of ways. In sharp contrast to banks and other lending institutions, there is no steel and glass, neither is there a leather couch or a coffee vending machine at the moneylender's workplace. Vithal Radke's business is registered as a shop because he hasn't met the legal standards required to call it a finance agency.

Vithal stumbled into the moneylending business eight years ago after failing at a number of other businesses. He doesn't look like you'd imagine a loan shark would — which, to most, is cunning, tough, maybe with a little streak of violence running underneath the refined exterior.

"It has always been business as usual. Shylocks are still in great demand," Vithal says.

"Shylocks give you that instant fix. You aren't asked for security or guarantors. I borrowed again this year and it is going well. I think that because of the ease of it, borrowing becomes addictive," says a cash-strapped farmer.

Loan sharks also do not ask questions regarding your borrowing history, meaning that the defaulters find a safe haven with them. Then there are those who are seeking to hide because of the shame of borrowing. Seeing as the transactions are quick and the requirements minimal, the moneylenders might seem like the perfect solution for those seeking a quick fix. Their customers agree that they are a working solution — as long as you do not default on your loan.

In Bina, a small farming village about 40 kilometres from Nagpur in central India, where I spent almost two years during my career in development finance, I relentlessly pursued a one-point agenda: banish the moneylender. But as all such social and economic experiments and policies have learned, a moneylender is an all-season creature whose unique DNA makes him resistant to all attacks. In every village, moneylenders are reviled, and their business seen as squeezing out the blood of poor farmers. Yet villagers know there is no life without the loan shark. The rapacious moneylender, who plugs the gaps in rural financial services, is also the man they turn to in times of need. You can't banish him from the financial planet; he remains indelible.

I found that nearly all inhabitants in Bina had been compelled at some time or the other to call on the sahukar. No matter how much distaste he provoked, the sahukar was the key person in the village. He was its banker, its moneylender, its pawnbroker, and very often its vampire. One must ask, as I did while living in rural India, where the capital of the poor came from, since that is the one permanent requirement of a capitalistic society. In poor countries across the world, you will find most tiny businesses being financed by moneylenders.

When I asked, I would get the ubiquitous answer: "I get my money where everyone else does."

"Where is that?"

"Everyone knows. I get it from a five-six."

"What is a five-six?"

"It is the place where you borrow five rupees in the morning, and pay back six rupees in the evening."

It is possible to get day loans in the vegetable market that provide 100 rupees in the morning but have to be repaid with 10 rupees interest by dusk.

In Bina village, all dirt tracks converged at the house of the sahukar, like the threads in a spider's web. Along the tracks came desperate families. Some brought their wives' ornaments wrapped in bits of rags; others brought the produce from their fields. Sometimes women would walk in and remove their glistening nose studs, their wedding chains, and bangles, and hand them to the moneylender. Others had nothing to pledge but their own bodies. The moneylender swallowed everything, and nothing that entered came out; his house grew and bulged. The moneylenders had already sucked the poor dry of their assets and their sleight-of-hand accounting had left the villagers' principal debt untouched by their repayments, which were marked up against the interest.

During my engagement with rural India I found that moneylenders would survey potential customers with the sleepiness of crocodiles and pose an instant offer. Despite the heavy interest, the offer would be a tempting solution to the customer's financial woes. As long as you keep paying the moneylender's monthly interest on time, you will find him the sweetest person on earth. All moneylenders carry the air of messiahs, as long as you allow them to bleed you.

Farming distress has attracted a new breed of moneylenders. Anyone with some disposable cash — from shopkeepers, government officials, and policemen to village teachers — now lends in the hope of making a killing. They are willing to extend credit, but at highly extortionate rates — sometimes exceeding 50 percent, which keeps borrowers in lifelong penury.

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 into a bond with village moneylenders — an intimate bond, and sometimes a menacing one. Popular cinema and classic literature tell many pathos-filled narratives of India's poor caught in that karmic cycle of poverty. Those stories inevitably end in tragedy.

Farmers who fall into the moneylending trap find themselves locked in a white-knuckle gamble, juggling ever-larger loans at usurious interest rates, in the hope that someday a bumper harvest will allow them to clear their debts — so they can take out new ones. This pattern has left a trail of human wreckage.

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."

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 the peasants' pressing needs.

Despite legions of committees and reports that have outlined ways of replacing moneylenders through stepping up institutional credit, the moneylender still remains the backbone of the rural financial system. It is a bitter truth which we have to swallow. Their very persistence and the limited success of the intervention to remove them highlight the oversight of the development theorists and managers in not recognising the moneylender as a significant institution of the underdeveloped areas and the 'courage' of this 'barefoot' figure (as Adams referred to it)

The picture which Nobel Laureate Gunnar Myrdal presented in his memoirs Asian Drama almost five decades ago remains the same, despite gigantic 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."

But the cheerful news for me is that today Bina is moneylender free, a most heartening feeling for me. Three years back, the village struck coal and that signaled the financial death of the moneylender. Every inch of land got a price tag. Bina's 3,000-strong community is slowly abandoning the village, which is being acquired by coal barons. Lalita Jangde, whom I lent 5,000 rupees to relieve her of a moneylender's debt, is a transformed women now. I still remember her scared face and trembling body when she came barefooted to me, without even the courage to speak. She now owns assets of around Rs 6 million. Her house is far more plush and grander than mine. But she still values those 5,000 rupees that I lent all those years ago more than her present fortune.

"It was a great event in my life. It liberated me from the chains of a moneylender," she exclaims with a great heave.