Having largely failed to alleviate poverty in the past 60 years, the powers that be are now set to eliminate the poor. They have chosen the moneylender to be their hatchet man. Laws and rural credit policies are to be revised to pump public funds in his hands to expand his operations multifold. The moneylender will do what he knows best: tighten his deadly stranglehold on the poorest of the poor.
What is the basis for us to make such a serious charge?
On October 18, 2006, addressing the Second Agricultural Summit, Prime Minister Manmohan Singh called upon for "more thinking on the credit front. What do farmers need, a lower rate of interest or reliable access to credit at reasonable rates? To do that, do we need to bring in moneylenders under some form of regulation?"
The Reserve Bank of India promptly appointed a Technical Group headed by its legal advisor, with three IAS officers and five banking officers as members. Its report (August 2007) makes a startling revelation that, in fact, 'the issue of mainstreaming moneylenders has confronted the government and policy makers for a long time since 1971. The report of the Study Group on the Indigenous Bankers (an honorific title given to moneylenders) had noted that but for the services of these indigenous bankers, several segments of the neglected sectors would have been even more neglected.'
Recall that proposition was advanced soon after the launch of the Garibi Hatao (get rid of poverty) campaign, and the nationalisation of banks in 1969; and subsequent regime of lending to priority sectors and expansion of bank branches in rural areas for delivering 'social' credit to liberate the poor from the clutches of moneylenders.
Thirty-five years later, the report of the RBI's Technical Group (August 2007) concludes that 'there is a case for looking at possibility of leveraging the presence of moneylenders who continue to operate despite century-long efforts by policy makers to find substitute for them.'
To speed up the facilitation and funding of moneylenders by the state, the group has furnished draft legislation for recruitment of moneylenders. It has of course added a heroic promise of 'regulating' thousands of moneylenders as if that will be easier than regulating the handful of big banks.
In so doing the policy makers have shut their eyes and conscience to all the studied evidence on their shelf about the operations and impact of moneylenders on the rural poor. They have ignored even the latest warning on the subject by economist Mihir Shah and others in 'Rural Credit in 20th Century India -- Overview of History and Perspectives', published in The Economic And Political Weekly, April 14, 2007.
Incidentally it was published while the Technical Group was still deliberating the issue.
They have condemned the Technical Group Report for 'crowning of the moneylenders.' It is a real shock, they say, that the Group has rejected measures to avert farmers' suicides recommended by RBI's own Johl Working Group (2006) that prescribed a lakshman rekha that, in no case, five acres of agricultural land and a house of a borrower shall be attached.
It illumines how private money lending to the poor turns out to be so profitable: The mechanism is precisely the interlocked markets in the colonial period. The only collateral rural borrowers can offer is future labour service, future harvest or the right to use already encumbered land. The lender is in a powerful position to undervalue these not easily marketable collaterals.
This transfers the risk of default from the lender to the borrower. Monitoring is no longer an issue as the borrower is far more worried about losing the collateral than the lender is. And there is great incentive for charging usurious rates of interest because default will only mean that the lender grabs the asset offered as collateral.
The moneylender could even be said to prefer default to repayment. This is an extraordinarily ingenious but utterly exploitative relationship, which has sustained itself over centuries in India.
It concludes: it is deeply distressing to note that the government is even considering that it could 'bring in moneylenders' to solve the problem of rural credit. There cannot conceivably be bigger disaster than that, especially when thousands of farmers are already being driven to suicide.
In fact, since the launch of economic reforms in the early nineties, the state apparatus has been busy expanding the space for the moneylender. The Debt Investment Survey shows that between 1991 and 2002 the share of moneylenders in the total dues of rural households increased from 17.5 percent to 29.6 percent -- a whopping 75 percent increase in their penetration.
This was enabled by the government and RBI choking the flow of institutional credit to the rural poor explains P Satish, (Agricultural Credit in the Post-Reform Era, EPW, June 30, 2007). He adds that the share of institutional credit agencies in the outstanding amount of cash dues of the rural households, which in two decades between 1971 to 1991 had increased from 29 per cent to 64 percent, was slashed to 57 per cent between 1991 and 2002; the proportion of credit to agriculture (of total bank credit) was allowed to fall from 15 percent to less than 10 percent; and rural credit/ deposit ratio decreased from 60 percent to 39 percent. And who bore the brunt of this depredation? The small borrowal accounts (below Rs 25,000) whose number shrank from 59 million 36 million between 1991 and 2003-04.
The authorities also emasculated the related supporting institutional mechanisms for rural credit. In 1992-93, the RBI stopped altogether its contribution to the Long Term Operation Fund and has since then been transferring its entire profits to the Central Government probably to reduce the latter's fiscal deficit. Growth of resources for refinance of rural credit was severely constrained: the General Line of Credit which had reached a level of Rs., 6, 600 crore in 2001-01, was tapered down and totally discontinued in 2006-07. The incremental credit/ deposit ratio which averaged 60.4 per cent during the decade 1981-91, was drastically reduced to 34.5 per cent during 1991-2001. The level of capital investment in agriculture that was at 1.88 per cent of GDP in 1992-93, declined to 1.27 per cent in 2002-03.
In the post-reform period, through a devious scheme the authorities also liberated the commercial banks from the obligation (imposed on them under the regime of priority lending) to lend a minimum to the rural poor. The sums -- by now about Rs 10,000 crore which they ought to have put in the hands of the rural poor -- were now permitted to be credited by them to an officially devised Rural Infrastructure Development Fund (RIDF) held in NABARD. RIDF is accessed by just five state governments to finance large infrastructure projects though alternative sources exist for funding such projects. It is daylight robbery.
In contrast, Japanese policy makers till today recognise that massive state-led resources are a must for agriculture, forestry and fisheries which have such characteristics as uncertain harvests affected by climate, wide price fluctuation of outputs, long gestation periods, characteristics of low return on investment and poor markets for possible collateral. Are these characteristics any different than what plague the rural poor in India?
Is it surprising then that the growth rates in agriculture which averaged 3.2 per cent per annum in the pre-reform period of 1982-90 have steadily and steeply declined to a dismal 0.7 per cent in 2004-05. We are now told that 'agriculture is not a paying proposition'. Of course, there is no pay commission for agricultural workers.
The most assured way of liquidation of the rural poor is to starve agriculture -- the principal means of their livelihood.
Dr L C Jain was an active participant in the Quit India movement and has been engaged in economic-social development for the last 60 years. He was a member of the Planning Commission and served as India's high commissioner to South Africa.
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