Rural India in Grip of Loan Sharks

Ever since days of India’s freedom struggle, there has been a repeated emphasis on the need of liberating rural population from the grip of moneylenders. Soon after Independence the Reserve Bank of India conducted All-India Rural Credit Survey (1951) to look into different dimensions of rural indebtedness and suggest ways and means to regulate money-lending business and provide alternative sources of ample credit so that the dependence of the rural population on non-institutional sources could decline. Moreover, the rural population was not to go on being born in debt, live in debt and die in debt, as Malcolm Darling had observed in his well known book on Punjab peasantry.

In pursuance of this, co-operative movement was expanded and the number of co-operative credit societies increased manifold. During the Indira Gandhi regime major commercial banks were nationalized with the stated aim of providing credit and other facilities in rural areas. Thousands of bank branches came up in villages, hitherto deprived of modern banking facilities. Later, with the help of NABARD (National Bank of Agriculture and Rural Development), regional rural banks came into existence to meet the banking needs of the rural population in general and credit requirements of farmers, artisans, petty shopkeepers and so on in particular. The aim was to liberate them from the hold of private moneylenders and traders. 

These measures yielded encouraging results. Over the years the dependence of the rural population on non-institutional sources of credit has declined. To illustrate this, in 1951 as much as 91.2 percent of all credit needs of the rural population were met by non-institutional sources consisting of moneylenders (68.6 per cent), relatives and friends (14.4 per cent) and others comprising local shopkeepers, grain traders etc. (8.2 per cent). Forty years later, in 1991the non-institutional sources accounted for only 46.7 per cent of rural credit. Over the years, the role of commercial bank in meeting rural credit needs became quite significant. In 1961 when all major commercial banks, barring the State Bank of India and its subsidiaries, were privately owned and controlled, they accounted for only 0.3 per cent of the volume of rural credit. One can safely conclude that even this small portion came not from the private commercial banks but from the State Bank of India and its subsidiaries. Roughly two decades after bank nationalization by Indira Gandhi, commercial banks in 1991 came to meet 29 per cent of total credit needs in rural areas. One may term this as not very satisfactory performance, yet one has to agree that the decision to nationalize major commercial banks and the people and political parties that supported the decision were right. One may not forget that the earlier incarnation of the BJP opposed bank nationalization and its the then president went to the Supreme Court to challenge it! Between 1951 and 1991 the share of the co-operatives in total volume of rural credit went up from 4.6 per cent to 18.6 per cent.

A qualitative change in the attitude of commercial banks has been witnessed since the beginning of economic reforms in pursuance of the ten-point Washington Consensus, the sheet anchor of ongoing globalisation. The Reserve Bank of India has, to a great extent, deregulated the interest rates. The performance of the banks whether in the public sector or the private sector is being judged now on the basis of their profitability. In view of this they have started paying greater attention to urban rather than rural population in general and the middle class and the neo-rich in particular. Prospective borrowers are bombarded every day with messages and offers from commercial banks not only through print and electronic media but also on their landlines and mobile phones. They are being offered loans for buying vehicles, houses, television sets, washing machines, refrigerators and so on. The thinking is that the chances of default among these urban borrowers are much less than in rural areas. Since foreign banks have been allowed to set up shops mainly in urban areas with no obligation to lend to old “priority sectors” they are in a position to register greater profitability and this exerts great pressure on Indian commercial banks to follow suit. The successive governments since 1991 have also become indifferent to the needs of the rural sector because they have been great votaries of the primacy of market forces and reducing the role of the state in economic development. The dictate of the Washington Consensus relating to fiscal deficit of the government has also grave implications for banks’ resources, which in turn adversely affect the financial resources to be lent to the rural sector.

This development has been to the advantage of moneylenders and  traders, constituting the traditional sources of rural credit. Their business has become rejuvenated. It may not be forgotten that even after the nationalization of banks and the expansion of co-operative movement, the credit needs of landless farmers and agricultural labourers have not been taken care of by institutional sources. They have most often been forced to look to moneylenders. Their inability to borrow from institutional sources arises from the lack of collateral with them. They may be cultivating land and having cattle and houses, but they seldom possess any ownership rights over them. This lacuna could have been removed by implementing the suggestion of the Peruvian economist Hernando de Soto who has been pleading for making de facto rather than de jure control over an asset as the basis of advancing credit. The ruling circles, irrespective of ideological colour and pretensions do not want to act on this for fear of antagonizing entrenched vested interests in the rural areas.

Consequently, as much as 70 per cent of the rural poor do not have a bank account and 87 per cent have no access to institutional sources of credit. This has been highlighted by a recently released survey by the World Bank and the New Delhi-based NCAER (National Council of Applied Economic Research). Moneylenders and others constituting the non-institutional sources maintain a powerful dominance over the rural poor. According to the survey, they lend on “frequently extortionary terms.” They have practically no access to any kind of savings accounts, and life, health and crop insurance, notwithstanding frequent announcements of various schemes. The survey has made the significant remark that “The failure of India’s rural banks to deliver finance to the poor may be attributed to a combination of factors. From the banks’ perspective, serving the rural poor is a high-risk, high-cost proposition, with high uncertainty, and transaction costs related to small loan size, frequent transactions and government policies, which contribute to a financial climate not conducive to rural banking. From the poor rural borrower’s perspective, banks do not provide conveniently accessible and flexible products and services, high transaction costs, including cumbersome, costly procedures, hefty bribes, and long processing times and poor borrowers can’t meet the demand for collateral.”

Corruption is widespread in rural banking sector. The survey has found that the borrowers have to pay 10 per cent to 20 per cent of the amount of the loan by way of bribe to secure it. On an average, around 27 per cent of the households borrowing from regional rural banks in the country paid bribe to borrow. In U. P. this proportion was found to be 48 per cent. If one takes into account the bribe the real cost of the loan goes up substantially

There are large regional disparities in the availability of financial services, both in terms of the volume of transactions and branch density of commercial banks in rural areas. The clients in economically weaker regions get much lower share in the financial services. Consequently, the poor rural households in these regions are almost completely ignored. Northeastern, eastern and central regions are much-neglected ones. While they account for 54 per cent of the population and 40.5 per cent of bank branches and 29 per cent deposits, they have only 20 per cent of outstanding credit.

It is needless to add that the situation is extremely serious. It is one of the major factors in growing unrest in rural areas, which cannot be tackled on lasting basis through police methods. There is an urgent need to ponder over the situation and realize that durable peace and sustained increase in agricultural production cannot be had without tackling the problem of rural credit and growing indebtedness.

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