The Hindu Business Line : Mainstreaming the moneylender

Much as Urban India hogs the limelight with its global connections, agriculture faces its worst ever crisis. For the first time in history, Agrarian Bharat is faced with the tragedy of farmer suicides. While some policymakers may callously underplay the magnitude of this crisis by comparing the numbers to the population size, the suicides in various parts of the country highlight the despair of some farmers and the unsustainability of farming, in general, for small landholders. More than half a century after Independence, one recurring aspect of this tragedy is the widespread indebtedness and its principal agent, the moneylender. Almost 40 years after bank nationalisation, the moneylender has yet to be replaced by the formal banking system as the financing agent in the rural areas. With forex reserves of $150 billion and the highest domestic credit growth ever, the Prime Minister has still to remind fellow policymakers that the credit delivery system to farmers has failed.

Nothing shows up the hollowness of India's claim of successful banking reforms than the tragic fact that the moneylender is still the farmer's primary banker. The Prime Minister should know that banks have failed to displace the moneylender because the two operate with different perceptions of lender profiles and credit risks; the former cannot hedge the risks of lending to the small farmer in the manner of the moneylender — high interest rates and recovery by force. But for the rural poor in need of credit, all this is a small price to pay the moneylender for simple and easy accessibility to funds, unlike via the banking system. In this sense, the informal banker has been more than just ubiquitous; he is almost part of family.

At the Agriculture Summit 2006 in the capital recently, the Prime Minister gave indication of the direction policy needs to take to meet the agrarian crisis head-on. Doubting the capacity of the formal institutional framework to help and questioning the value of reducing interest rates for farmers beyond a point, he made the rather unique point that moneylenders should be brought into the mainstream "subject to some form of regulation". Presumably this will mean regulating interest rates and forms of loan recovery. But the induction of moneylenders into the mainstream will also have to cover their access to funds-as-deposits; moneylenders themselves often borrow, sometimes at high rates, to fund their operations. Perceptions of risk and high cost of funds tempt them into usury. Being the most vital financier for the small farmer, policymakers can snip out the extortion elements of his business by providing him with cheaper and accountable deposits. This way it would also be easier to monitor his age-old loan-recovery techniques.

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