Does farm loan waiver save farmers from loan sharks?

A poor farmer is always at the mercy of loan sharks. (Source: IWP Flickr photos)
A poor farmer is always at the mercy of loan sharks. (Source: IWP Flickr photos)

The Devendra Fadnavis government in Maharashtra has decided to expand the coverage of Rs 34,022-crore farm loan waiver scheme to extend the benefit to farmers indebted since 2009. The government had earlier said 89 lakh farmers would benefit from the scheme. The expansion of the scheme's ambit means the number of farmers, as well as the amount, will rise. Though the state is yet to come up with new figures, it is estimated that the number of farmers to be benefited may go up by 10 lakh and the total loan amount by Rs 4,000 crore. 

Since the government waiver applies only to the formal credit, the really distressed farmers who owe money to moneylenders are not spared of their misery. It is the rich farmers who are the real beneficiaries of such populist policies. The problems faced by small farmers are complex and require a ruthless political will to address them. Their landholdings are below the economically viable threshold. Loan waivers have little to do with ending the conditions that lead to such problems. 

In Maharashtra, farmers’ dependence on private money lenders has shown a steep rise. Loans disbursed by private money lenders in the state saw a 40 percent increase as compared to the previous financial year, according to the economic survey report for 2016-17. The total amount of loans disbursed by private money lenders was Rs 1,254,97 crore, an increase of Rs 358.63 crore over the previous year. At 10,56,273, the number of individuals who have taken a loan from private money lenders went up by 49 percent in 2016, recording a figure of 7,04,452. These individuals, most of them farmers, also include traders, non-traders and cultivators.

Poor farmer caught in a maze

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 important part of the rural economy that the banks have become secondary, or even redundant, for a small farmer.Farmers' issues are never ending. (Pic by Rakesh.5suthar via Wikimedia Commons)

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.

It was expected that in socialist India, banks would be much sought after for 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 percent 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 percent during the 1980s led India to eventually abandon the branch expansion programme.

Aggregate debt figures from the surveys of the National Sample Survey Office (NSSO) 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 percent in 2012. Institutional credit is now mired in thickets of red tape blocked by bankers who are bedeviled 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 subsidised interest rate of 7 percent and for prompt repayers 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 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.

New players in the market

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 penury. Farmers who fall into the money lending 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 up new ones. But there seems no sign of the rainbow as the farmer continues to chase this vain chimera.

Shylock demanded only a pound of flesh. But 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—including doctors and hospitalswhich sold the organ to a desperate patient for an insane amount. When the farmer found that the price of his kidney could not take him very 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 are no steel and glass buildings, neither are there any leather couches or coffee vending machines 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 how you would imagine a loan shark which, to most, is cunning, tough, maybe with a 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 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.

How to tackle the menace

The authors of a landmark study of the system of credit and household indebtedness, the All-India Rural Credit Survey, published by the Reserve Bank of India (RBI) in the early 1950s 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 “two-fold 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 peasants’ pressing needs.

Despite his image as the father of the free-market capitalism and his advocacy of laissez-faire economics, Adam Smith was in favour of the imposition of an interest rate ceiling. And the noted 20th-century economist John Maynard Keynes endorsed government control of lending rates “by statute and custom and even invoking the sanctions of the Moral Law.” 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 interventions 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.

The picture which Nobel Laureate Gunnar Myrdal presented in his memoir 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.”

Moin Qazi is the author of Village Diary of a Heretic Banker. He has spent more than three decades in the development sector. The views and opinions expressed in this article are those of the author/s and do not necessarily reflect the policy or position of India Water Portal.