The Hindu Business Line : Shylocks of Urban India

The suave and sophisticated bank manager is not perceived in the garb of a 21st century usurer, while the illiterate village moneylender is. But both pursue a similar service, appeasing the demands for short-term liquidity and charging steep rates.

C. J. Punnathara

There is a Shylock on the prowl in most urban cities, preying on unwary and gullible victims. Numerous middle-class Indians have fallen prey to its usurious ways. With Urban India’s new-found prestige and affinity to hoard and flaunt credit-cards, this tech-savvy 21st century shyster comes in three distinct shades — silver, gold and platinum. Surprisingly, it is still to extend its reach in a big way into Rural India.

However, Rural India is plagued by another form of usury, as the poor and illiterate continue to wage a losing battle against the proliferating and unorganised moneylenders. Newspapers are replete with stories of indebted farmers losing their land and livelihood to moneylenders’ cut-throat rates — as high as 100 per cent.

In the garb of credit cards

But what about their urban counterpart: The sophisticated and organised banks and their equally extortionate rates? This tech-savvy usury comes in the garb of credit-cards, often issued by new generation and foreign banks, through their sprinkling presence in Urban India. But their reach is far beyond these meagre numbers. Charging preposterous rates, they have proved no different from their crude and rustic counterparts.

Let us take the classic example of a middle-class employee on tour to an outstation Tier-II city and is direly in need of money. He uses his credit-card to withdraw Rs 5,000 from the nearest ATM.

Though service charges might vary, several credit-cards immediately charge him Rs 500 upfront — more so if it is the ATM of some other bank. The clock then begins to tick on the second round of interest rate charges.

Most credit-cards charge upward of three per cent per month (36 per cent per year) for cash advances. But there are different billing and payment cycles, with hidden charges lurking between the two. If the billing cycle commences from the first of every month, the payment cycle is often 15 days after the billing date. So the customer first pays interest for one month of credit that he enjoyed through the first bill.

Then comes the second bill, where he is charged for the next 15 days of payment cycle, after he is said to have received the bill and still not paid up. Sometimes, the customer pays interest for close to 45 days on the cash advances. At the rate of 3.5 per cent, the customer would be coughing up over Rs 250 as interest.

Label of usurer

Including the service charge, the total outgo for the customer would be around Rs 750 for what should have been a one month loan of Rs 5,000. The effective outgo works out to around 10 per cent per month or 120 per cent per year. Despite the steep rates of interest charged by the modern-day banker in the cities, how come the label of usurer has not fallen on him? How come the RBI and the government are winking at this nefarious practice? Is it because it is practised across the world?

No, it is primarily because the suave urban banker has moved in to fill a niche segment — appease society’s demand for contingency funds to tide over unforeseen exigencies, even at high costs.

Since he is fulfilling an innate social demand, the consumers have not been protesting. But, when the moneylender fulfils the same role charging similar usurious rates, it evokes loud protests of outrage from the government, the public and the media.

Similar service

To a degree, it is a matter of perception. The suave and sophisticated bank manager with his MBA degree is not perceived in the garb of the 21st century usurer, while the illiterate village moneylender is. However, there is hardly any distinction between the two. Both are pursuing similar service, appeasing the demands for short-term liquidity and charging steep rates.

Even in scrutiny and assessment of the repayment capacity of prospective customers, both the bank and the moneylender are equally vigilant. The main distinction is on the two distinct segments that they cater to: With the banks narrowing the choice to middle-income and rich customers, and the moneylender focussing on the rich and the poor alike — the universal provider.

However, the rich farmers and merchants often fall outside his purview since they can take care of themselves. Also, most often, these very same rich farmers double up as the village moneylender. Not by choice, but out of sheer compulsion, these moneylenders are forced to lend to the poor and illiterate peasants and lowly farmers. And they constitute a vulnerable lot, as their economies can crumble under the weight of a single calamity such as drought or flood.

Leaving aside the holier-than-thou attitude, one can safely say that moneylenders are fulfilling an inherent social demand from Rural India. There is demand and there is a supplier. Denigrating the role of the moneylender would be the easy way out.

The urban banker would outright refuse the short-term exigencies of the rural poor. The only way out is to integrate the moneylender into the organised financial system, promote institutions such as micro-credit and encourage bank Accredited Loan Providers. Calling names and denigrating a service provider will not provide the answer.

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