The Hindu Business Line : The other side of micro-finance

Opinion - Agriculture
Industry & Economy - Rural Development
Agri-Biz & Commodities - Insight
Money & Banking - Credit Market
Columns - Down to Earth
The other side of micro-finance

If the money that the government poured into the co-operative network had been used for loan waivers of the farmers, no farmer would have been driven to suicide, there would be no problem of agricultural indebtedness.

— Vivek Bendre

Suppression of moneylenders has become a popular demand of both farmers and politicians.

Sharad Joshi

In banking and finance, India has long, well-rooted traditions and institutions. Whoever thought there would be the need to ape the newfangled institutions even in this field? Indians grow under the shadow of the Banyan tree of ancient history and have an innate tendency to refer to the past precedent than innovate. Alternatively, they tend to refer to what happens elsewhere on the globe and plagiarise it. This is generally admitted in science, technology, economics and even literature.

Even in social matters, Indians brush aside native institutions and prefer to replicate those developed elsewhere, without even trying to find out if they can be transplanted to our soil. For hundreds of years, the farmers have depended on the local moneylender to meet their needs of cash and credit. The local Sahukar was always accessible 24x7 to meet their cash needs, no matter what the purpose and what the security offered were. Since most Sahukars combined money-lending with trade, more often than not, both the loans and the repayments were in kind rather than in cash.

Suppressing the moneylender

Given the perishable nature of agricultural produce and the caprices of the weather, the rate of interest was often high. It was also complained that the Sahukars used harsh methods for recovery. The evil features of local money-le nding became even more prominent during the British Raj, as agriculture came under heavy taxation. It became a common belief that the misery of the farmers was largely caused by the moneylenders rather than by the vagaries of monsoons and the tyrannies of the government.

Suppression of moneylenders became the popular demand of both the farmers and the politicians. The farmers wanted to drive away the moneylender because he was perceived as the tyrant, proximate cause of all his problems. The politicians capitalised on this popular demand to serve their own political agenda. Even during the British Rule, there were instances of farmers’ revolt against moneylenders. Abolition of the Sahukar became an important agenda of the Freedom Movement. So on after Independence, the moneylender in the informal sector was sought to be abolished and replaced by the cooperative or commercial bank network in the formal sector. Given the rigidities of the formal banking sector, it could never really meet the needs of the agriculturists.

Networking with banks

Post-Independence, agriculture became an even more losing proposition, most debts remained unrequited. Consequently, there could be no further extension of debts and the whole wheel of credit in the agricultural sector came to a screeching halt. Every 20 or 30 years, under one slogan or another, government money was pumped into the cooperative network to give it a further lease of life. If the money that the government poured into the co-operative network were used for loan waivers of the farmers, no farmer would have been driven to suicide, there would be no problem of agricultural indebtedness and there would be nothing like agricultural stagnation at 2 per cent growth. The formal sector, nevertheless, accounts for less than 40 per cent of the agriculture and rural credit.

A proposal was given that, rather than carrying out a hate campaign against the moneylenders, it might be a better idea to regulate the moneylenders by reviving the old Usurious Loans Act that set a limit of 4 per cent on the rate of interest and a ceiling of two times the principal on debt accumulation (daam-dupat) and develop a regulatory mechanism for keeping a watch on the moneylenders’ operations.

The proposal was briefly to formalise and regularise the moneylenders’ network that had worked in spite of all odds without any governmental subvention for so many decades. But, that was not to be. For the populist politician, moneylender was a favourite hate-object. Even though the politicians recognised the need for a highly flexible mechanism for financing of the farmer and other weaker sections as also women, they were not yet prepared to recognise local structures. They went in for the more fashionable “micro-finance”.

Obsession with micro-finance

In the 1970s, the micro-finance and the self-help groups (SHGs) in Bangladesh were claimed as a great success. Dr Muhammud Yunus received accolades and numerous international awards for his accomplishment, so much so that many believe that micro-finance as institutions began only in the 1970s and that too only in Bangladesh. In fact, there have been earlier claimed successes. Wilhelm Reiffeisen’s Village Banking Movement, the Caisse Populaire of Alphonse Desjardins in France were amongst the notable instances where considerable improvement was brought about in the condition of the extremely disadvantaged people.

The world over, micro-finance institutions are evaluated on the basis of five criteria:

Has there been a significant improvement in the living standards of the people targeted?

Has there been the development of a sustainable micro-finance institution?

How reasonable the rates of interest charged?

Are any coercive methods used for recovery of loans?

Is there an element of government subsidy involved?

In India, forming SHGs and micro-finance organisations became a favourite hobbyhorse of the non-governmental organisations (NGOs). Most of them fail on all the aforementioned criteria.

They are all beneficiaries of governmental subsidies, they charge rates of interest as high as 30 per cent and use coercive methods for recovery that had driven, in some cases, loanees to suicide. Further, the choice of the loanees is far from transparent and it is believed that in most of the cases, the loans given will become non-performing assets.

Nabard initiative

The Government and the bureaucracy are, however, bubbling with enthusiasm as regards the micro-finance network as if that will be the panacea for all the problems of rural credit and poverty. The National Bank for Agriculture and Rural Development (Nabard) is planning to start a micro-finance institution to take financing to the “poorest of the poor”. The venture will be launched in partnership with commercial banks (49 per cent). Nabard (51 per cent) will also launch a Financial Advisory Unit to help bring down the high incidence of farmers’ suicides. The Government is also proposing legislation on micro-finance. The expectation is that the Bill will regulate the micro-finance institutions to ensure fair, equitable and ethical practices and democratic functioning. Under the Bill, Nabard, which is the regulator for the formal sector in rural areas, will also assume responsibilities as regulator for the micro-finance institutions. Under the Bill, there will be a ceiling of Rs 50,000 on loans by micro-finance institutions (MFIs).

It is quite clear that the intention of the Government is to hand over the MFIs to those who have already failed in ensuring successful operations of the formal sector in the rural areas.

(The author is Founder, Shetkari Sanghatana and Member of Parliament (Rajya Sabha). E-mail: sharad.mah@nic.in)

More Stories on : Agriculture | Rural Development | Insight | Credit Market | Down to Earth

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Reaching out to the border

The other side of micro-finance

Remanufactured capital goods — Do away with the import shackles

Africa’s rising star, and India

The new world of work

The Novartis saga — Prescription for patent strategy in India

Controversy over naval exercises

The role of RBI

Fair-price shops