Give private credit institutions a chance

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One solution to the credit crunch in the farm sector is to harness the moneylender's services but ensure that he operates under the discipline of a regulatory authority.
One solution to the credit crunch in the farm sector is to harness the moneylender's services but ensure that he operates under the discipline of a regulatory authority.

Sharad Joshi

I EXPECTED sharp reactions to my article "Moneylender surfaces again" (

Business Line

, January 11). I expected objections from a handful of co-operative barons because it was the Co-operative Credit Network that which was my principal target. I was not prepared for the tide of protests from those unconnected with the co-operatives. "Is the farmers' organisation in Maharashtra turning into a moneylenders' organisation?," one person asked, rhetorically. I owe my readers some explanations

For long years, any discussion on rural credit has begun by separating the roles of the formal and informal credit sectors. It is pointed out that while the role of the formal sector is widening and expanding, the informal sector continues to survive and often plays a significant role in many regions. The volume of credit made available by the co-operative banking system has been on the decline, amongst other things, on account of the increasing incidence of rural indebtedness and the inability of farmers to repay even crop loans. The farmers are being pushed towards the old moneylender.

The co-operative barons are obviously unhappy that the meek moneylender has survived while the State-sponsored powerful co-operative network is floundering. The main objective of my article was to suggest that, rather than being stuck with the dichotomy between the formal and informal sectors, attempt should be made to open the field of agricultural credit to the private moneylenders, albeit subject to the controls of an appropriate regulatory mechanism.

Agriculture is starved of funds and credit. Obviously, private individuals continue to have a certain financial capacity to provide the necessary support to the sector. However, they are unable to operate properly because of the unreasonable animus towards the private moneylender. The immediate provocation for the article was the fact that prominent political leaders as also a part of the media were trying to pin the burden of responsibility for the large number of farmers' suicides in Maharashtra on the minuscule group of moneylenders. The facts show that neither the private moneylenders nor the commercial banks indulge in brutally coercive methods to recover loans. That heinous work, putting to shame the worst of the old world `moneylenders', is done essentially by the officers of the co-operative organisations, who feel confident about the political support to cover up their brutality.

Attempts are being made to dig up cases where some farmers had sold a part of their holding to other villagers, most of whom were landless labourers and, consequently, in a better position of liquidity. The years-old transaction of sale was made to look like a transaction of loan against the mortgage of land. This permitted a massive attack on the moneylenders, which was certainly undeserved. The moneylender in the villages in Maharashtra was considered as one of the 12 humble village artisans (


) before the British came in. The British drew up the land-maps and revenue records and established systems of cash and revenue. Even the better-off farmers found themselves in a cash crunch for payment of government dues.

As the date for revenue payment neared, they had to approach those with a greater degree of liquidity, thanks to the nature of their professions. These happened to be either the traders or the priests. Very soon, the moneylender developed into a power centre and was treated as one of the pillars of village society, unlike the poor village artisans.

During the Freedom Movement, abolition of the moneylender became a popular slogan. The Deccan riots in Pune district were targeted against the moneylenders. The British government, judging the situation correctly, introduced the system of


loans. Dr B.R. Ambedkar made a caste issue out of it and started a campaign against the Khots in the Konkan region of Bombay province. In the early enthusiasm of the post-Independence era, both money-lending and zamindari were sought to be abolished by tinkering with the basic structure of the Constitution. The Co-operative Village Primary Society and its hierarchy of district and State banks largely replaced the private moneylender. By 1955, it was obvious that the co-operatives had failed. But, concluded the Rural Credit Survey, the co-operation must succeed. This provided justification for massive influx of State funds into the co-operative structure. Fifty years have passed since then and there is no improvement in the availability of credit to the farmer through the co-operative network.

Once again, the Minister for Agriculture and even the Prime Minister are talking of restructuring and reinforcing the co-operative structures by pouring in thousands of crores of rupees into the pockets of the co-operative barons. Such a programme can only mean political reinforcement of the co-operative movement and the political party it supports.

It is at this juncture that I ventured to suggest that if the moneylender continues to survive, and even to progress, the institution must have some merits of its own which should not be lost sight of.

The urban sectors were inimical to the private moneylender in the countryside, not for the reason they stated his tyranny. The moneylenders, at least a good number of them, were brutal, ruthless and cunning. But that was not the real reason why the urban sector wanted them removed. It had its eyes on the rural surplus, which remained in the countryside in the coffers of the Sahukars, and wanted private moneylenders to be abolished and replaced by the formal credit institutions of urban links, so that the agricultural surplus may start flowing out of the countryside into the urban areas.

The penury of credit and finance, both public and private, in the agricultural sector are well known. All kinds of methods have been talked of to overcome the situation. One solution that has not even been mentioned is harnessing the moneylender to operate under the discipline of a regulatory authority.

(The author is Founder, Shetkari Sanghatana and Member of Parliament, Rajya Sabha. Feedback can be sent to

(This article was published in the Business Line print edition dated January 25, 2006)
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