Moneylenders still rule India’s rural economy

While the government is set to forgive billions of dollars of loans of Indian farmers, the truly distressed among them…

Moneylenders still rule India’s rural economy

(Photo: Getty Images)

While the government is set to forgive billions of dollars of loans of Indian farmers, the truly distressed among them will have no respite from misery. They owe money to moneylenders whereas the government waiver applies only to formal credit.

Almost every farmer in India’s massive rural swathes is tethered, in one way or another, to the sahukar, the Indian variety of the moneylender, the ubiquitous, ravenous loan shark.

For centuries, moneylenders have monopolised rural Indian credit markets. Families have lost land and assets, farmers have been asked to forfeit jewellery of their wives or to prostitute them to pay off debts, and, when all else has failed, they have tied the noose to end their misery.


An inescapable cycle of debt continues to grip rural India, particularly its farming class. Yet the public image of menacing debt collectors does not reflect the actual plight of India’s three million farmers. The rapacious moneylender, who plugs the huge gaps in credit supply in a hassle-free process, is an inalienable 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. For most villagers there is no life without him. Moneylenders have been around for generations, but their business has boomed ever since India’s economic priorities shifted, with globalisation, from agriculture to industry. An ancient Indian proverb has it: a village can be formed wherever there come together “a river, a priest, and a moneylender”.

According to the All-India Debt and Investment Survey 2012, nearly 48 per cent farmers across the country took loans from informal sources such as moneylenders and landlords. The number had risen from 36 per cent in 1991 and 43 per cent in 2001. Moneylenders provided 69.7 per cent of total rural credit in 1951. This fell to 16.9 per cent in 1981 before climbing up again.

The latest survey shows that among farmers who owned land parcels smaller than 0.1 hectares, 85 per cent had pending loans from such informal finance sources. 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 seven per cent and for prompt repayers at four per cent.

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 farmers who rely on crop success — and prayers — for loan repayments. But a 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. Farmers borrow from moneylenders at insane rates of interest.

The peasants hope for a better yield in times to come but this never happens, and they find themselves in a debt trap. Unable to pay the interest, let alone the principal, they borrow more to get onto a treadmill recklessly driven by the cruel moneylenders who are no better than sharks.

Shylock demanded only a pound of flesh. But the moneylenders bay for blood. Crushing debts are pushing farmers into the darkest of pits. A current of dread runs through the country’s suicide-ravaged farmlands as their debts pass from husband to widow, from father to children. Most villages are locked into a bond with village moneylenders — an intimate bond, and sometimes a menacing one.

Popular cinema and classic literature tell many pathos-filled narratives of India’s poor caught in that karmic cycle of poverty. Those stories inevitably end in tragedy. Farmers who fall into the moneylending trap find themselves locked in a white-knuckle gamble, juggling everlarger loans at usurious interest rates, in the hope that someday a bumper harvest will allow them to clear their debts — so they can take out new ones.

This pattern has left a trail of human wreckage. The authors of a landmark study of the system of credit and household indebtedness published by the Reserve Bank of India in the early 1950s, the All-India Rural Credit Survey, 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. 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.

The picture, which Nobel laureate Gunnar Myrdal presented in his Asian Drama, almost five decades ago remains unchanged 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.”

(The writer is a Nagpur-based scholar. He can be reached at moinqazi123@gmail.com)