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By Dr Sudhirendar Sharma An unprecedented new legislation from the RBI seeks to give traditional moneylenders a new legitimacy, making them eligible to borrow from commercial banks and putting a cap on interest rates that can be charged
Will life for the rural poor change if the traditional moneylender is brought under a regulatory framework? The Reserve Bank of India thinks it will, and has scripted a recent legislation that aims to give credence to the celluloid villain of the 1960s as a legitimate agent of rural economic activity. Rechristened Accredited Loan Providers (ALP), the historic notoriety attached to moneylenders seems to have been shelved. A spate of suicides by rural borrowers in the recent past seems to have triggered this move by the apex bank.
Spelling out proposals for ‘compulsory registration’ and an ‘interest cap’ for moneylenders at the state level, the legislation acknowledges the incredible reach and unprecedented role of moneylenders in meeting credit exigencies across villages over centuries. The drafting committee also took note of an increase in borrowings from moneylenders since 1991, the period that saw a spate of suicides by rural men and women caught in a debt trap. The Accredited Loan Providers legislation was drafted by a technical group constituted by the RBI in May 2006, under the chairmanship of S C Gupta, the then legal advisor-in-charge of RBI.
The confirmed suicides of some 20 rural borrowers in Andhra Pradesh during the last year cast a dark shadow on the fledging microfinance sector. Four leading microfinance institutions were charged by government inspectors with levying interest rates in excess of 40%. According to the All-India Debt and Investment Survey, on the other hand, the average rate of interest charged by moneylenders varied between 18 to 36%, although a low of 12% and a whopping high of 150% were also observed.
No wonder moneylenders have continued to flourish amidst obscurity. Though the RBI doesn’t rule out cases of unscrupulous interest rates, the increase in loans from moneylenders by rural households, from a low of 19% in 1991 to a high of 36% in 2007, shows how integral the moneylender continues to be for rural credit. The legislation proposes to bring the disparate group of moneylenders – including agricultural traders, commission agents, retired postmen, retired teachers and educated youth – within its fold.
The legislation has seemingly been based on the old ju-jitsu principle: use your opponents’ strength to achieve your objectives. Thus, the legislation aims to correct the distortions in the rural financial systems that had resulted from discouraging moneylending after independence, a process that was reinforced after the bank nationalisation of the late-1960s. For instance, under Section 45-S of the RBI Act, a butcher or barber could borrow money, but not a moneylender. Now this will change as an ALP will be financed by commercial banks under the new provision.
These developments have sent the jitters across microfinance institutions (MFIs), many of which have questioned the need to bring the traditional moneylender, synonymous with the Shakespearian ‘pound of flesh’, at par. They contend that capping interest rates will only determine the minimum that can be charged, leaving the moneylender free to exploit the situation through his historic proximity to vulnerable clients.
The RBI has responded to these charges: “Would the commercial banks be in a position to supply funds to millions of small borrowers with comparable ease and informality, that is, give loans on the basis of personal creditworthiness rather than tangible securities?” The conclusion is that in many ways indigenous bankers constitute an indispensable link between the formal banking system and the class of small borrowers who may not be in a position to obtain funds at the right time and in right quantum from the banks.
Although there are several loose ends still to be tied up before putting the new legislation in operation, the fact that a complaint against erring ALPs can now be filed with registering authorities is one plus-point that may favour poor borrowers. Further, should it be presumed that the rural poor will continue to remain vulnerable despite the creation of diverse credit opportunities at their doorstep? Competition amongst disparate ALPs may indeed be to the advantage of the borrower!
All said, bringing traditional moneylenders into the mainstream underscores their inherent potential in strengthening the Rs 40,000 crore rural credit industry. Not only will the moneylender play a vital role in taking credit to the remotest parts of the country in a systematic and orderly manner, but the livelihoods of over a million families that are dependent on this rather tainted profession will get a boost alongside opening up new employment avenues in the villages.
Although it is too early to ascertain whether moneylenders will seize the newfound opportunity, it is expected that the transition from a nondescript existence to a legitimate financial identity will help moneylenders stake their long-pending claim on the rural financial system. This move by the RBI is unprecedented. Nowhere in the world have moneylenders been regularised and legitimised. However, the ‘law’ can only be effective if the state governments turn it into an effective ‘order’.
By legitimising the existence of moneylenders, the new legislation has inadvertently followed the history books. Had the Chettiars not engaged in moneylending, modern Singapore would not have come into existence! They lent money to businessmen who needed money to set up their businesses. It is no secret that the Chettiars, South Indian moneylenders, earned a respected place in Singapore society since.
InfoChange News & Features, August 2007
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