A year has passed since Prime Minister Manmohan Singh visited Vidarbha. But indebted farmers continue to kill themselves in this region of Maharashtra, and elsewhere. One out of every two farmers is turned away by banks. They also don’t get credit for consumption. Banks have too many procedures and often lend much less than what the farmer needs.
So they go to moneylenders. When a farmer has borrowed from both, he gives priority to repaying the much costlier loan from the moneylender, and defaults on the bank loan.
Now that the problem has been acknowledged in black and white, by a new Reserve Bank of India (RBI) technical group on moneylending laws, we can perhaps get down to solving it. Yet, there’s little that is innovative in the report submitted on Tuesday, or in that of the RBI group on distressed farmers released alongside, except in their humble admission that “one of the important reasons for continued dependence on moneylenders is that the formal credit delivery structure has not percolated down to the villages.” And that the problems are too endemic to be overcome in the short run.
In 2003, the National Sample Survey Organization conducted a unique and landmark survey in India which laid bare the crumbling framework of the country’s post-Green Revolution agriculture. It showed that 35 years after Indira Gandhi nationalized banks to ostensibly shovel cheap money to the underprivileged, more than 57.2% of all rural households were indebted to a formal institutional lender, and 29.6% to a moneylender. And the moneylender’s influence has not waned despite the increasing appeal and recent success of microfinance.
Close to 60% of outstanding loans are for agriculture and 35% for consumption, such as ill health or wedding expenses. The average per capita debt per state ranges from Rs72 in Meghalaya to Rs41,576 in Punjab. Clearly, nobody is immune, though marginal farmers are more debt-ridden. Cooperative banks are riddled with defaults and now dysfunctional, while the rural bank network collapsed with liberalization.
In such a situation, the committee rightly said, severely restricting the moneylender would choke off all credit sources to the farmer. But, won’t acknowledging the moneylenders as legitimate agents of economic activity also imply encouraging the often-usurious practices, the foreclosure of land or other collateral, and interest rates that are often as high as 2-3% a month?
What then can be done to stop farmers from falling prey to a greedy moneylender? The committees suggest the usual: a new model legislation allowing easy registration (as opposed to licensing earlier), a cap on interest rates (prime lending rate plus 4-5%, for instance) and systemic checks and balances including stiff fines and local dispute settlement.
Three obvious solutions are clearly outside the law but within the government’s ambit. One, clean up land records and entitlements. Unclear ownership of collateral has pushed many a farmer to destitution and suicide, while making it easier for the local muscleman in the guise of a moneylender or even the bank to take over assets. The report on distressed farmers hints at this, but only barely. Second, bring back institutional mechanisms in agriculture that facilitated supply of seeds, fertilizer etc., to farmers, but which have now been replaced by input-supplying middlemen. Third is crop insurance.
As long as a farmer is forced to approach a moneylender, it is futile to expect the moneylender or any other informal credit supplier to charge interest rates that are lower than his risk perception. Don’t forget that 40% of farmers want to get out of farming because it is a very high-risk activity.
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