On the face of it, the government has been doing a good job for the rural poor. That is what the advertisements say. That is what politicians like to claim.
But the numbers describing rural, especially agricultural, indebtedness tell a different tale.
First, as the tables below show, marginal farmers have seldom enjoyed lines from credit from ‘legitimate’. As things stand, barely 45-51% of small and marginal farmers had access to credit.
The rest had to manage their lives apparently without any recourse to credit. Which means, that at best, they could have gone to the local jeweller -- who also doubles up as a money lender — and borrowed money without the figures ever getting recorded.
Therefore, even if we go by data recorded, only 39-58% of these small and marginal farmers got money from banks. The rest had to go to money lenders. This also means the figures for money lenders would be a lot bigger, if one assumes that all of those shown as not having access to credit, were in reality left with no option but to go to the money lender. Whether the government likes it or not, the role of the moneylender is huge in rural areas.
Now take the second table. Look at the percentage share micro-financing institutions (MFIs) had of all loans outstanding. During 2006-07, MFIs catered to barely one-fifth of customers. During the same year, MFIs had a share of just 22% of total loans outstanding. However, watch how the share of the MFIs has kept increasing since then. They managed to capture almost one-third of all customers, and accounted for almost 37% of outstanding loans. So, were banks and self-help groups (SHGs) losing their relevance?
Not really. There are good reasons to believe that after 2006-07, banks did not want to lend to small farmers any longer because the government had begun to teach them — once again — not to repay loans. Politicians raised the demand for loan write-offs (akin to the “loan-mela” ceremonies of the 1980s during the ministership of Janardhan Poojary). The cries for loan write-offs became louder and shriller during 2010-11. Faced with the prospect of more bad debts, banks opted to slow down lending to small farmers. MFIs and money lenders filled the resultant vacuum.
But don’t MFIs and moneylenders face the same risk of default in repayment? They do. But they have always used peer pressure and other ways ingeniously to recover their dues. Yet, as both the risk they face and their financing costs are higher than those faced by banks and SHGs, this finds ample reflection in the interest rates at which they offer loans. Farmers agree to pay these rates, because they are left with no other option.
Moral: (a) Don’t teach farmers NOT to repay loans. Eventually, small farmers suffer most for at least 10 years thereafter. They are compelled to go for more expensive loans because of the one-time irresponsible largesse announced by politicians. (b) If MFIs and money lenders charge higher interest rates, it is because of two reasons (i) their cost of financing is high, and (ii) they offer loans to customers who are more risky. If the government wants moneylenders to charge lower rates, first legalise moneylending so that they can gain access to cheaper funds. Do the same with MFIs as well.
Branding moneylending as ‘illegal’ is definitely not the answer.