Long before the banking system in India existed, the practice of providing rural credit was hitting waves. ‘Sahukar’, ‘Mahajan’, or, ‘Loan Shark’ have always been famous in rural India for providing flexible credit borrowing facilities. The practice is as vicious as it gets. From selling houses to pay back the money; to farmers being asked to prostitute the women in the house; and some even committing suicide in the pressure of not being able to return the money, nothing has been able to stop these money lenders from sucking the blood out of the innocent borrowers and asking for an unjustified heavy interest in return for the amount provided.
Who are the Money lenders
Every person in the village has been compelled to call the money lender at some point of time, whether it’s a farmer in need of money after the crops have been destroyed with excess rain or a helpless father who needs money to pay for his daughter’s marriage or in every other possible scenario, one man is common; it’s the almighty ‘Loan Shark’, the man with a protruding belly, grinning with his tar filled teeth, eyebrows as thick as a spider’s web and a shiny bald head. Famous in the village for his offensive jokes and vicious behaviour, it is impossible to cut the Money lenders tie from the rural system of finances and financial planning. Although, this activity of borrowing loans from ‘Sahukar’ is illegal as a license from Reserve Bank of India (RBI) is required to extend loans to people but even in the 21st century most of rural India is highly dependent on it.
Rise of Money lenders
Having acquired a dominant position in the field of finance in the pre-British era, money lenders have been around in India for a long time. Even after charging exuberant amounts of interest, as high as 50% and some even charging 70% or more, money lenders have always been the first choice of farmers and everyone else in the village. After independence and the nationalization of banks, the percentage of borrowing reduced but it is nowhere close to completely destroying its very roots. Moneylenders took birth because of no proper credit borrowing system present in India. Thus, money lenders are your very own bankers however the borrowing comes with an extortionate high interest. Even after the nationalization of banks, village ‘Mahajan’, is the preferred choice for the daily wage worker or farmer due to ease and flexibility of borrowing loans as well as the absence of documentation as borrowing from a bank involves a large amount of paperwork and other legal formalities which the regular farmer doesn’t appreciate and thus comes the Money Lender in the picture.
Other factors include having no collateral security or credit history. The factor of ‘Lack of knowledge’ also plays a crucial role as even today, most of the farmers are not aware of ‘where to apply’ or the correct procedure that has to be followed for taking a loan from a bank benefitting the Shylocks of village, the money lenders.
‘Officially, almost half of India’s nearly 100 million farming families are in debt. Of these borrowings, almost 30% are said to be in debt to private moneylenders, although farmers’ lobby groups say the ratio is many times higher.’1 The total amount of loans disbursed by private money lenders rates was Rs 1,254,97 crore. Compared to the 2015 statistics, the total amount disbursed thus has risen by Rs 358.63 crore. According to the All India Debt Investment Survey of 2012, nearly 48% farmers across the country took loans from informal sources such as from moneylenders and landlords. The number had risen from 36% in 1991 and 43% in 2001. Among farmers who owned land parcels smaller than 0.1 hectares, 85% had pending loans from such informal finance sources.2 Looking at the data, the dependency on money lenders is clearly visible.
Debt trap
A debt trap occurs when a borrower is unable to make payments on the loan principal; instead, they can only afford to make payments on the interest. Because making payments on the interest does not lead to a reduction in the principal, the borrower never gets any closer to paying off the loan itself. The farmer being the borrower here finds himself unable to pay the amount borrowed owing to hefty returns thus starts the circle of debt trap. Most farmers get stuck in the cycle and take more loans to pay the old loans and others pass this debt to their wives and to the next generation in the family resulting in getting deep in the debt trap.
Return of Moneylender
The Covid-19 led pandemic is forcing the micro, small and medium enterprises to tap money lenders for cash due to cash flow and other requirements in these difficult times. IIT Madras conducted a survey in collaboration with MSME federations to assess the impact of COVID-19 on these firms in Tamil Nadu, the survey found that 31.3% of the respondents were looking to access finance from money lenders.3 However, this doesn’t come as surprising as it sounds because the banks are not lending and people have spent all their savings. Their products or services are not selling much and cash is urgently required to save the business and/or to feed the family, therefore money lenders seem the last resort where cash can be obtained from, without presenting a lot of papers and not even answering dozens of questions. Hence, Money lenders seem to be the solution for urgent cash requirements and as such it is impossible to erase the money lender from the map of India’s financial planning.
