Fifteen Eighty Four

Academic perspectives from Cambridge University Press


Climate, Courts and Indian Moneylenders

Maanik Nath

The evil moneylender exploiting the vulnerable borrower is a recurring genre in popular fiction. Oliver Twist depicts moneylenders as crooked gangsters operating illegal businesses and luring impoverished groups into crippling debt arrangements. Indian cinema told similar stories, proselytizing villainy of moneylenders and stirring compassion for deprived borrowers. Mother India, released in 1957, is a classic example. It followed the struggles of a protagonist who borrowed a small loan from a local moneylender. The moneylender coerced the protagonist to part with three-quarters of her harvested crop as repayment, leaving her in an unbreakable cycle of debt and poverty for the rest of the story.

These stories were powerful and embedded in public discourse from colonial times. Newspapers claimed Indian farmers were unthrifty, indolent and easy to manipulate. One article provocatively titled ‘India’s Dumb Millions’ recorded an interview with Francis Skrine, a senior colonial official who opined that peasants borrowed far more than they earned. Unscrupulous moneylenders, according to Skrine, exploited financial illiteracy of the rural poor by charging high interest rates, capriciously inflating principals and coercing debtors to part with assets such as land or jewellery in latter decades of the nineteenth century.

Lawmakers tried disciplining moneylenders from the 1870s, tightening regulation in the 1930s. After independence regulation tightened further, rendering the exchange of credit from an unregistered lender to a farmer illegal in many Indian states. Officials acknowledged the need to substitute the moneylender with other forms of credit enterprise. From the early 1900s, governments expanded financial inclusion strategies by establishing and funding credit cooperatives. In the postcolonial period, the Indian government instructed nationalized banks to lend in rural areas. The goal was to target ‘unbanked’ farmers, those who borrowed entirely from moneylenders. And yet, despite repeated attempts to discipline lenders and free indebted borrowers, the moneylender did not disappear.

Capital Shortage, recently published with Cambridge University Press,shows that the discourse outlined above was rooted in a misdiagnosis of the problem. Analysing credit and development from the lender’s perspective, and asking why loans were supplied the way they were, the book argues that a set of risks explains credit arrangements in colonial and postcolonial India. It tells this story in two parts and nine chapters.

The book analyses historical sources documenting credit markets across villages and districts in the Madras Presidency, a major province in South India. The book finds that region-specific ecology determined lending patterns. Regions with a high likelihood of harvest failure, the arid parts of the South Indian hinterland in particular, saw high rates of credit default. Lenders acted strategically, charging high interest rates and providing loans to the richer borrowers, the ones more likely to repay following harvest failure. Markets operated differently in irrigated parts. Moneylenders were numerous and loans were accessible to a wide range of borrowers in villages where the risk of harvest failure was low. Both harsh and lenient credit terms existed.

The design and persistence of colonial institutions were additional constraints. The book discusses laws and court procedures as obstacles to lending. When unregulated, moneylenders had two choices to recover unpaid loans. First, they could secure loans with types of contract, and enforce these contracts in courts. Second, they could operate outside the sphere of law and recover loans through informal forms of debt settlement. Written contracts were commonly used in rural credit markets in the late-nineteenth and early-twentieth century, though judicial procedure was expensive. Lenders compensated for legal expenses by charging high rates. Borrowers footed the costs of legal disputes.

Lawmakers and judges struggled with the decision of who to protect when contract liability was weather dependent. When they protected lenders, borrowers rioted. When they protected borrowers, lenders either exited the market or provided loans outside the scope of law. Following the enforcement of a ceiling on interest rates in the 1930s, lenders could no longer transfer default risk or legal costs to the price of credit. Many stopped lending, while remaining lenders continued to lend in underground markets and enforced repayment informally, outside the legal sphere. More importantly, credit became harder to access and the prices of credit did not change after regulation. Investment and development stalled in the first half of the twentieth century.

The final chapters of the book demonstrate that attempts to make the market more competitive did not have the desired effect. Governments in colonial and postcolonial India championed cooperatives to outcompete moneylenders. The colonial government designed cooperatives to perform a welfare rather than banking function. Political interests conflicted with developmental ones. The outcome was mismanagement and exclusion in the cooperatives sector. Some borrowers benefitted from accessing publicly-funded credit cooperatives. For many, moneylenders lending in underground markets remained the only source of credit.

Capital Shortage shows that climate, law, policy design, and interactions between these factors, perpetuated a stubborn cycle of credit scarcity, low investment and widespread deprivation over several decades. Some broke out of this cycle. Millions of Indians are still stuck in it.

Capital Shortage by Maanik Nath

About The Author

Maanik Nath

Maanik Nath is Assistant Professor in Economic and Social History at Utrecht University....

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