Last week, Reserve Bank of India (RBI) slammed a whopping fine of Rs 50 lakh on a premier financial institution for engaging goons to recover loans from urban middle class customers. From where did these financial institutions and banks learn that engaging goons is the quickest way of loan recovery? Of course, from the moneylenders who rule the roost in rural India.

The government itself has now chosen the very moneylenders to dispense credit to the rural poor. In October 2006, the Prime Minister had called for “more thinking on the credit front. What do farmers need, a lower rate of interest or reliable access to credit at reasonable rates? To do that, do we need to bring in moneylenders under some form of regulation?”

The RBI responded promptly by appointing a technical group. Its August 2007 report reveals that, in fact, “the issue of mainstreaming moneylenders has been on the agenda of the government and policy makers for a long time since 1971.

Apparently this was happening behind closed doors when publicly the banks were nationalised and Garibi hatao campaign was launched in 1969 to liberate the poor from the clutches of moneylenders.

Thirty-five years later, in August 2007, RBI’s technical group concludes that there is a case for looking at the possibility of leveraging the presence of moneylenders who continue to operate despite century-long efforts by policy makers to find substitutes for them. To speed up the funding of moneylenders by the state, the group has furnished appropriate draft legislation.

Have the authorities shut their eyes to all the studied evidence over the decades pointing to the devastating impact of moneylenders on the rural poor? Even while the technical group was deliberating recently, economist Mihir Shah and others in an overview “Rural Credit in 20th Century India” had condemned the reported attempts of the technical group to “crown” the moneylenders.

It is a real shock, they said, that the group has rejected measures to avert farmers’ suicides recommended by RBI’s Johl Working Group (2006) that prescribed a lakshman rekha that, in no case, five acres of agricultural land and a house of a borrower shall be attached.

These economists also threw light on how private money lending to the poor turns out to be so profitable: the mechanism is precisely the interlocked markets in the colonial period. The only collateral rural borrowers can offer is future labour service, future harvest or the right to use already encumbered land. The lender is in a powerful position – like a goon himself – to undervalue these not easily marketable collaterals.

There is great incentive for charging usurious rates of interest because default will only mean that the lender grabs the asset offered as collateral. There cannot conceivably be a bigger disaster than to bring in moneylenders to solve the problem of rural credit especially when thousands of farmers are already being driven to suicide.  Besides, if engagement of goons in urban areas is bad, then how can the state let them loose on the rural population? Such discrimination is violative of the Constitution.

The state has been steadily expanding the market for the moneylender. The Debt Investment Survey shows that between 1991 and 2002 the share of moneylenders in the total dues of rural households increased from 17.5 per cent to 29.6 per cent – a whopping 75 per cent increase in their penetration.

This was enabled by the government and RBI choking the flow of institutional credit to the rural poor. Explains P Satish, an executive of the National Bank for Agriculture and Rural Development (NABARD) that the share of institutional credit agencies in the outstanding amount of cash dues of rural households, which in two decades between 1971 to 1991 had increased from 29 per cent to 64 per cent, was slashed to 57 per cent between 1991 and 2002; the proportion of credit to agriculture (of total bank credit) was allowed to fall from 15 per cent to less than 10 per cent; the number of small borrowal accounts (below Rs 25,000) shrank from 59 million to 36 million between 1991 and 2003-04.

The authorities have also emasculated the supporting institutional mechanisms for rural credit. In 1992-93, the RBI stopped altogether its contribution to the Long Term Operation Fund and has since then been transferring its entire profits to the central government, probably to reduce the latter’s fiscal deficit.

Growth of resources for refinance of rural credit was severely constrained: the General Line of Credit which had reached a level of Rs 6,600 crore in 2001-01, was tapered down and totally discontinued in 2006-07. The level of capital investment in agriculture that was at 1.88 per cent of GDP in 1992-93, declined to 1.27 per cent in 2002-03.

Through a devious scheme or daylight robbery, the authorities also liberated the commercial banks from the obligation (imposed on them under the regime of priority lending) to lend a minimum to the rural poor. The sums by now about Rs 16,000 crore – which they ought to have put in the hands of the rural poor – were now permitted to be credited by them to an officially devised Rural Infrastructure Development Fund (RIDF) held in NABARD. RIDF is accessed by just five state governments to finance large infrastructure projects.

Is it surprising then that the growth rates in agriculture which averaged 3.2 per  cent per annum in the pre-reform period of 1982-90 have steadily and steeply declined to a dismal 0.7 per cent in 2004-05. The most assured way of liquidation of the rural poor is to starve agriculture – the principal means of their livelihood. And those who still survive will be strangulated by the moneylender.