FINANCE

MONEY-LENDERS.

The age-old institution of money-lenders has traditionally been the main agency meeting the credit requirements of the rural sector of our economy in the past and it continues to enjoy even to-day, more or less, the same predominant position in that field inspite of vigorous efforts by Government to develop and enlarge alternative sources of credit and to control and regulate the business activities of money-lenders by various legislative measures. The enquiries undertaken and the report published thereafter in 1954 by the All-India Rural Credit Survey Committee appointed by the Reserve Bank of India in 1951 reveals certain surprising facts. It records that about 93 per cent, of the total borrowings of cultivators is financed by non-institutional or private agencies of which the most important are money-lenders who account for nearly 70 per cent. In contrast to this, " the combined contribution of Government and the co-operatives was about six per cent, of the total (each accounting for about three per cent). As for commercial banks, one per cent, represented the insignificant part played by them in the direct financing of the cultivator. [All India Rural Credit Survey, Report, page 167.] This is confirmed by the findings of Dr. P. C. Patil who in his work, "Regional Survey of Economic Resources, Kolhapur" published in 1950, reveals that about 93 per cent, of the farm debt was financed by money-lenders (including gul brokers) and only 4.37 per cent, by co-operative societies, including the State Co-operative Bank. Although co-operative movement has registered good progress in Kolhapur district, it has not significantly affected the predominant position of money-lenders.

Such a predominant position of the money-lenders would have meant no harm to our rural economy had they refrained from indulging in unhealthy practices. The Agricultural Finance Sub-Committee appointed by the Government of India under the chairmanship of Shri D. R. Gadgil, in its report of 1945 noted (page 59); " While it is true that the money-lender is the most important constituent of the agricultural credit machinery of the country, it is not possible to justify many of his practices and the charges he makes for his services. Very often these charges are out of all proportion the risk involved in the business and constitute only exploitation of the helplessness, ignorance and the necessity of the borrower. Nor is the agricultural economy of the country in a position to bear the strain of his extortion. The credit dispensed by him instead of contributing to the agricultural prosperity of the country serves as a serious drag on it." But inspite of all these evil practices which are known to all including the debtors, moneylenders still continue to enjoy almost the same predominant position in our rural economy as in the past. This is due to the fact that the methods employed by money-lender in dealing with the debtors, though objectionable in other ways, have the advantage of being extremely flexible. He is able to make funds available promptly and for all purposes and sometimes without any kind of legal formalities. This is exactly what the Government or co-operative credit agencies have not been able to do. Hence the continued dominance of money-lenders in the rural sector.

Money-lenders in the past.

The old Gazetteer of Kolhapur State published in 1886 recorded that money-lending was the chief form of investment. Everybody who could save something, except perhaps State officials, took to money-lending. Thus, apart from professional money-lenders, money-lending was resorted to by some traders, shop-keepers, brokers, pleaders, etc. who were able to save and lend. In the rural areas landlords, village headmen or Patils and a few cultivators, besides the professional money-lenders, advanced loans to those in need of them. There were also low usurers who lent small sums for short periods to the poorest borrowers at very high rates. Sometimes farmers had to borrow to meet sudden demands of the Darbar or the State Government for additional revenue and sometimes to meet demands of old creditors for return of their debts. The helpless farmers had to run to money-lenders, many of whom used this opportunity for exploiting them. However, debtors were protected by the State Law by which a limit of 12 years was fixed for the recovery of pawns and cash debts. The land and the dwelling of the husbandman were exempted from sale in the execution of court decrees except when they were specially mortgaged.

Besides the mortgages of landed property with or without possession, there was also in vogue the practice of service mortgage. Labourers often pledged their services to moneylenders for a period of three to ten years as the price of the loan which they raised for marriage and other social and religious observances.

The rate of interest charged by money-lenders varied from 6 per cent. to 30 per cent. depending upon the security offered, the size of the transaction and the credit of the borrower.

Classes of Money-lenders.

The situation has, however, considerably changed during the last sixty or seventy years. A comparatively small number of persons are now (1958) found to follow money-lending as the sole profession in life. Others combine with money-lending some other business. The Bombay Provincial Banking Enquiry Committee (1929-30), listed the following among indigenous credit agencies apart from indigenous bankers who were classed separately:-

(1) Money-lenders:-

(a) Village money-lenders,

(b) Town money-lenders,

(c) Land owner or agriculturist money-lenders,

(d) Goldsmiths and dealers in ornaments who specialise in loans secured by pledge of ornaments,

(e) Moneyed persons of all classes who invest surplus funds in loans.

(2) Shroffs and other persons dealing in hundis.

(3) Merchants, commission agents and Dalals.

Evil Practices of Money-lenders.

The above classification holds good even to-day except that the persons included in (1) (e) i.e. moneyed persons with surplus funds who used to lend money occasionally find it difficult to do so now under the Bombay Money-lenders Act, 1946, which requires them to get licences to carry on the business of money-lending.

This legislation was considered necessary in order to put an end to certain objectionable practices followed by money-lenders. These resulted from a more or less complete monopoly enjoyed by money-lenders in the rural economy. The practices included the following [The Indian Central Banking Enquiry Committee, 1931, Majority Report, page 77.]:-

(a) demand for advance interest;

(b) demand for a present for doing business, known as girah kholai (purse-opening);

(c) taking of thumb impression on a blank paper with a view to inserting any arbitrary amount at a later date if the debtor became irregular in payment of interest;

(d) general manipulation of the account to the disadvantage of the debtor;

(e) insertion in written documents of sums considerably in excess of the money actually lent; and

(f) taking of conditional sale deeds in order to provide, against possible evasion of payment by the debtor."

In Kolhapur, too, a large section of money-lenders was found indulging in certain questionable practices, thereby exploiting the helplessness of the villagers. In some cases it was found that the debtors themselves colluded with the creditors in concealing certain evil practices followed by the latter. In the absence of any other agency which could provide loan finance to them as easily and promptly, for all purposes, productive or unproductive and without any legal formalities, the needy borrowers had no other alternative except to borrow from the money-lender who always had an upper hand. The need of the debtor and the greed of the creditor thus acted to accentuate, the acuteness of the problem.

In these circumstances it was found necessary to regulate the business of money-lenders by appropriate legislative measures so as to curtail their powers till they were replaced by organised credit agencies. It was with this purpose in view that the Bombay Money-lenders' Act was formulated.

The Bombay Money-lenders' Act (XXXI of 1946)

This Act came into force in other parts of the State from November 1947 and was made effective in Kolhapur district from May 1949. The Act requires all persons and institutions, with the exception of those expressly excluded by the Act, (e.g. scheduled Joint Stock Banks, Co-operative Societies, etc.) to give every year in any recognized language, prescribed returns to their borrowers and to the State. The Act prescribes maximum rates of interest that can be charged by money-lenders on secured and unsecured loans. It also entitles Government to alter the maximum rates of interest from time to time.

Of particular significance are sections 32(i) and (ii) and 33 (i). Section 32 (i) lays down that no money-lender shall take any promissory note, acknowledgement, bond or other writing which does not state the actual amount of the loan, or which states such amount wrongly, or execute any instrument in which blanks are left to be filled after execution. The penalty for violation of these provisions is embodied in sub-section (2) of the same section which lays down that whoever is convicted of contravening them shall be punishable with fine which may extend to Rs. 1,000 or/ and with simple or rigorous imprisonment which may extend to six months. Section 33(i) lays down that whoever molests or abets the molestation of a debtor for the recovery of a debt due by him to a creditor shall, on conviction, be punishable with imprisonment (simple or rigorous) which may extend to three months or with fine which may extend to Rs. 500 or with both.

Some amendments to this Act were necessitated subsequently to facilitate its stricter enforcement and to remove genuine hardships caused to money-lenders and to borrowers. The most important amendment was one that enabled Government to vary the maximum rates of interest which money-lenders may charge. By two other important amendments incorporated in the Bombay Money-lenders (Amendment) Act, 1951, non-scheduled banks were excluded from the purview of the Act and loans from landlords to tenants for financing crops, or seasonal finance of not more than Rs. 50 per acre of land held by tenants were exempted from the provisions of the Act except for the purposes of section 23 and 25 thereof. It was also decided to exempt loans to licensed money-lenders from the provisions of the Act, so as to facilitate the flow of capital from big financiers to persons actually engaged in money-lending business.

Two other important amendments were passed in 1954-55. The first was an amendment to section 33 by which carrying business of money-lending without a licence was made a cognizable offence. The second was the amendment to section 13A. It brought out clearly the original intention that Registrars and Assistant Registrars of Money-lenders are competent to enquire into financial dealings of persons suspected to be engaged in money-lending business.

Rates of Interest.

The maximum rates of interest laid down originally were six per cent. on secured loans and nine per cent. on unsecured loans. The money-lenders found these rates unremunerative. So. certain money-lenders, especially pawn-brokers, raised hue and cry against this scheme and argued that unless the rates were revised upwards most of them would find it impossible to continue in their business. Government, therefore, in exercise of the powers given under section 25 of the Act raised by a notification in 1952, the maximum rates of interest on secured loans from six per cent. to nine per cent. and on unsecured loans from nine per cent. to twelve per cent. The expectation that the increase in the maximum rates of interest would result in a considerable increase in the number of licensed moneylenders was not fulfilled as can be seen from the following table:-

TABLE No. 1

LICENSED MONEY-LENDERS, KOLHAPUR DISTRICT.

Figures taken from the Annual Reports on the Administration of the Bombay Money-lenders' Act, 1946.

The above table shows that even after the upward revision of the rates the number of money-lenders holding valid licences has been on the decline. This may be explained by the fact that the number of persons who apply for licences to cover a few casual transactions for one year only and then do not apply for renewal of their licences, far exceeds the number of new applicants who are professional money-lenders. It seems, however that even the upward revision of rates has not satisfied money-lenders. Some of them still contend that the maximum rates of interest are not remunerative, particularly with regard to petty loans which form the bulk of their loan operations. But it should be noted that inspite of the gradual fall in the total number of licence holders, Kolhapur district has continued right from 1949 to have the largest number of licensed moneylenders as compared to those in other districts of the State. The amount of finance made available by them was also quite large.

The taluka-wise distribution of money lenders in the district in 1955-56 was as follows:-

The following table shows the amount of loans advanced by licensed money-lenders to non-traders and as far as available, to traders from 1949-50 to 1955-56:-

TABLE No. 2.

TRANSACTIONS OF MONEY-LENDERS BETWEEN 1949 AND 1956.

continued

Working of the Act.

The figures given in the above table about loans advanced by money-lenders need not be taken as fully indicative of the business of the money-lenders in the district. Under the scheme of the Act loans extended to traders are exempted from the provisions of the Act except for the purposes of sections 23 and 25. Money-lenders were, therefore, tempted to take an undue advantage of this concession. The Registrar General in his Administration Report for the year 1952-53 remarked as follows:-

"A number of money-lenders are found to be advancing loans to persons who really are not traders, as defined in the Act. Transactions which in pith and substance are nothing but loans and promissory notes, are made to assume the garb of advances and hundis. It is also noticed that a number of persons who were in the past doing money-lending business have now resorted to purchase and sale business which in essence are money-lending transactions."

Since September, 1946, the Kolhapur Money-lenders Act, 1946, promulgated by the then Kolhapur State Government was in force in the district. With the merger of the State in 1949, steps were taken to apply the Bombay Money-lenders Act to this area and it was made applicable in 1949.

A large number of money-lenders in the district are commission agents or dalals who advance loans to agriculturists on the security of their agricultural products. As noted by the Registrar General of Money-lenders in his report for the year 1950-51 the commission agents affiliated to the Shahupuri Merchants' Association advanced, annually, loans to the extent of one crore rupees to agriculturists for production of gur. This was far in excess of the total finance made available by co-operative societies which amounted to Rs. 24.53 lakhs and Rs. 53.99 lakhs during the years 1949-50 and 1950-51 respectively. It is found, that quite a large number of these commission agents, did not obtain licences on the plea that they did not charge any interest.

As gur is the chief agricultural product of the district, money-lenders advance loans to agriculturists usually on the security of gur. The general mode of repayment of loans is in kind i.e. in gur. This being so, it is difficult to find out precisely the rate of interest charged by them.

Our enquiries (in 1957) show that most of the clients of village money-lenders are agriculturists. On the other hand, town money-lenders have a variety of clients which include labourers, small employees and petty retailers. The amount Such loan lent to an individual debtor varies between Rs. 100 and Rs. 8,000. The demand for loans was for varied purposes, the chief among them being agricultural improvement. Such loans to agriculturists were generally given for a period of one year. The loans advanced to salaried persons and labourers were for shorter terms.

Money-lenders in the district were also engaged in certain other activities, such as retail shopkeeping, commission agency, etc. They generally did not accept deposits from the public. They carried on their business of money-lending on their own capital, supplemented by their earnings from other businesses which they usually pursue. Some money-lenders in towns who were also businessmen or commission agents had access to the resources of the organised banks-both joint stock and co-operative.

The importance of money-lenders in the rural credit structure is expected gradually to diminish in future, thanks to the legislation that has been and may be passed for regulating their activities. It is also realised that strengthening of institutional agencies to supply the necessary credit to rural population is equally necessary. That alone will remove the necessity of having to go to the money-lender for obtaining the necessary finances.

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