Farmers' debt

Creditor’s noose

Print edition : September 04, 2015

The grief-stricken wife (left), children and relatives of Mahadevanayaka at their house at Hura village in Nanjangud taluk in Mysuru district. Photo: V. Sreenivasa Murthy

The State government’s drive against usurious moneylenders is bound to fail because it is not backed by any effort to reach institutional credit to farmers.

JOWARIAH, a cotton grower in Kundur village of H.D. Kote taluk in Mysuru district, is a worried man. Shunned by banks and other institutional sources of funds, the farmer with a two-acre plot, who also works as an agricultural worker, is at his wits’ end. The State government’s drive against moneylenders in the past few weeks has shut access to the only source of credit he knows of. Not for nothing are such informal loans termed kai sala, literally “hand loan” in Kannada, implying the informality with which the transaction is conducted.

The Superintendent of Police, Mysuru district, who has visited many of the families of suicide victims in the past month, told Frontline that more than 80 cases have been registered and 60 arrests made in the past few weeks. The cases have chiefly been under sections of the Karnataka Prohibition of Charging Exorbitant Interest Act and the Karnataka Moneylenders Act. He clarified that the cases are registered under what are considered to be “bailable sections” of the two pieces of legislation. Asked about the fear among farmers that private and informal sources of credit would dry up, Khare said, “The legislation acknowledges the relevance and importance of such sources of finance. It is only aimed at [those charging] extortionate interest rates and to prevent expropriation of property of borrowers…. We are aware that in H.D. Kote there is virtually a parallel economy of the moneylender.”

But Jowariah is not convinced that normality will return soon. He took a loan of Rs.20,000 from a private moneylender 20 years ago, mainly to part-finance his daughter’s wedding. Every year since he took the loan, he has paid Rs.8,000 as interest to the creditor, who lives in the same village. The peculiar terms of credit, a financial innovation of a unique kind, require him to clear the interest and principal (Rs.28,000) in one shot to clear the loan. If such a lending practice were to exist even in a semi-urban setting, let alone an Indian metropolis, one wonders how one could borrow to buy a two-wheeler. No wonder this lending practice is termed “ meter baddi” (interest piling on top of interest like a fast-moving meter).

Jowariah nurses no grudge against his lender. “Yes, the S.P. did visit the village. He did comfort us and ask us to speak out fearlessly against those who lend at outrageously high rates of interest,” said another person from the village. Those around Jowariah said they would support him if he spoke up against the lender, but he himself shifts uneasily. “How can I complain against the lender. After all, he lent me money when I needed it badly and nobody else was willing to give me a loan,” he said.

The case of Nanjundanayaka, another resident and cotton grower of Kundur, is even more ironic. The local moneylender “sponsored” Nanjundanayaka’s candidature in the recent local bodies election by extending a loan of Rs.10,000. The condition was that he would repay the loan in four months, with the interest amounting to Rs.4,000, implying an annualised interest rate of 120 per cent. Nanjundanayaka said: “I have other loans from similar sources, amounting to about Rs.35,000. I can barely pay the interest on these loans, I cannot imagine paying the principal.”

Across the State more than 1,200 cases have been registered and nearly 1,000 arrests made after the State government issued a directive to the police to crack down on lenders who harass farmers. In the absence of institutional credit, private and informal credit takes several forms, of which the classical usurious moneylender is just one. Families of victims in Mysuru, Mandya, Tumakuru and Hassan districts told Frontline that cotton commission agents in Mysuru, coconut commission agents in Tumakuru, potato seed dealers in Hassan or pesticide dealers in Mandya were the other sources farmers turned to in the absence of access to institutional credit.

Another important category of lenders goes by the name “family or friends”, which, according to C. Yashwant, an activist of the Karnataka Prantha Raitha Sangha (KPRS), is often a euphemism for caste connections. Microfinance has also made great inroads in places like Mandya district.

“But that is deceptive because the loans are repaid on a weekly basis, often through the grass-roots network of self-help groups,” Yashwant observed. In several districts, the most active promoter of SHGs is the Sri Kshetra Dharmasthala Rural Development Project (SKDRDP) trust. Particularly active in the field of microcredit since the mid-1990s, the trust is led by D. Veerendra Heggade, the Dharmadhikari and temple administrator of Sri Kshetra Dharmasthala. The temple is well positioned to lend because it has assets of several thousand crores and annual revenues believed to be running into several hundred crores of rupees, mainly through the thousands of SHGs it works with.

Somegowda, 46, a resident of Shatigrama village in Hassan district, is a potato grower. His wife, Jayalakshmi, 40, committed suicide on July 25. He told Frontline that the persistent failure of the potato crop, not only his but of many others in the village, has driven him to despair. Several potato growers showed their fields afflicted with late blight disease (a variant of the disease that caused the Irish potato famine in the 19th century). He had borrowed Rs.70,000 from a moneylender in 2011. “Initially, he charged me 2 per cent a month, but from 2014 this was increased to 7.5 per cent a month [90 per cent on an annualised basis].”

Mahadevanayaka, a resident of Hura village in Nanjangud taluk of Mysuru district, committed suicide on July 8. Raghu, a friend of the victim, a cotton grower with 2.25 acres of land, told Frontline that Mahadevanayaka had run up debts to several “private” sources. These included a “hand loan” of Rs.30,000, Rs.35,000 from the Dharmasthala Temple Trust, and Rs.30,000 from an SHG promoted by Spandana, a non-governmental organisation in the microfinance business. Apart from these, he had borrowed Rs.15,000 from a regional rural bank. Raghu said the loans were not only for “agricultural purposes” but also for conducting family events such as birth ceremonies.

“Mahadevanayaka’s complete dependence on these sources of funds was mainly because he was unable to transfer the title of the land to his name after his father’s death,” said Raghu. Apart from these loans, his wife, Mahadevamma, had borrowed Rs.35,000 from the Dharmasthala Sangha. The repayment schedule requires her to pay Rs.800 for 50 months in order to clear the loan. Although the simple interest on Mahadevamma’s loan would be only about 14 per cent, the fact that she is repaying a portion of the loan every week implies that the internal rate of return (or compound interest) she would be paying to the temple trust would be a whopping 32 per cent.

How microfinance deceives

The deceptively low rate of interest in microfinance is what has endeared it to those who advocate it is a panacea for the failure of institutional credit to reach small farmers and businesses. It rests on simply taking the interest rate at face value, without factoring the repayments that borrowers make, typically on a weekly basis. While travelling through the districts with a high incidence of suicides in the past six weeks, the Frontline team found that the simple rate of interest charged by microfinance agencies operating through SHGs ranged between 18 and 24 per cent, and in some cases it was as high as 36 per cent.

But it is not just the high rate of interest that puts pressure on borrowers. Raghu told Frontline that since the SHGs are closely knit, often from within the same village, a member with outstanding loans faces pressure that cannot be ignored. “Unlike a moneylender, the pressure from other members is intense and incessant, almost on a daily basis,” he said.

G.C. Bayya Reddy, president, KPRS, pointed out that banks were willing to lend to large borrowers even if the loans threatened to turn into non-performing assets but were unwilling to lend even Rs.50,000 to a small cultivator for animal husbandry. He pointed out that private lending was filling the void caused by the collapse of institutional credit. The only sensible way of attacking usurious lending practices is to get institutional credit back on track. “Otherwise, the action that is being taken against moneylenders will prove futile,” he said.

Bayya Reddy observed that in the irrigated areas of northern Karnataka, where feudal interests were more entrenched in their classical form, lenders were typically those with large land holdings. “Those who control land control the mandis; they are also dealers of a range of inputs such as fertilizers and pesticides; they are the moneylenders, and they also control the panchayats and cooperatives,” said Bayya Reddy.

He recalled a recent case of a protest by farmers in Gangavati in Raichur district where a moneylender lent to more than 1,000 farmers, charging a graded interest rate. The rate for the first six months was 3 per cent a month (36 per cent per annum), after which it doubled to 72 per cent per annum. The lender also got the land registered in his name as security for the loan, alleged Bayya Reddy. The government’s crackdown on private moneylenders is likely to be short-lived. This approach is destined to fail, not merely because of the lack of political will to go after the entrenched interests but because it is not accompanied by any moves to get institutional credit to fill the void.