Tuesday, 12 May, 2009

The logic of the evil moneylender

The village moneylender is the villain of countless movies. His two great crimes being high interest rate and ruthless demand for  collateral. Doubtlessly, he did and does both. However, there may be more to his sins than greed.

All businesses have low rates for bulk orders and high rates for small orders.

Second, all lenders, including the Nobel winning Gramin Bank, have different terms for borrowers with bad credit ratings. Undeniably, most Indian farmers are shaky debtors.

Third, the moneylender’s business, one assumes, had and has little or no legal protection. One cannot imagine the government, of any age, paying off farmers’ loans to him. So what choice did he have besides strongmen?

This is not to say that the moneylender was a misunderstood and unappreciated do-gooder. But to suggest that had his limitations been taught in schools, instead of evils – which probably had far more to do with justifying political rather than economic reforms – people would have a better idea of what needed to be done in rural credit.

For example, (good) organised rural banking may well be a viable business at high interest rates and high penalties for non-payment. Yet it may be impossible if people are brainwashed into believing that both are unnecessary evils. Also, if the US were wrong about sub-prime credit for homes, why are we right on waiving repayment on sub-prime credit on farms? The humanitarian reasons are readily apparent, yet one wonders if no ‘restructuring’ was possible.

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