ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Moneylenders as Agents of Development?

Despite there being a strong case for revitalising the many components of institutional banking, the Reserve Bank of India (RBI) has proposed, through the release of an essentially in-house technical group report, a perverse scheme that would co-opt moneylenders into the organised banking system. The proposal is for states to enact moneylending legislation that will create, amongst moneylenders, a category of “Accredited Loan Providers” who will have links with the formal banking system and who will get credit facilities from banks with the explicit purpose of supporting their moneylending activities. What is more, to incentivise the banks, such advances granted by the scheduled commercial banks to the co-opted moneylenders will be treated as “priority sector” lending!

The technical group report, inspired as it is primarily by official thinking that wishes to absolve the organised banking system of its responsibility to provide credit to small and marginal farmers and large segments of informal enterprises, is a neatly articulated document but too clever by half in some respects. The increase in the share of moneylenders in the outstanding debt of rural households, from 17.5 per cent in 1991 to 29.6 per cent in 2002, is not a case for promoting the moneylending class as an agency that would solve the credit problems of the poor. In fact, the decline in the share of institutional agencies in total rural debt in the 1990s – a direct consequence of financial sector liberalisation – should have had the opposite effect: It should have aroused the conscience of the official agencies and forced them to correct the distortions in banking development.

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