The policy landscape around digital and physical micro-lending
Micro-lending is in the news again for the wrong reasons. First, the Assam government passed a bill which barred micro-finance institutions (MFIs) from lending to vulnerable sections of society. It was a response to a backlash against MFIs. A large number of borrowers working in tea plantations had taken loans from MFIs. The Reserve Bank of India (RBI) noted that the economic slowdown in tea plantations and anti-Citizenship (Amendment) Act disruptions led to rise in the delinquencies. MFIs started sending collectors for recoveries to the borrowers, leading first to the backlash and then the political response in terms of the bill.
Second, RBI expressed caution against digital lending platforms which promise quick loans, and constituted a working group to study both regulated and unregulated digital lending “so that an appropriate regulatory approach can be put in place”. Digital lending platforms have mushroomed and there are criticisms of high interest rates, hidden charges, unacceptable recovery methods and misuse of data of borrowers. Whether it is physical lending or digital micro-lending, the outcomes seem to be similar across the two cases.
In 1870s, a similar backlash emerged in Poona and Ahmednagar districts of the Bombay presidency. The agriculture boom in the early 1860s led farmers to take loans from moneylenders. As the boom went bust, farmers were unable to pay these loans. The moneylenders took away land placed as collateral, fuelling protests and riots.
How did the government respond? By passing new laws. In 1879, the Deccan Agricultural Relief Act barred the arrest of the agriculturist-debtor and saved his immovable property from attachment and sale, unless specifically pledged. The Land Improvements Loans Act 1883 and Agricultural Loans Act of 1884 specified legislation relating to loans from the government for agricultural improvements.
However, none of these legislations created the desired impact. The discussions moved to establishing new financial institutions to serve the needs of farmers. In 1892, the Madras government established a committee under Sir Frederick Nicholson to study the theory and practice of agricultural and land banks in Europe. The Madras presidency was the ideal setting for this experiment as it was already home to Nidhis (local financial institutions), which financed the needs of farmers. Nicholson summarised his findings in two words: “Find Raiffeisen”. German Friedrich Wilhelm Raiffeisen was seen as the pioneer of the cooperative movement and Nicholson asked to find another Raiffeisen to start the cooperative movement in India. In 1900, ICS H Dupernex also wrote a book titled People’s Bank for Northern India which had similar ideas of cooperation.
These ideas gave birth to the Indian Cooperative Movement. In 1904, the government passed the Co-operative Credit Societies Act. It classified societies as rural and urban. Rural society members were bound by unlimited liability whereas urban ones were given a free choice. The cooperatives could raise funds and carry on their business in a corporate capacity. Loans could be given only to members on personal or real security. Since 1904, the cooperative credit movement has gone through many cycles and is currently grappling with a crisis with closures and suspensions of several cooperative banks.
In 2010, the Andhra Pradesh government also passed similar legislation like the one in Assam against MFIs leading to a crisis in the industry. Though the scale of lending is lesser in Assam and is unlikely to drive MFIs to a crisis, finance is not about scale alone but interconnectedness of the players. Fintechs will soon be criticised for being Shylocks and loan sharks.
Pre-2008 crisis, financiers were the cynosure of all eyes and post-crisis they were branded as devils of the game. Across countries, several legislations were passed to curtail the activities of the financial sector. But is it all the fault of lenders? Shouldn’t borrowers also suffer the consequences of over-borrowing? How do we address this cyclical pattern of hailing and rubbishing financiers? It is time for an honest review of the entire issue.