Saturday, May 17, 2014

Moneylending in Kerala and the Unjustifiable Gimmicks of the State


Introduction

The moneylending market in Kerala was a natural economic bubble. The bubble grew because the factors favoured it. Very few people can be blamed for it save the State for its inability to predict the case. Why? Because it was empowered with a strong legislation (Kerala Money Lender’s Act 1958) to prevent this growth and which seems was never used until now. There are several questions then on the rising money lending market in Kerala and the actions taken by the state government in the wake of a spate of suicides by borrowers. The state action, to prosecute illegal moneylenders, was widely accepted by the general public. Several people were arrested and prosecuted, and documents including blank cheques and promissory notes worth millions were seized from them. This article proposes to examine two questions in the context of the issue of money lending in Kerala.  

1.       Is the current ‘Operation Kubera’ carried out by the state justified?

2.       What are the possible impacts of this state action? And what should be done?

History: The Market for Moneylending

Before we explore these questions we need to understand the state of affairs in moneylending in Kerala. Moneylending in Kerala as for any other region across India was a thriving business at the time of the state formation. As for any other business this market too operated on the basic principles of demand and supply. Money was demanded by a lot of people who did not have it and it was supplied by people who had it in plenty. The ethical question as to how some people had more while some had very little, and the moral question of continuing exploitation led the State of Kerala to control this market. At the time of state formation this ought also to have been a popular policy too ensuring that dividends of universal adult franchise could be tapped for political power. And so the market for moneylending came under the control of the state. The earliest legislation for this control in Kerala was the Kerala Money Lender’s Act 1958. The main form of state control was introduced through a policy of licensing, which required that individual business which wanted to do moneylending should be licensed by the state. The Act also prescribed a series of measures including giving the state the right to fix the level of interest charged by the lender, strict rules and legal implications to prevent harassing of the borrowers, and fines, penalties and imprisonment for violating the provisions of the Act. This Act was revoked time and again, but this time on a grand scale to stop moneylending activities in Kerala. It came with a new nomenclature-‘Operation Kubera’. Several people were arrested and jailed but not until many others had lost their lives.

Is the Current Operation Justified?

The current occupation cannot be justified mainly because it was nothing more than a delayed intervention from the state of Kerala. The state allowed for the growth of this market over a period of time until it ruptured. This was followed by a dramatic intervention to wipe the debris from these fault-lines. It is also not justified because this state action is only a gimmick and nothing more; and the market would still thrive. I have some reasons for believing this. They are noted below:

1.       Huge Profits: An individual could earn double or four times the interest in the unregulated market if he lend his money while in the regulated markets it was much lesser that this. This created a situation where no one need to be a big capital holder. Even if you could spare Rupees 100 as investment in the non-regulated money lending market, it was guaranteed that on an hourly rate you could charge Rupees 10 as interest to this amount. Thus the regulated market for money lending created a potential moneylender in each person who had some token amount to spare. How will the state reverse this trend until it has a well-developed plan other than the use of force?

2.       Economic Conditions and the Possibility of Foreign Elements Controlling the Local Market: In a State where unemployment levels are very high this was all the more a reason to try some luck in this very old form of income generating activity. Given the potentially high interest rates in these transactions it can be assumed that the demand for money was very high and it would similarly have generated a shortage in money supply. Into this space entered new agents with money from the neighbouring states. Into this space might also have entered unaccounted money or more probably fake currency. It could also be assumed that the demand for money might have been filled through illegal activities indicated mostly by rising incidence of crime across the state. Until all this mayhem is cleared there will be questions on the current effort of the state.

3.       Logistically Impossible to Control the Unregulated Market: The inability to control the large possibilities under which these transactions could persist, say between friend, among relatives and family members, among businesses and so on made the states regulatory framework in moneylending a meek affair. It is logistically impossible for the state to restrict all these activities. So when logistically it is impossible the only alternative with the state would be to check the growth of this market through occasional ‘grand interventions’ in the form of organized attacks against moneylenders and seizing their property.

4.       Heterogeneous Base of Borrowers and Lenders:  The borrowers were mainly from all classes of the society: people wanting to do business, people in need for immediate transactions, to purchase gold, to conduct weddings, to pay fees and for that matter anything that money could be used for. The lenders were either possessors of the capital or agents who functioned for people who possessed capital. But as against the expectations none in these groups were homogenous categories and especially in the current situation most of the people picked up by the police include people from the middle or lower class of the society. So it is not a homogenous target for the state to deal with but a scattered crowd of people who entered the market for various reasons.

5.      Alternatives: A more important question concerns the freedom of individuals to adopt alternative and fair lending and borrowing practices. The more the number of restrictions the greater the trade-off between freedom and fairness. The more strangled you are, the greater would be your attempt to free yourself at all cost. When your freedom to access facilities including banking are restricted by a large number of requirements, you think less about the fairness of accessing it through alternative (legally forbidden) sources. So whom do we blame and put in jails, the alternate sources who filled the requirements or the state itself which were majorly responsible for restricting this freedom to borrow.

The Possible Impacts of Operation Kubera and Way Forward

Given the above conditions, the possible impact of ‘Operation Kubera’ would not be much until the ground realties are studied and the root cause explored and contained. The following are the suggestions in the way forward.

1.      Employment Opportunities: For one, the demand for money in a civilized society is met through labour; people extend their valuable labour time and skills and intellect in return to money. It is not only required that people have a venue to find employment but it is also required that these employment arise in return to the demand for it. So what is required is to ensure that skill gaps are filled and sources for employment is generated. A major requirement in this context would be to ease employment restrictions, and generate conducive atmosphere for conducting business in the state. This has been much debated, but at the forefront of such a measure lies the inevitable need to break free from the ideological logjams in which we are trapped.

2.       Addressing the Failure of Organized Banking Activities Led by the State: While the skill gap is being evaluated and addressed, the state can examine the points at which the major organized banking activities failed. Money demand was not met in many of the cases; which requires that stringent laws in extending money needs to be eased. This is however easier said than done in the context of mounting bad loans in these organizations. A more important reason is that the state action is likely to create a zone where officials get a chance to be corrupt.

3.       Encouraging Entrepreneurial Skills and Capacities: It is impossible to generate growth in the economy without encouraging serious entrepreneurial skill and capacities. People invest only when they feel that their returns match or exceed these investments. The moneylending market showed an easy way towards this.

4.       Empowering Micro Level Organizations: A way to monitor and curb moneylending would be to develop a mechanism of empowering micro level bodies like the residents association. Let these associations’ monitor activities and pool resources to meet crises situations of its members, and let them pool money to ensure the rise of small scale businesses across the state. Rather than such initiatives, providing more powers to the state would not help much. Any form of centralization could only increase possibilities of a rupture with reality. We want a better deal.

Conclusion

Let’s get this notion out of our minds that we have a free and fair state. Reportedly there were people with political ties, policemen and several government officials who had direct involvement in the business of money lending in Kerala. There is no answer to how this status quo could be changed. The reason is because this system has evolved and reached a stage where corrections would require changing the system in the first place. But there still are possibilities. As a start what might be required is a change in the attitude of those who occupy key positions in the state. This can be ensured through legal means, easy and accessible and understandable to the laymen. The story should begin at this point.

 

 

 

4 comments:

D Dhanuraj said...

There are many NBFCs and Cooperative Banks are operating in Kerala. If the money lenders are edge of these institutions, it means these institutions failed. One has to find the reasons why have they failed? I strongly believe that RBI and State have to work in tandem to work on the innovative and specialised sectoral approaches in banking.Time to go beyond the firewalls of conservative banking operations.

sidharthan said...

The logical vaccum of this piece is matched in its emptiness only by the poorely reasoned attempt to call for less and less state intervention in the economy. You raise the questio "whether the current operation is justified" and to arrive at a no, the first reason given is "because it was nothing more than a delayed intervention from the state of Kerala." Does it then mean that if there is a delay, then intervention is undesirable?

While it is understandable that the market may continue to thrive, and hence intervention(s) of different sorts are required, how can that justify a decree that the current intervention is undersirable?

Following this, four paragraphs, which are suggested to be the reasons for the undersirability of the intervention are given. Now, all of these four paragraphs are good descriptions of the reasons and the processess that created the current situation. But none of them point towards the undesirability of the current form of intervenion!

In the fifth paragraph you state that "A more important question concerns the freedom of individuals to adopt alternative and fair lending and borrowing practices." The analytical shallowness is fully visible when you state "The more the number of restrictions the greater the trade-off between freedom and fairness." and that "he more strangled you are, the greater would be your attempt to free yourself at all cost." While this statement essentially points towards the buisiness man, like a frog jumping from one point to the other, you take a leap out of context to state that "When your freedom to access facilities including banking are restricted by a large number of requirements, you think less about the fairness of accessing it through alternative (legally forbidden) sources" - which is the consumer. SOme kind of continuity of context would have been desirable


"So whom do we blame and put in jails, the alternate sources who filled the requirements or the state itself which were majorly responsible for restricting this freedom to borrow. "

The point is, we are putting in jails those guys who were UNFAIR in the way they dealt in thier business. Only a crony free marketeir can support an argument for the lest restrictions on capital - which ny now I assume you are!

While you have logic on your side when you enlist the factors that lead to the growth of the money lender - principally inaccessible banking terms, there is very little logic in making an assumption that for that reason an UNFAIR money lender must be allowed to go scot free.

Further, those "stringent laws in extending money" which you argue "needs to be eased" is what saved your and mine asses in 2008 when the major banks on the other side of the world went to the sky!!


If you think that the Money Lenders Act, 1958 is an unreasonalbe piece of legislation, give some reasons for it. Atleat go throug the Act once before you criticise.

..and while eagerness to please your masters is understandable, dont forget to pay some attention to logic and the context in which principles are articualted.

sidharthan said...

"Let’s get this notion out of our minds that we have a free and fair state. "

nobody has such a notion

Rahul V Kumar said...

Dear Sidharthan,

Thanks for the comments. I have the following questions.

1) How far should the state delay its activities (is there a justifiable time frame)?
2) Is there any way reason not to link this delay with the strengthening of money lending mafias in Kerala?
3) The reasons given from 1 to 5 shows why the money lending market would have thrived (if you read the paragraphs above the reasons more clearly) and is not a direct explanation of the desirability question. However, in the context of these reasons the desirability question emerges.
Before understanding at least these 'shallow'(as you said) possibilities the state ha continued its lacklustre attitude.
4) I am not sure of the term UNFAIR. Is it because they were forced to take up this business or is it because they were allowed by authorities to mature into full time goondas. In both cases please help me out with an alternative suggestion or explanation.
5) Not sure how you could speak for me when you say that I have called the money lenders act as unreasonable. In fact I have tried to focus on the lack of implementation of this act by the state as one of the reasons for the current state of affairs. You can read the third line in the first paragraph.

Appreciate your comments. Thanks