: The Dharmashastras form the basis of Hindu morals, ethics, codes of conduct and law. In the Dharmashastras, and even in Mahabharat, interest rates are differentiated according to caste — lowest for brahmins, higher for kshatriyas, higher still for vaishyas and highest for shudras. (The actual interest rate doesn’t matter, since it varies from one text to another.) The standard reaction is — how terrible! How can interest rates also be determined by caste? But in some texts there is a rationale. In today’s jargon, it is the following. Brahmins will borrow small sums of money, for sacrifices. Kshatriyas will borrow larger sums for waging wars, with greater uncertainty of outcome. Vaishyas will borrow still larger sums for trade and commerce, with even greater uncertainty. Shudras will borrow for conspicuous consumption and the sum will never be returned. Stated thus, caste is an incidental category and interest rates are differentiated according to risk premium.
Logically, there is nothing wrong with interest rates graded according to risk premium and administrative costs of delivery. And this has a bearing on our attitude towards agricultural credit. Why must we decree that agricultural credit must be at not more than 2 percentage points above the prime lending rate? (The preference is for 2 percentage points below PLR.) This is price control. If there is one thing price control ensures, it is non-delivery and shortages.
Thanks to the farm debt waiver, our attention has again turned to the despicable act of money-lending. Here are some facts worth remembering. First, the All-India Debt and Investment Survey (2002) showed an increase in the share of money lenders in total dues of rural households from 17.5 per cent in 1991 to 29.6 per cent in 2002. Money-lender shares were highest in states like Bihar, Manipur, Punjab, Rajasthan, Tamil Nadu and Andhra Pradesh. This list includes Tamil Nadu and Andhra Pradesh, where banking penetration is not bad. Second, in April 2006, the RBI announced the setting up of a technical group to examine legislation on money-lending. That report is now available. Third, the RBI survey found that the number of registered money-lenders (pawn-brokers are different) increased from 12,601 in March 1995 to 19,627 in March 2006. Even in the reform era, with talk of financial inclusion, we have not been able to eliminate money-lending. Fourth, the average size of a loan varies between Rs 1,000 and 30,000. Typically, these are small loans....
