Loan wolves

Meena (name changed) believes that borrowing Rs 60,000 from an usurer a year ago may have been the worst decision of her life. A domestic worker, she managed to pawn her jewellery to repay Rs 40,000. But her worries are far from over, for she still owes Rs 80,000.

“For someone who earns Rs 6,000 a month, most of which is used up for domestic expenses, the only way to settle the debt is to borrow from elsewhere,” says the mother of two and a resident of Aminjikarai.
She is now forced to work, sometimes even in households where she is abused, because she cannot afford to lose her job at any household, even if it is just for a month.

The kanthuvatti system has been around for centuries in the State, though limited public discourse has followed it. Once in a while tragedy strikes and flaws in this system are in the limelight, before being forgotten once more.

A day after a Tirunelveli man set his wife and daughters ablaze after alleged harassment by loan sharks, a powerloom weaver in Kasipalayam (Erode) had reportedly set off to Ernakulam, accompanied by a broker, to sell off his kidney and settle loans after mounting pressure from lenders.
Sampoornam (37), father of two, was persuaded to return home without selling his kidney by the police ,who initially suspected that he had been kidnapped.

Often, these loan sharks thrive, exploiting entire communities which are more vulnerable than others. Farmers, for instance, turn to “finance” firms as the quantum of crop loans advanced by cooperative credit societies is not commensurate with cultivation costs.

This year, the scale of finance for paddy crops was fixed at Rs 26,500 per acre. However, according to Sundara Vimalnathan, district secretary of the Cauery Delta Farmers Protection Association, only a few farmers were offered the prescribed loan amount.

“Most of these farmers are given only around 50% of the amount. For the rest, they have to approach usurers who charge an interest rate of 36%,” says Vimalnathan.   Most of these farmers pledge their jewels with pawnbrokers, and others submit bond papers for getting  a loan. The farmers who get loans above Rs 1 lakh may have to pledge their land documents. While farmers turn to the unlicensed “finance” firms and pawnbrokers, farm labourers on the other hand turn to mushrooming microfinance institutions (MFI) for high-cost loans.

“MFI officials lure prospective clients by approaching them at their doorstep and offer loans ranging from Rs 20,000 to Rs 50,000 without any collateral”, says Karunamurthy, a representative of an NGO working with rural poor. Once members of Joint Liability Groups (JLG) avail these loans and spend mostly for family functions and children’s educational needs, the representatives appear at their doorsteps early in the morning for collecting the loan.

Typically, in the kanthuvatti system, interest rates vary from 60% to 200%. Similarly, in areas like Krishnagiri, tribal villagers of Anchetti and Thakkati panchayats pledge their ration cards for loans of Rs 2,000-5,000, at interests of over 12%.

Usury rationale flawed: Experts

The most popular argument put forward by those in favour of usury has been that value of money is higher at the time when it is sought than what it may be at a future point of time, making availability at the right time worth the exorbitant interest rates.
M Manikandan of Chennai, who says he was a local kandhuvattikaran a few years ago, remarks, “In case of emergencies, say, if a relative is in the hospital, we are able to give them money immediately. What’s the use if they get the same amount later?”

Some usury debtors agree. For instance, silver businessmen Salem’s Ammapet and Shevapet have no complaints, even if it means that they have to pay an interest as high as Rs 1,000 per day till the time of repayment. They say that they receive cash from usurers within hours, which allows them to buy silver whenever its price falls.

They are able to settle the debt within the next few days after selling the silver that they’d purchased at a much higher price. However, the basic premise of the argument that is used to rationalise kanthuvatti is deeply flawed, say economists. Firstly, not in all cases is ‘now’ considered as better than ‘later’; if it had been so, it would defeat the entire purpose of savings.

The more sensible argument is making up for the low recovery rate. While a collateral may secure the credit, it is often not feasible in kanthuvatti.
Says economist Venkatesh Athreya, “The recovery rate in these cases is very low. Also, since it involves people from financially backward communities, these loans are not collaterally backed in most cases.”
In cases where people are willing to pay up to 200% interest, the inability of the State to meet the demand is also a glaring flaw.

“The State has a responsibility of providing credit. The system makes a mockery of the high rhetoric of financial inclusion.”

Laws in place

The Tamil Nadu Money Lenders Act, 1957, states that no person can carry on business without a licence, and that moneylenders should exhibit names in front of their shops. Section 7 of the Act states: “No moneylender shall charge interest on any loan, at a rate exceeding such rate as the government may, by notification, fix from time to time.”

However, the law has done little to stop the practice.
The Tamil Nadu Prohibition of Charging Exorbitant Interest Act, 2003, was also enacted by former Chief Minister J Jayalalithaa after the suicide of Tamil producer G Venkateswaran, allegedly due to harassment from loan sharks.

It states that anyone who “molests or abets the molestation of any debtor for recovery of any loan shall be punishable with imprisonment for a term which may extend to three years and also with fine which may extend to thirty thousand rupees”.

More recently, former city commissioner S George formed a special wing in 2014, and called it ‘kanthuvatti and non-specialised traditional crimes’ wing, exclusively to deal with complaints of kanthuvatti harassment. Inputs from Ramesh, Thanjavur, Sabari (Salem), Siva Guru (Krishnagiri) & Baranidharan C.

Hook, line and sinker

According to Karunamurthy, an NGO worker, microfinance officials lure clients by approaching them at their doorstep and offering loans ranging from D20,000 to D50,000 without any collateral. Once members of these Joint Liability Groups avail the loans and spend mostly for family functions, children’s educational needs, the personnel appear at their doorsteps early in the morning for collecting the loan.