Banking is as ancient as exchange in money. In South Asia, the Jataka stories often have 'shresthis' as the main protagonists. Many of them were enormously rich, but were prepared to spend their wealth for what they considered to be a just cause. For example, shresthi Anathapindaka bought the garden (Jetavana) for Gautama Buddha to stay in at the price of covering the whole garden with gold.
Nearer our own times, there were rich bankers in Mughal India, and the post-Mughal regimes between Bahadur Shah, and 1799, when the British defeated and killed Tipu Sultan, their most redoubtable enemy. Even after that many Indian bankers continued to operate in the Native States under British paramountcy. For purposes of analysis, it may be useful to classify these Indian bankers into three groups: at the apex were those who served the state at the highest level such as Fateh Chand Jagat Seth, whose family had become bankers to the Nawabs of Bengal. At the next level, there were bankers who lent money to the Nawab or subahdars, and zamindars who claimed lordship of a region, and were held liable for payment of rent to the Nawab or Subahdar. At the third level, there were moneylenders who lent money to the actual cultivators of land. Before the British made various kinds of rights attached to land (such as the right to pay land revenue to the government treasury) fully marketable, the bankers or money-lenders and the zamindars or cultivators observed a code of mutual forbearance. Only at the last extremity would a zamindari change hands because of inability to service a debt, and the indebted cultivators rarely lost their land.
There was also custom in many parts of India that the lender could never claim more than twice the principal (the principle of Damdupat). Some of these pre-British customs continued to be observed in many Native States such as Baroda).
When the British administration allowed moneylenders to charge any rate of interest and to foreclose and take over the peasants' land, peasants suffered dispossession of their land all over British India, or became serfs on their own land under the terms of usufructuary mortgage. Peasants were mostly illiterate, and when jurisdiction over tenure was taken over by courts in towns and cities at a long distance from the villages of peasants and judges decided only on the rules of evidence applicable to well-informed and reasonably independent litigants, there was mayhem of the little rights peasants possessed. The British authorities were then forced to introduce specific legislation in the Bombay Presidency and Punjab in order to limit the alienation of land by agriculturalists to non-agriculturalists. This mitigated the problem in those provinces but did not by any means eliminate it. First, wily moneylenders could evade the provisions by using 'benami' transactions or keeping two kinds of documents, one for showing to the officials and the other recording the real transactions. Peasants were rarely in a position to challenge the latter set of papers. Moreover, many rich peasants themselves emerged as moneylenders and actual cultivators continued to join the ranks of dispossessed labourers.
The problem of peasant indebtedness and eventual dispossession was particularly acute in areas under zamindari or talukdari areas such as the Bengal Presidency and the United Provinces of Agra and Oudh. In these provinces, a long process of farming out the different levels of rights to pay rent had led to an incredible process of sub-infeudation, and most of the actual cultivators were reduced to a status of tenants with no legal rights to the land they cultivated.
In Bengal, a series of amendments to the Permanent Settlement Act of 1793 had given some tenurial rights to so-called occupancy tenants, but they constituted a small fraction of the actual cultivators. The depression in agricultural prices starting in 1926 and going on through the 1930s rendered a precarious situation utterly untenable. The Bengal Agricultural Debtors (BAD) Act of 1935 was passed because in the words of a confidential official record, 'The agriculturists of Bengal, particularly of its fertile and previously most fertile districts, have become involved in debt far beyond their power to repay, and unless a remedy is provided, the consequences may be disastrous to the province'.
Under the provisions of this Act, Debt Settlement Boards were set up at the district and Union Board levels, with powers to bring debtors and creditors together. The Act was sought to be implemented with seriousness after A. K. M. Fazlul Huq of Krishak Praja Party became Prime Minister of Bengal in 1937, with the support of Muslim League. However, the performance of these boards was disappointing:
'Till 1943, out of the total applications submitted to the boards for settlement, only 31 per cent were settled either partially or wholly, 29 per cent were pending, and 40 per cent were transferred and dismissed'.
There were several problems thwarting the work of the debt settlement boards. First, as the Collector of Mymensingh observed: Very few cultivators have substantial 'surplus' income. Even if the crops are slightly below normal or some of the earning members fall ill during part of the year, the so-called surplus is turned into deficit. Hence most creditors have little faith that debtors would be able to pay according to the terms of the award [of the debt settlement Boards].
Second, there were many bureaucratic hurdles facing both the debtors and creditors for them to be able to come to a settlement both parties could honour. The penal provisions of the Bengal Moneylenders Act passed in 1940 did not help matters.
Third, the Bengal cabinet came to be dominated by the Muslim League, especially after Khwaja Nazimuddin of the Dhaka Nawab family became Prime Minister of Bengal. The leadership of the Muslim League was dominated by big landholders who had very little interest in the debt settlement process.
In some districts, such as Jhansi in the United Provinces of Agra and Oudh, cultivators or pastoralists, trusting to the pre-British relationship between owners of land and moneylenders, the potential borrowers actually invited 'accommodating' moneylenders to settle in their locality.
However, those accommodating lenders allowed the borrowers to run up large amounts of debt, and under British Indian law, foreclosed on their loans and took over the borrowers' land. Thus in the Mah Tahsil of District Jhansi, between 1865 and 1890, the biggest losses of land were incurred by Thakurs, Ahirs and urmis-zamindars, pastoralists and cultivators - and the biggest gains were by Marwaris, Baniyas and Kayasths.
From these two case studies of two major regions of South Asia, the lesson can be drawn that if peasants remain illiterate and poor because of exploitation, lack of incentives and access to essential inputs such as irrigation and fertilisers, and if creditors can dispossess them because of indebtedness, then no amount of tinkering with terms of lending can provide a framework for ethical banking.
Even in colonial India, if the cultivators or big farmers who directly supervised the agricultural operations, had the right to pay their land tax directly to the government treasury - a right they enjoyed under the 'raiytwari' system - they enjoyed better access to cheap credit.
Thus in the Madras Presidency, in many districts of today's Tamil Nadu and Karnataka, nidhis and chi funds sprang up. Moneylenders and cultivators had shares in these funds, and could access credit from these funds. Some of these funds later mutated into joint-stock companies. Moreover, these regions witnessed the emergence of two large banks, namely, Canara Bank and Syndicate Bank, whose primary business was lending to landowners and cultivators, long before the nationalisation of fourteen commercial banks in 1969 made formal credit available to such borrowers.
Dr. Amiya Kumar Bagchi is Emeritus Professor at the Institute of Development Studies Kolkata (IDSK), Paschimbanga, India. The article is based on his 14th Nurul Matin Memorial Lecture delivered at the Bangladesh Institute of
Bank Management (BIBM) on November 10, 2014.