Bengaluru: With the govt officially notifying an ordinance imposing stringent penalties to curb harassment by moneylenders — a move to protect borrowers from predatory practices — concerns are mounting over its potential impact on rural credit access.
Governor Thaawar Chand Gehlot had objected to the severity of the penalties, which increase imprisonment from 3 to 10 years besides stipulating a steep fine of Rs 10 lakh. Gehlot had suggested excessive regulation could drive moneylenders out, leaving farmers with limited financial options.
But both home minister G Parameshwara and law minister HK Patil defended the ordinance saying, “If the law is not strong, these incidents will not stop. It is intended as a deterrent.”
Although nationalised banks offer agricultural credit, the process of securing loans is cumbersome, forcing many rural borrowers to rely on private lenders.
Agricultural scientist Vinay Chengappa said a crackdown could trigger a liquidity crisis. “Moneylenders, despite their flaws, remain a crucial last-resort credit source for small farmers and businessmen. If they withdraw due to legal fears, the rural economy could face a severe cash crunch,” he said.
Former NABARD official K Ravi Kumar also echoed concerns over a credit vacuum. “Penalising harassment is necessary, but removing informal lenders could create a gap that banks cannot fill. Many banks require collateral and complex paperwork that small farmers struggle with,” he said.
Banks too are located far away from villages, while local lenders provide quick loans for emergencies such as medical crises, weddings and childbirth. But they often charge exorbitant interest rates, trapping borrowers in cycles of debt. Many also double as traders, controlling both loan disbursement and crop sales, forcing farmers to sell at unfair prices, said senior agriculture officer B Raghavendra.
Still, they provide a vital link in the chain and harsh penalties could drive their operations underground rather than curb exploitative practices.
“There is a risk that some borrowers might misuse these laws to evade repayment, further discouraging legal lenders,” said GK Harish, a financial consultant. “This could push lending into informal, unregulated networks, where coercion may take even more dangerous forms.”
Financial experts advocate a more nuanced approach. “Regulation should not be about elimination; it should be about fair practices,” said a former RBI officer. “A licensing system with interest rate caps and transparent lending terms could ensure moneylenders remain part of the system but within legal boundaries.”
Some suggest the govt should look to expand rural banking services and promote cooperative credit models. “Empowering farmer cooperatives and self-help groups is an alternative to exploitative lending,” said social activist B Vishwanath. “In some states, cooperatives have successfully replaced moneylenders by offering fair credit terms.”
The opposition is expected to raise Gehlot’s concerns in the legislature when the govt moves to replace the ordinance with a law. It is likely to trigger a heated debate and potential changes to the new legislation.