Microfinance & The Culture of Credit: A Lesson in History

The problems in the microfinance sector has brought the issue of indebtedness of the poor to the forefront. However, the issue is not new and has been a feature of the Indian economy and society for centuries, rather than decades. F.A.Nicholson was probably the first colonial administrator who analysed the causes of indebtedness as far back as the 1890s. His Report was published in 1895 (Report Regarding the Possibility of Introducing Land and Agricultural Banks into the Madras Presidency, Volume I, Madras, Government Press). F.A.Nicholson has provided an exhaustive analysis about the nature of moneylending, indigenous financial activity and peasant indebtedness in colonial India. He has made perceptive remarks about the nature of moneylending in the Madras Presidency, a number of which describe the nature of the moneylending business and the culture of the business even to this day.

The interesting aspect of the microfinance business has been that it has thrived in areas where there has historically been regions where the culture of lending and borrowing was predominant. Ironically, though they have always claimed that they are delivering credit to the poor (which may be partly true) they have largely carried out their business in areas where moneylending has historically played an important role. Importantly, microfinance institutions have not replaced the moneylender, instead they have become just another source of credit. Nicholson has pointed out that ‘probably there is no ryot who at one time or other has not borrowed. That a man who is rich or has large private lands is nothing; it merely means – as correspondents state and experience proves that they can and do borrow more largely’(p.231).

Moreover, a large proportion of personal credit was provided to ryots by the ryots (p.230). Nicholson pointed out that anybody with surplus cash was a lender (p.230). This observation holds true in large parts of Andhra Pradesh even to this day. Nicholson has classified the lenders in the presidency into nine different classes (essentially based on the category of people they lent to) and has provided fourteen purposes for which credit is taken. The different kinds of lending include ‘(1) masters to servants, (2) landlords to tenants, (3) ryots to ryots, (4) sowcars (moneylender) to clients, (5) brokers to producers, (6) cattle dealers to ryots, (7) cloth sellers to buyers, (8) shopkeepers to buyers and (9) domestic to petty lenders’. The purposes for loan cited by Nicholson include ‘(1) Cultivation expenses including purchase of seed, manure, etc., (2) purchase of cattle, implements, stock in trade, raw material, etc., (3) purchase of land, (4) improvement of lands, (5) relief from prior debt, (6) House building and repair, (7) advances for entering into contracts, small trades, security to employers, etc., (8) Maintenance, (9) Payment of government dues, rent, etc., (10) Marriages and other social events including borrowing by bridegrooms of money for ornaments and others, (11) Ornaments and other tangible luxuries, (12) Litigation, (13) Education and (14) Unproductive or extravagant expenditure’. Among the fourteen purposes for borrowing cited by Nicholson the predominant reason in the presidency was settlement of prior debt (about fifty percent of the loans), marriages (about one-eighth of the loans), and purchase of lands. Interestingly only about one and a half per cent of the loans were for improvement of lands (p.230-32).


W.R.S. Sathyanathan, yet another colonial administrator, dealt with the causes of peasant indebtedness in his report (Report on Agricultural Indebtedness, Government of Madras, published in 1935). Some of the reasons cited by him about the causes for indebtedness are valid to this day.
Among the reasons cited by him, were the lack of sound institutions within easy reach of him to put his savings (p.13), lack of insurance facilities and because: ‘he has not been taught to save or balance his budget. His everyday wants are few, but now and then he “goes on the burst” and indulges in an orgy of expenditures for a marriage or a funeral’(p.13).

This orgy meant that the peasant was prone to live beyond his means thereby forcing him to borrow money from the moneylenders. The colonial views were succinctly expressed by Darling who declared that ‘Debt followed credit’. Interestingly in his report, Sathyanathan’s observations on the peasants are discussed in a part of the study sub-titled ‘the character of the people’.

The image below is a promissory note from the 1950s. The proponents of the Industry should try to analyse how they differ from the moneylenders.