Friday, April 10, 2009

Max Interest Rate aka 'Kabandhu Vatti'

Rather curiously this is my first political opinion piece this election season. I guess working on the field is much more satisfying than ranting online.

Anyway, the issue I want to muse today is private lending at abominable interest rates. In Tamil, we call it as 'kandhu vatti'. The practice where a private person lends loans which are typically charged interest every month. For example for 1000 rupees lent, the debtor will have to pay 50 rupees interest per month until he repays the principle.

If the math doesn't strike you in the gut already, thats 60% interest per year!! And in many cases, the creditor will also deduct the interest at the time of lending. Example: For a 1000 rupee loan, the debtor will just get 400 at the time of the transaction. But by the end of the year he has to pay 1000 back. No wonder farmers commit suicide.

Few months ago I discovered that one of my friends happened to be one such debtor. The '50 on 1000 rupees' interest I mentioned above sadly isn't one I made up. Thats what my friend was paying! His family had taken a loan of about 60K for his sister's wedding, they had paid about 40K at the end of the year and still 'owed' their creditors 80K!!

Believe me, this country has several million such debtors whose blood is being sucked by those bastards. Now, how do you solve this problem? Is waiving loan given by public sector and cooperative banks gonna solve this? I seriously doubt if anyone among the thousands of farmers who committed suicide, did so, because he/she owed money to a bank and was embarrassed about not being able to repay.

Anyway, the Congress party went ahead and waived 50K crores of farm credit. Ofcourse you, I and a few million others, paid for that largesse with our tax money. BJP hijacked by such socialists as Sudheendra Kulkarni and Raman Singh also proposes to waive more such loans in its manifesto. Screw the millions of other honest farmers who repaid their loans in time or were plain 'stupid' not to have taken a loan in this period.

Moving on, how will such loan waivers stop the suicides of farmers who got credit from those evil private lenders? The solution is actually straight forward. If those farmers get easy access to bank loans at cheaper rates, they'll perhaps refinance their credit. BJP has proposed Farm loans at max interest rate of 4%. If I waste some time on the Congress manifesto, I might even find a line on "easy kisan credit".

Now which party do you trust to deliver on the promise of easy farm credit? I leave it to you to decide.

Anyway, I would further propose that the incoming govt, start a max interest rate regime across the board. For instance, we may set the max interest rate as twice that of the prime-lending rate. If RBI gives credit at 6%, anyone who gives credit at more than 12% annual interest should automatically land in jail. Simple, no?

ps: 'kabandhu' in Tamil means protection. So a Max Interest rate regime = kabandhu vatti = protection againt atrocious interest rate regime!

12 comments:

Vijay said...

why is the max interest scheme "wrong"? You are a proponent of capitalism aren't you?

Note: Clearly it 'feels' wrong, but I want you to tell me why it is wrong.

Arun said...

The farmers very well know the high interest rates, so its their fault to go after these "evil" people. I can sympathize with their misery and not being able to get bank loans, but calling the private lenders evil bastards is just ridiculous. What they are doing is called business and its totally legal(unless govt has rules against private lending). If one cannot afford the interest, don't take a loan. Its that simple!

Arun said...

"If RBI gives credit at 6%, anyone who gives credit at more than 12% annual interest should automatically land in jail. Simple, no?"
Yeah, except that its total bullshit!

Balaji said...

Vijay,

>> why is the max interest scheme "wrong"? You are a proponent of capitalism aren't you?

well there is no max interest rate. i'm proposing one.

why is the current scenario against the free market principles?

1. the high interest culture in this country is plain wrong. public sector lending rate itself is too high. lending rate is high bcos this country gives a whopping 10% interest on savings. typical case of middle class screwing the needy namely the poor and the industry. in no capitalist country will the interest rate be this high. Even BJP has talked of a 'low interest rate regime' in its manifesto.
2. if people are willing to pay 50% interest rate, why is the legal market not supplying this demand? bcos, in this freakin socialist country, most of the lending is done by public sector banks and those morons treat farmers like shit. try privatizing SBI which has a high rural presence and see how the credit situation improves in the farm sector.
3. to be fair to banks, they are worried about their NPA's. when 50K crores is gonna be waived off, who'll repay the loans? isn't the govt wrecking the whole credit system?
4. in many cases the debtors aren't even aware of the exploitation. "oh, I get thousand and have to pay just 50 per month without putting up with bank bureaucracy". its govt's fault that people in this country are so illiterate and hence stupid.

Arun,

i'm sure according to you bonded labor is legal, bcos the laborer knew exactly what he was getting into.

Arun said...

Bonded labor is legal if the lender has a legal contract like stamp paper, saying if the borrower has to do work(the extent of work described) and if the labor laws doesnt have any laws against this.
I dont understand why this is not legal?

Or perhaps u r confusing legal with moral or ethical?

You might as well want to blame the borrowers also for being irresponsible. I find this kandhu vatti, no different from Americans taking credit irresponsibly. Instead of blaming the borrowers or the system(govt/labor/watever) for not allowing regulations, u r blaming the entities(banks or private lenders) who try to make a business out of it.

Balaji said...

>> Bonded labor is legal if the lender has a legal contract like stamp paper

i'd laugh at this if the subject weren't this serious. there is no question of stamp paper. people who employ bonded laborer are always arrested and sent to jail. so shud the kandhu vatti lenders.

>> Instead of blaming the borrowers or the system(govt/labor/watever) for not allowing regulations, u r blaming the entities (banks

how can there be any regulation without laws. and isn't the whole point of this post, my demand for a law to stipulate a max interest rate across the board? law = regulation.

and further, I'm supporting BJP's election promise of setting a max interest rate of 4% for Farm loan.

Arun said...

i'd laugh at this if the subject weren't this serious. there is no question of stamp paper. people who employ bonded laborer are always arrested and sent to jail. so shud the kandhu vatti lenders.

u left the other part of the clause - "and if the labor laws doesnt have any laws against this."
first laws against bonded labor shud be set in place(just like its set for crime) along with what constitutes bonded labor. otherwise bonded labor is still legal.


how can there be any regulation without laws. and isn't the whole point of this post, my demand for a law to stipulate a max interest rate across the board? law = regulation.

u r right. just re-read the post.


and further, I'm supporting BJP's election promise of setting a max interest rate of 4% for Farm loan.

seems good, but dont think it wud make sense for the bank to lend to farmers, when interest rate for individuals is still high. rates shud drop across the board.

Sriram said...

It is unfortunate that people mix up free markets with unregulated markets. Mature Capitalism relies on free market with regulation. A rate beyond nominal rates will lead to misery for everyone including the lender. It is like killing the golden goose. It is time for Indians to stop acting more capitalist than Americans and more communist than Chinese. We definitely need to create microcredit institutions that would lend at 1-2% per month factoring the risks involved than continuing to promote these usurers. Everyone here has to realize they come back in the form of govt writeoffs, more freebies etc hitting the middle class hard down the road. Dhanax, Rangde, SpandanaIndia are along the path of redefining credit. Please see their sites to help and get helped.

Balaji said...

Thx for letting me know. Will check them out.

Anonymous said...

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SSK!!! said...
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