Future of Rural Banking in India

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Future of Rural Banking*
Y. V. REDDY I am grateful to the Ram Reddy Memorial Trust for giving me an opportunity to deliver this endowment lecture. I knew Ram Reddy Sab since 1960 and, like some of you here, we developed abiding affection towards each other. To me, he was indeed, a friend, philosopher and guide in every sense of the word. He won people's heart, made academic contributions and built lasting institutions, and he achieved all this without ever displeasing or hurting any one. A scholar and a gentleman to the core, I cannot think of anyone in India who has contributed as much to advancement of higher education as he did. He simply, with one stroke or may be two, one in Hyderabad and one at all-India level, made higher education open, virtually to all. I feel greatly honoured at being called upon to be with you, since some of us have grown up in the last three to four decades, as part of one extended family of Ram Reddy garu. Since we are aware of his abiding interest in rural areas, especially the dynamics of rural development, I will speak on Future of Rural Banking. I hope to reflect in the lecture, the pragmatism and analytical rigour that Ram Reddy Sab would always insist upon. Banking in Ancient India Let me start by sharing with you some features of banking in India in ancient times since you may still find traces of such ancient banking practices in isolated rural areas in our country. Like in many other aspects, we have a long tradition of banking. Evidence regarding the existence of money-lending operations in India is found in the literature of the Vedic times, i.e., 2000 to 1400 B.C. The literature of the Buddhist period, e.g., the Jatakas, and recent archaeological discoveries supply evidence of the existence of sresthis, or bankers. From the laws of Manu, it appears that money-lending and allied problems had assumed considerable importance in ancient India. What were the interest rates? The role of interest rates was recognised in ancient India. Interest rates were prescribed by almost all Hindu law-givers Manu, Vasistha, Yajnavalkya, Gautama and Baudhayana as also Kautilya. A common base number was 15 per cent per annum – what the banker-economist Dr. Thingalaya calls Hindu rate of interest. Incidentally, this is higher than current Prime Lending Rate (PLR) of many banks! It was not as though everyone used to get loans at PLR. Only prime borrowers got at PLR, though the basis was different then. According to Manu and Vasistha, the interest rates were not to vary depending on the risk involved or the purpose for which the money was borrowed. But, they were directly linked to the caste classification of the borrowers. Brahmin was to be charged 2 per cent, Kshatriya 3 per cent, Vaishya 4 per cent and Shudra 5 per cent per month. However, Chanakya's interest rate structure was risk-weighted since the rate of interest increased with the risk involved in the borrowers' business. The interest rate worked out to be 15 per cent per annum for general advances. The traders were charged a rate of 60 per cent per annum. Where the merchandise had to pass through forests, the traders had to pay 120 per cent per annum while those engaged in the export-import business handling sea-borne cargo had to pay 240 per cent per annum.

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Again, it was not everyone who could take up banking business. Only men belonging to the Vaishya caste could take up the money-lending profession. In other words, in ancient times, your caste gave you licence to banking and not RBI! What about disputes and debt recovery? Manu specified the punishments to be given in case of disputes arising about loan repayment and listed 18 types of disputes. When a creditor sued the debtor for recovery of money, it was the duty of the king to ensure that the creditor got back his money. Manu permitted the king to employ all means, fair or foul, to recover the dues, for example, torturous punishment like killing the debtor's wife, children and...
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