When is Money-Lending Immoral?

Moneylenders have never received such good PR as they have in the past few months. First, the RBI claims that they perform an essential “gap-filling function” (which, IMHO, they do) and calls for the role of the moneylender to be legitimized (which, IMHO, makes a lot less sense – see earlier post). Now, in a recent article The Economist argues that those who dare to criticize moneylenders are “credit snobs.”

While I agree with the central conclusion of The Economist article – that money-lending to the poor, even if it is pricey, short-term, and profitable, is not inherently immoral – I feel that they are glib when they extrapolate from this logic to argue that all money-lending is Ok. There are definitely some cases where money-lending is unequivocally bad. Here are a couple:

When money-lending is used as pretence for extreme monopsonistic behaviour Often, moneylending is just a device used by cartelized traders to justify gouging local farmers. In Everybody Loves a Good Drought, P. Sainath describes how the cartel of middle-men who control the market for chillis in Ramnad, Tamil Nadu collude to manipulate the market and keep prices low. At the beginning of each chilli growing season, the middle-men give loans to the farmers in exchange for the promise that the farmers will sell them their entire harvest. This might seem like a straightforward, if somewhat cruel, deal. After all, the farmers can always choose not to take the loan, right? Wrong. The cartel of middle-men refuse to deal with any farmer that has not taken a loan, effectively shutting him out of the market.

When moneylenders require borrowers to become bonded labourers. You shouldn’t be able to sell yourself, and especially not your children, into slavery. This seems pretty obvious yet the practice is much more common than many might think.