A temporary pause

In the midst of another monsoon, India’s news media seems to have forgotten to report on farmers’ suicides. The studios of national television news stations seem strangely bereft of bussed-in farmers and the leader pages of (English) national newspapers appear listless sans the obligatory technocratic calls for agrarian reform or the jeremiad op-eds about our insensitive society. Around this time last year, farmers’ suicides were squarely on the menu: consistent reminders of the constantly declining numbers of farmers (for instance, here and here) were met with, quite peculiarly, with flat-out denial.

The General Election resurrected the issue for a brief albeit farcical moment – Arvind Kejriwal claimed that Gujarat led the country in farmers’ suicides, the Gujarat Government issued an unconvincing rebuttal, and Prime Minister Narendra Modi said that electricity was the answer. Cambridge University also had answers, British researchers reportedly cracked the mystery wide open. They also claimed that Gujarat had the lowest farmers’ suicide rate. Maharashtra, meanwhile, owned up to having the highest farmers’ suicides rate. And the Guardian asked if farmers’ suicides were linked to GM cotton?

The present pause in this annual circus of despair is welcome. There is a new government at the Centre, although its first-choice Rural Development Minister, who often spoke about farmers’ suicides, was tragically killed. India seems to be moving towards the East Asian model of manufacturing-led state capitalism. Land acquisition law reform will soon make it easier to inflict even greater distress upon farmers. The Planning Commission, the performance of which I cannot and do not judge, is to be dismantled. The Reserve Bank of India’s new leadership has been acclaimed. And, for the first time in many quarters, there appears to be an expansion of GDP growth. No doubt, India’s desperate farmers remain sceptical. But, this pause also gives us an opportunity to consider the legal contours of India’s agricultural debt.

The origins of the legal regime of agricultural credit

The colonial government introduced India’s first ‘modern’ legal system governing agricultural credit. The colony was a vehicle for exploitative commercial gain, its agricultural policy was grounded in revenue collection. For independent India, planned production was the chosen vehicle of growth, and the Planning Commission was firmly installed as its driver.

The colonial government’s feudal arrangement of land tenure – a means of administrative, economic, and social control – invited the collusion of dominant local elites to result in large landholdings (zamindari) but even larger numbers of landless labourers. The zamindari model was an effective method of taxing land and agricultural produce, which in a vast country with an economy dominated by agriculture, was a lucrative revenue source. But, the zamindari model completely failed to provide food to the colony’s poor natives, not that the colonial government particularly cared.

Following the disastrous famines at the end of the nineteenth century (read Amartya Sen’s lucid application of the Entitlements Approach to food security) and the consequent reports of the famine commissions (1880, 1898 and 1901 [pdf]) appointed to look into their causes, the colonial government was forced to enact two laws that formed the basis of agricultural credit in the country: the Land Improvements Loans Act, 1883, and the Agriculturists Loans Act, 1884.

The Land Improvement Loans Act, 1883

After more than one famine commission suggested a complete breakdown of agricultural credit in India, the colonial government enacted the Land Improvement Loans Act to simplify credit availability. The Act provided for a system of credit advancement by authorised “companies” in compliance with government guidelines. All loans were made repayable in installments, in the form of an annuity or otherwise, within a notifiable period ordinarily within thirty five years. Village communities could also borrow for which they were jointly and severally liable with their individual liabilities certified by the loan disbursing officer. The enactment gave wide rule-making powers and discretion to local governments.

The Agriculturists’ Loans Act, 1884

The Agriculturists’ Loans Act repealed existing ‘taccavi’ laws in the country that only provided for the recovery of a loan’s principal amount and not the interest on the loan or the cost incurred by the government in advancing the loan. (Taccavi loans were distress loans from the sovereign). The existing law also did not provide for loans to members of a village community. The new Act allowed the local governments to make rules for credit advancement to landowners for any purpose not covered by the Land Improvement Loans Act but nonetheless connected with agriculture. All loans were made recoverable, with all interest chargeable and costs incurred, from the borrower, as arrears of land revenue; and, the borrower’s surety, as arrears of land revenue.

The Cooperative Societies Acts

To establish credit societies outside the procedures of the Companies Act, the colonial government enacted the first Cooperative Credit Societies Act in 1904. Societies were divided into rural and urban categories with the former vested with unlimited liability. This 1904 statute was replaced by the Cooperative Societies Act, 1912, which governed all cooperative societies irrespective of their purpose, distinguished between them on the basis of their liability, required all agricultural societies to have unlimited liability and restricted the profits of their members.

The Usurious Loans Act, 1918

By the end of the First World War, the Indian national movement threatened to offer organised resistance to colonial rule. Legislative reforms resulted in Indians serving on some elected legislative bodies. The Raj was weakened by war. A few social concerns of the native subjects of colonial rule found their way into law. I believe the Usurious Loans Act, 1918 should be viewed in this background. The Act upheld, for the first time in colonial India, the interests of farmers over market-determined interest rates. It gave courts suo moto powers to initiate proceedings to deal with usury. The Act authorises courts to reopen loan transactions to relieve the debtor of any liability arising out of excessive interest if the court is satisfied that (i) the interest is excessive; or, (ii) the transaction was substantially unfair. Courts are also given power to deem an interest rate excessive. Interest alone is of sufficient evidence to prove substantial unfairness of the transaction.

Provincial laws in the 1930s

Rural welfare was a central theme of the Indian national movement after Mohandas Gandhi joined its ranks and rose to prominence. It is not surprising that the next large steps taken to protect the interests of Indian agriculture came from the newly elected provincial assemblies elected after the passage of the Government of India Act, 1935. Important steps were taken by several States to protect farmers from excessive interest rates on loans, both from banks and moneylenders. In 1936, the Madras Legislature amended the Usurious Loans Act to introduce two significant provisions:

• A rebuttable presumption of the substantial unfairness of a transaction if the interest is excessive; and,
• An irrebuttable presumption of excessive interest if compound interest is charged on an agricultural loan.

In addition, several provinces enacted laws to curb rural indebtedness. Many of these laws still exist today albeit after considerable changes. The Madras Debtors Protection Act, 1934 was amended in 1936 to provide for a presumption of usury and substantial unfairness where the interest rate was excessive. Compound interest on agricultural loans was declared usurious and prohibited. The Andhra Pradesh (Andhra Area) Debtor’s Protection Act, 1934 was amended on identical lines. The practice of dam dupat was prohibited by the Punjab Relief of Indebtedness Act, 1934, which disallowed courts to decree a debt for a sum double the principal amount; and, made such debts voidable at the instance of the debtor.

However, most pre-Independence provincial laws, even those curbing money lending, stopped short of an outright ban on compound interest and usury, banks and cooperatives being always excluded or exempted. Bihar was the first state to break from this mould when in 1939 its Legislature passed the Bihar Money Lenders (Regulation of Transactions) Act, 1939. For the first time banks and cooperatives were brought within the definitions of both “loan” and “money lender” thereby disallowing their charging of compound interest on, and prohibiting the attachment of the property of, agricultural debtors.

There is, therefore, a historical and accepted difference between agricultural credit and commercial credit. There is also incontrovertible evidence that the incidence of suicide among Indian farmers is directly linked to agricultural debt and the inability of farmers to repay their loans.

Two types of agricultural credit in India

Broadly, agricultural credit in India is advanced by:

(a) money-lenders, and
(b) banks.

In the absence of specialised micro finance law, micro-financial credit will continue to be governed by banking law.

The law regarding the regulation of money-lending

The regulation of money-lending is within the exclusive legislative competence of the States. Entry 30 of the State List reads:

Money-lending and money-lenders; relief of agricultural indebtedness.

Money-lending is a pernicious practice that is not constitutionally protected as a trade under Article 19(1)(g). This was laid down by the Supreme Court in the case of Fatehchand Himmatlal v. State of Maharashtra (1977) 2 SCC 670 where, while dealing with a constitutional challenge to the Maharashtra Debt Relief Act, 1975 [pdf], Krishna Iyer, J, ruled:

A meaningful, yet minimal, analysis of the Debt Act, read in the light of the times and circumstances which compelled its enactment will bring out the humane setting of the statute. The bulk of the beneficiaries are rural indigents and the rest urban workers. These are the weaker sections for whom constitutional concern is shown because institutional credit instrumentalities have ignored them. Money lending may be ancillary to commercial activity and benignant in its effect, but money lending may also be ghastly when it facilitates no flow of trade, no movement of commerce, no promotion of intercourse, no servicing of business, but merely stagnates rural economy, strangulates the borrowing community and turns malignant in its repercussions. The former may surely be trade but the latter – the law may well say – is not trade. In this view, we are more inclined to the view that this narrow, deleterious pattern of money lending cannot be classed as ‘trade’.

In Fatehchand Himmatlal, Justice Krishna Iyer placed money-lending outside the limits of protected commerce by implementing an Indian-ised and perhaps incorrect [pdf] version of the doctrine of res extra commercium. For other landmark case law on the principle of res extra commercium, see State of Bombay v. R. M. D. Chamarbaugwala AIR 1957 SC 699, Khoday Distilleries v. State of Karnataka (1995) 1 SCC 574, State of Andhra Pradesh v. McDowell & Co. (1996) 3 SCC 709 and State of Punjab v. Devans Modern Breweries (2004) 11 SCC 26.

Hence, it is open for the States to enact legislation to regulate money-lending, which many States have done. The problem has been that to regulate money-lending, States often prescribe limits on interest to relieve agricultural indebtedness and this seems to conflict with the Union empowerment in respect of banking contained in Entry 45 of the Union List. On several occasions, the Supreme Court and several High Courts have repeatedly upheld the legislative power of the States to regulate money-lending by applying the doctrine of pith and substance to trace the impugned laws to the State List and save them from being struck down for legislative incompetence. Fatehchand Himmatlal itself was such a case, where the powerful banking lobby instigated a challenge to the Maharastra Debt Relief Act. See also the Supreme Court cases of Pathumma v. State of Kerala (1978) 2 SCC 1 and Ganpathraj Surana v. State of Tamil Nadu 1993 Supp (2) SCC 565.

However, even if money-lending were to be given the shade of constitutional protection, it may still be subject to restrictions. This is because legislation in the public interest that is consistent with the equality dispensation of the Constitution may impose reasonable restrictions on the freedom of a particular trade under Article 19(1)(g). This is a well-settled principle of law. Article 19(1)(g) if limited by Article 19(6). For supporting case law, see Bijay Cotton Mills v. State of Ajmer AIR 1955 SC 33, Raghubir Dayal v. Union of India AIR 1962 SC 263, Sreenivasa General Traders v. State of Andhra Pradesh (1983) 4 SCC 353, MRF Ltd. v. Inspector, Kerala Government (1998) 8 SCC 227 and New Bihar Biri Leaves v. State of Bihar (1981) 1 SCC 537.

The law regarding the regulation of banking

Banking is subject to the exclusive legislative competence of the Union. Entry 45 of the Union List reads:

Banking

Courts used to have the power to reopen banking transactions on grounds of excessive interest or substantial unfairness between the parties. This power was traceable to section 3(1) of the Usurious Loans Act, 1918, which reads:

Re-opening of transaction. – (1) Notwithstanding anything in the Usury Laws Repeal Act, 1855 (28 of 1855), where, in any suit to which this Act applies, whether heard ex parte or otherwise, the Court has reason to believe,

(a) that the interest is excessive; and
(b) that the transaction was, as between the parties thereto substantially unfair,

the Court may exercise all or any of the following powers, namely may,-

(i) re-open the transaction, take an account between the parties and relieve the debtor of all liability in respect of any excessive interest;
(ii) notwithstanding any agreement, purporting to close previous dealings and to create a new obligation, re-open any account already taken between them and relieve the debtor of all liability in respect of any – excessive interest, and if anything has been paid or allowed in account in respect of such liability, order the creditor to repay any sum which it considers to be repayable in respect thereof;
(iii) set aside either wholly or in part or revise or alter any security given or agreement made in respect of any loan, and if the creditor has parted with the security, order him to indemnify the debtor in such manner and to  such extent as it may deem just:

Provided that, in the exercise of these powers, the Court shall not

(i) re-open  any  agreement purporting  to  close  previous dealings   and  to  create a new obligation  which  has  been entered  into  by the parties or any persons from  whom  they claim  at a date more than twelve years from the  date  of the transaction;
(ii) do anything which affects any decree of a Court.

Explanation: In  the  case  of  a suit brought  on  a  series  of transactions the expression “the transaction” means, for the  purposes of proviso (i), the first of such transactions.

There are a number of cases where the Usurious Loans Act has been used by courts to examine loans that were unfair or excessive and relieve the debtor of liability. For a representative sample of such cases, see, Dayawati v. Inderjit AIR 1966 SC 1423, Srinivasa Vardachariar v. Gopala Menon AIR 1967 SC 412 and State Bank of Travancore v. C. T. George AIR 1975 Ker 169.

However, in 1984, Parliament enacted an amendment to the Banking Regulation Act, 1949, to insert a new section 21A to bar the jurisdiction of courts to examine banking debt transactions on the grounds of excessive interest. section 21A reads as follows,

Rates of interest charged by banking companies not to be subject to scrutiny by courts. – Notwithstanding anything contained in the Usurious Loans Act, 1918 (10 of 1918), or any other law relating to indebtedness in force in any State, a transaction between a banking company and its debtor shall not be reopened by any Court on the ground that the rate of interest charged by the banking company in respect of such transaction is excessive.

Section 21A of the Banking Regulation Act overrides section 3 of the Usurious Loans and, therefore, courts can no longer reopen usurious loan transactions.

Legislative competence over debt relief

There is no doubt that the States are competent to legislate to regulate money lending. However, the primary question is whether the States are competent enact legislation that will affect banking (Entry 45, Union List) even though the States are competent to legislate on “…relief of agricultural indebtedness.” (Entry 30, State List).

For a State to claim competency, it must show that the “pith and substance” of the proposed legislation falls in the State’s List or the Concurrent List but does not fall within the Union’s List. Where a subject matter does not appear to fall in the State or the Concurrent List, it falls within the ‘residuary’ power of the Union under Entry 97 of the Union List read with Article 248 of the Constitution. This principle of affirmed in the case of Union of India v. H. S. Dhillon (1971) 2 SCC 779.

Apart from applying the doctrine of pith and substance, the Constitution lays down that the power of the Union and the States shall be exclusive in the areas of their respective lists; and, that the Union’s power will prevail in respect of any matters in the Concurrent List (See, Article 245 and Article 246 of the Constitution). But, this principle of exclusivity is subject to the detriment of the States by certain Entries in the State List that specifically safeguard the Union’s power even on matters which are otherwise exclusively within the State’s competence. These are: Entry 1 (public order), Entry 2 (police), Entry 13 (communications), Entry 17 (water), Entry 22 (courts of wards), Entry 23 (mines and minerals), Entry 24 (industries), Entry 26 (trade and commerce), Entry 27 (production, distribution and supply of goods), Entry 32 (incorporation), Entry 33 (cinema), Entry 51, Entry 55, Entry 57 and Entry 63 (concerning certain excise, taxes, fees and stamp duties).

The broad principles for determining legislative competency are: (a) the principle of pith and substance to determine which Entry or Entries a legislation falls under, (b) the principles of exclusivity so that the Union and States do not encroach on each others powers, (c) the principle of repugnancy denying States the power to infringe Union legislation in the Concurrent List, and (d) invoking special principles for a situation of emergency or to fulfil international obligations.

In interpreting the scope of any Entry, (a) a broad substantive interpretation must be given to each entry treating it as a field of legislation to give the words the widest possible meaning so that they may have effect in their widest amplitude. For a judicial statement of this principle, see Atiqa Begum v. United Provinces AIR 1941 FC 16 and Calcutta Gas Company v. State of West Bengal AIR 1962 SC 1044, (b) any interpretation must ensure that “each general word should be held to extend to all ancillary and subsidiary matters which can be said to be fairly and reasonably comprehended in them” (cited from Elel Hotels and Investment v. Union of India (1989) 3 SCC 698) and, (c) while bearing in mind both the principles of exclusivity and repugnancy, a harmonious interpretation must be given in inter-relating entries (Harakchand Ratanchand Banthia v. Union of India AIR 1970 SC 1453, State of Bombay v. Balsara AIR 1951 SC 318 and Tika Ramji v. State of Uttar Pradesh AIR 1956 SC 676).

Therefore, it is not open for the States to enact legislation, the pith and substance of which affects banking. For supporting case law, see Associated Timber Industries v. Central Bank of India (2000) 7 SCC 93, Bank of Baroda v. Rednam Nagachaya Devi (1989) 4 SCC 470 and N. M. Veerappa v. Canara Bank (1998) 2 SCC 317.

However, States may competently legislate on rural indebtedness to the exception of banks to provide debtors suitable relief.

Powers of the RBI to lower interest rates on agricultural loans

In the absence relevant Union legislation and the inability of States to regulate loans advanced by banks, recourse may be had to the regulatory powers of the Reserve Bank of India (RBI). The RBI is vested with the power to regulate all banking in the country. In exercising its regulatory powers, the RBI may issue circulars or directions to banks which the latter are bound to comply with. The mandatory nature of the RBI’s directions are affirmed in section 21(3) and section 35A(1) of the Banking Regulation Act; and, Canara Bank v. P. R. N. Upadhyaya (1998) 6 SCC 526 and Central Bank of India v. Ravindra (2002) 1 SCC 367. The latter two cases also confirm that the circulars of the RBI under sections 21 and 35A of the Banking Regulation Act have statutory effect.

In the exercise of its regulatory powers, the RBI can specify maximum limits for interest rates and other aspects of agricultural loans. In one crucial 1994 case – Corporation Bank v. D. S. Gowda (1994) 5 SCC 213 – the Supreme Court noted:

Section 21 of the Banking Regulation Act enables the Reserve Bank to give directions to all other banks in regard to loan policies with a view to control credit facilities and curb speculative activities. This is clearly a matter of public interest. This provision authorises the Reserve Bank to give directions to other banks inter alia in regard to the rate of interest to be charged on advances/financial accommodation. The newly added Section 21-A restricts the court from reopening a transaction between a banking company and its debtor on the ground that the rate of interest charged is excessive, the Usurious Loans Act or any other similar State Act, notwithstanding. If any of the directions given by the Reserve Bank are violated, apart from the punishment that can be imposed on the officers, Section 47-A empowers the Reserve Bank to penalise the banking company also.

This position has also been echoed by the Karnataka High Court in H. P. Krishna Reddy v. Canara Bank AIR 1985 Kant 228 and Bank of India v. Karnam Ranga Rao AIR 1986 Kant 242.

In sum:

1. There is incontrovertible evidence that inability to service agricultural debts are forcing farmers to commit suicide and severely affecting Indian agriculture;
2. In order to fulfil the objects of the scheme of constitutional protection, the States’ power to legislate in relief of rural indebtedness must also extend to bank debts;
3. The continued existence of section 21-A of the Banking Regulation Act prevents courts from examining banking transactions for usury, even where the debtor is an impoverished farmer;
4. While the States’ are unable to legislate to protect farmers, the Reserve Bank of India must exercise its supervisory power to place limits on the rates of interest that may be charged on agricultural loans;
5. The crisis in Indian agriculture is manifold; its legal resolution requires legal reform. Relief schemes and government charity will not suffice.