Abstract
Responding to a vast increase in demand for trade credit in moving agricultural goods, banking of all types expanded in colonial India. Banking laws regulated some firms, but most were not regulated. The ones that were not were often called indigenous bankers. It was a diverse set. Several large family firms carried considerable market reputations at one end of the set. The corporate banks accepted the bills they issued, which made for overlap between their operations. On the other end, local lenders operated with no legally recognized instrument and only based on their knowledge of the clients, who were farmers or urban groups of small means.
This spread worried the provincial governments in colonial India and later worried the central bank and the Government of the Indian Union. The cause of the worry was the very high interest rates charged as one went from the regional to the local. The call to regulate indigenous banking was an old one, partly driven by a fiscal motive and partly the usurious nature of local lending. The pushback was strong too. Many officials felt that regulation would reduce the flow of credit. At stake was a dispute over why interest rates were high, the excessive power of the lender, or extreme risk. In 1918, the Usurious Loans Act empowered the courts to reduce interest rates. The law followed an English precedence. Few cases, however, came to court. Decades before, individual provinces had passed laws restricting land transfers in the event of a failure to repay mortgaged loans. Interestingly, most provinces did not take that road, preferring alternative institutions like the credit cooperative.
After independence, regulation practically outlawed the entire series of indigenous banking, big or small, regional or local, in all states. The move killed the more visible top order, the family firms that commanded market reputation. What happened to the middle is a matter of speculation. At the local level, where the clients are poor but still creditworthy (with some assets and a viable trade), the credit business went ‘extra-legal’. This enormous field of credit operation in postcolonial India, technically unobservable to the governmental authority or the central bank, both pretending that it did not exist, forms the subject of Debt, Trust, and Reputation.
The book combines historical with anthropological methods, combining a rich granular study of colonial-era regulation and the thinking that went into it, with first-hand observation of the credit business in Banaras town. It could not be studied in any other way because it is extra-legal, yet with a volatile past. The result is a path-breaking book, not only because of the narrative and the descriptive detail presented but also the quality of the arguments. Innovative and bold, the book’s central claims change almost everything we thought we knew about the evolution of credit business in India. Debt, Trust, and Reputation reshapes the discourse in fundamental ways. What are these claims?
First, we often think about the division in the business in terms of binaries like formal–informal and organized–unorganized. These binaries derive from a governmental way of privileging the formal and the organized. It does not say what the informal is, which is almost always too mixed a group to carry one name, nor how it was created. Instead, legal and extra-legal work better. It makes a window into how the informal does business. Second, the book sees the long transition in regulation with a colonial beginning as a move to create a procedurally capitalist order. The core of the intervention was the introduction of creditor-protection laws, later balanced by debtor-protection laws. In its beginning, it did not outlaw the informal and, therefore, left scope for a reputationally capitalist order to emerge among this set. The set consisted of large family-run indigenous bankers, for whom Banaras was once famous.
The third claim is the most innovative one for the implications it has for historical analysis. It is about the information intensity of financial transactions. All credit transactions are information intensive (remember the 50-page form one must fill out to take a housing loan). The extra-legal domain is intensive in information in ‘impoverished’ and ‘amateurish’ ways. It relies on the reputation of both parties relatively less, has no ambition to extend beyond the local, its account books are simple and secret, and it builds more on client needs and personal relations. The shift of credit towards the extra-legal makes the economy information-poor on average. Fourth, government regulation, especially the nationalization of banks, made the opposition between the legal and the extra-legal, procedural capitalism and personal capitalism sharper. Law created the informal and made it harder to observe.
The book consists of seven evidence-based chapters, besides a short introduction and a conclusion. Chapter 2 is called ‘Contract’, but it is mainly a review of the historiography of credit in colonial India. Chapters 3 and 4 (‘Discretion’ and ‘Containment’) describe the patchwork of laws and case laws that emerged in Uttar Pradesh and elsewhere in response to usury charges. The four chapters that concentrate on the postcolonial and non-documentary sources describe first the sharp division that came into being between formal and informal (Chapter 5 on ‘Trust’), then the demise of indigenous banking based on reputation in Banaras (Chapter 6, ‘Obligation’), and the mode of operation within the extra-legal economy (Chapter 7 called ‘Disappearance’ and Chapter 8, ‘Reputation’).
More than it acknowledges, the book converges into a new idea in the economic history of colonial India taking shape in the last six to seven years. This scholarship asks a question it shares with development studies: Why is it so difficult to provide cheap credit to the poor? The older scholarship on rural credit in India drew upon one type of colonial administrative discourse that answered: moneylenders with monopolistic power. An emerging scholarship draws on another type of discourse that factored in creditor risk, especially the risks that stemmed from frequent crop failures in a tropical monsoon cultivation regime. In principle, creditor risk can be mitigated with contract law and enforcement of contracts through courts. A contract act did happen in 1872. But its making was caught up in a debate between Henry Maine, who designed it, and his critics over whether equity considerations should fetter the law. In colonial India, the former set of administrators thought that a contract that allowed for the transfer of assets from poor debtors to rich creditors would be unconscionable.
In the end, colonial law on rural credit developed a built-in conflict between different juridical rules. Postcolonial regulation took a more drastic step. It removed the problem by outlawing all private credit contracts for the poor, giving rise to huge distortions. The Banaras situation differs from this way of framing the problem, only in detail, not in the fundamentals.
The economic history in this area has shown how the provincial debtor protection acts at the turn of the twentieth century reduced credit supply (kept interest rates high) and pushed credit underground. The business shifted from the professional moneylender to the neighbourhood landowner, who was hard to observe and regulate under the new laws. The absence of or partial regulation in Madras led to the emergence of various credit regimes adapted to local agricultural conditions, but not quite the move towards the extra-legal. An earlier work connected creditor risk with ecology in a world where every form of business risk across occupations depended on how good or how bad the monsoon was. Another earlier work showed how the revival of the ancient principle of damdupat, although aimed at debtors’ protection, made the lender more selective about choosing clients.
The book seems unaware of the compatibility between its project and this scholarship, which places creditor risk at the centre of the argument and connects risk with the structure of trade and production. This direction is under-explored in the book. The historiographical discussion in Debt, Trust, and Reputation instead consists of exceedingly long and unnecessarily deferential paragraphs devoted to familiar icons—C. A. Bayly, David Hardiman, Jairus Banaji and Karl Marx—for whom risk is not of major interest, let alone business, environmental, or creditor risk. The discussion overrates the relevance of that literature. The book has some interesting observations about perceptions of default, but the theme does not develop far enough.
Let me repeat, Debt, Trust, and Reputation is a fundamental contribution to the historiography of modern India. It builds on history, especially the colonial–postcolonial link and how these were reshaped. The book’s starting point is an anecdote touching on the 2016 demonetization episode, showing the project’s relevance for understanding the present. It is impressive and uncompromising in its commitment to evidence; this is a major work.