Hindu Capitalism #16: How loans were recovered in ancient India

Here’s more on ancient Indian banking institutions: Future of Rural Banking by Y. V. Reddy [PDF]

EXTRACT

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. [Sanjeev: for such a rate to be paid, there had to be commensurate rewards in the market.] 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 charged2 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.

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.

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 cattle or obstructing his movements. Manu held the view that a defaulter could not absolve himself of his debt burden even by death. Chanakya said that sons should pay with interest the debt of a deceased person or co-debtors or sureties. Was a spouse, i.e., husband or wife responsible to pay for the debts incurred? Yes, and no. Wife was exempted from debt burden of her husband if she had not given her assent to his borrowings. However, for the debt incurred by a wife, her husband was liablefor repayment.